Tokenization: Are financial markets ready for what's next?

Blockchain technology has the potential to fundamentally change how the financial services industry operates, with a recent report forecasting that real-world assets moving onto the blockchain represent a $16 trillion dollar opportunity by 2030.

What exactly is the opportunity? For financial institutions, it goes beyond holding crypto deposits or trading cryptocurrencies. From tokenized cash to tokenized securities, we’re seeing an acceleration of digital asset use cases in the market, enabling institutions to reach new customer segments with new products and services.

The most cited benefit of adopting digital assets is the operational efficiency that comes with tokenization. Tokenization represents any asset on a blockchain, including money, financial instruments such as bonds and securities, and real-world assets such as real estate and carbon credits.

Tokenization and fractionalization

Tokenization can create massive efficiencies in back- and middle-office operations. For example, it can streamline key activities such as issuance, transfer of ownership and asset servicing.

That operational efficiency makes way for fractionalization, broadening the types of assets available for people to invest.  Imagine the minimum investment threshold for buying into a fund being $1,000 instead of $100,000.

Tokenization and fractionalization represent a massive opportunity for the financial services industry by enabling it to offer new products and services to a wider audience. The technology promotes financial inclusion by dissolving economic borders and extending investment opportunities to underbanked and unbanked populations. That greater accessibility to diverse investment choices opens newer, largely untapped liquidity pools.

With such an upside, why hasn’t there been greater adoption in traditional finance to date?

Requirements for mass adoption

First, there needs to be more regulatory clarity. It takes time for regulators to assess new technology and its impact on industries and customers, causing regulatory uncertainty. As a result, financial institutions have yet to invest at scale, only testing the technology through proofs of concept and pilots. Many financial institutions have joined forces in creating consortiums to work on establishing standards, involving regulators for opinions and comments, similar to a sandbox feedback loop.

However, we are starting to see regulatory clarity, particularly in Europe. The passing of the Markets in Crypto Assets Regulation (MiCA), by the European Union, and the Financial Services and Markets Act in the UK are setting the stage for financial services companies to invest in digital assets in the near-term.

Second, as blockchain technology is still an immature market and asset class, industry-wide standards have yet to be set. Standards enable interoperability and trust across markets and counterparties. Although financial institutions have been involved in proofs of concept, the technology still hasn’t proven itself as reliable and scalable for banks.

However, over the past 18 months, many tokenized assets have been launched using emerging smart contract standards that run on an enterprise-grade digital asset infrastructure—driving the industry towards a widely accepted standard operating model.

Furthermore, tokenized asset use cases are gaining momentum at leading financial institutions. NAB stablecoins are being issued in Australia, tokenized securities are being explored in France, and a crypto custody platform is launching in the UK.

Third, when adopting any technology, new skills, knowledge and processes are required. Getting up to speed with these skills takes time, so it’s important to invest in training and education, not only internally but also for customers.

Once blockchain technology is understood and demystified, employees can identify the best use-cases for their business and educate customers on the benefits.

With all the potential benefits of tokenization, what can financial institutions do to launch a successful offering and transform their business?

Three considerations for a tokenization strategy in financial markets

First, it is vital to build your digital asset roadmap. Understanding the use cases applicable to your business and where they fall on your roadmap is a critical starting point.

Second, choose an infrastructure partner. A key component of launching a successful digital asset offering is ensuring that you have a secure infrastructure to help you scale and grow your business, without compromising security.

Last, build and engage with your ecosystem. Blockchain technology requires a network of participants to achieve the greatest value. Without counterparties, trading venues or issuers, there’s no market.

Establishing the right partnerships

Ensuring you have the right partner to support your pilots, demonstrate value quickly and scale across use-cases is critical to success.

Across all three areas, Fireblocks can be your trusted partner to launch and scale your Web3 business. We have built a network of 1,800 institutional clients, including some of the world’s largest financial institutions. Whether it’s support in building your roadmap, launching a new offering or scaling your business, Fireblocks can support you at every step of your journey.

Fireblocks is the most scaled and secure infrastructure partner supporting banks building digital asset businesses. To learn more about how the Fireblocks solution has helped financial institutions issue, secure and transfer trillions of dollars’ worth of assets, please visit: fireblocks.com

By John Hallahan, Director of Business Solutions, EMEA, Fireblocks