Tokenization is a hot topic in the financial industry. Many traditional financial institutions are trying to understand the value of tokenization as advocates claim tokenization could become a catalyst for financial innovation. I believe that all financial products will be tokenized, and all financial institutions will have to adopt blockchain technology.
Tokenization is a method of representing real-world assets in a digital-native form. Any asset can be tokenized through digital token issuance. Even illiquid financial products such as Private Equity and Real Estate have been tokenized. When tokenizing an asset, its product information and ownership records are initially published to a blockchain. The ownership rights have been digitized using a blockchain, and any subsequent changes to the ownership are captured through the network. Asset tokenization unlocks many benefits.
Increased access and liquidity: Tokenized assets live on a blockchain and can be transferred and traded without intermediaries. This means that assets can be traded 24/7/365 around the world with broader investor access
Reduced settlement times: Transactions on a blockchain lead to a near-instant settlement, with assets being traded for other digital assets through a direct swap
Enhanced transparency: All transaction details are recorded on a blockchain, and there is no need for reconciliation because records are immutable
Improved automation: Tokenized assets can be programmed using smart contracts to automate various aspects of the security lifecycle, such as issuance, trading, clearing and settlement, custody, and asset servicing. Additionally, smart contracts can ensure that tokenized assets are only transferable to authorized investors
Enhanced customizability: Digitalization and automation of processes enable unique innovation opportunities to develop more customizable assets. Existing assets can be unbundled, where dividend payments and equity ownership can be separated into two distinct tokens. New customized products, such as corporate bonds with bespoke coupon frequencies, can be created
Tokenization presents disruptive changes to the current financial industry. Those harnessing this innovation could capture greater market share while improving their internal processes and reducing costs. The next post will cover how bonds have been tokenized.