How Blockchain Tokenization Will Make Crypto’s Future Secure
The importance of tokenization in blockchain adoption is highlighted by Algorand CEO Staci Warden, who believes that banks must establish a standardized infrastructure. By tokenizing assets, new markets can be created, allowing for the trading of fractional shares of high-value assets. This would enhance liquidity and provide opportunities for non-accredited investors. For blockchain adoption to revolutionize the financial sector, banks' systems need to adopt a communication standard comparable to the current SWIFT system.
Warden, speaking at the Financial Times Crypto and Digital Assets Summit, believes that tokenization is crucial for ensuring the survival of cryptocurrencies. However, for this to become a reality, banks and counterparties need to work together seamlessly, while companies like Chainlink strive to pave the way for cross-chain interoperability. Warden emphasized the importance of banks embracing blockchain technology but also stressed that true transformation of the financial infrastructure will only occur if all parties involved synchronize their efforts.
How Tokenization Creates New Markets
Tokenization has the potential to open up new markets for individuals who are not accredited investors or high net-worth individuals, allowing them to participate in certain parts of the economy. By creating tokens that represent fractions of high-value assets, additional liquidity can be added to these markets. One example of this is FlyBondi, an airline in Argentina, which is leveraging blockchain technology to tokenize tickets. This means that the original buyer of a ticket can sell it as a tokenized asset on a secondary marketplace if they no longer require it, as explained by Warden.
Warden Said, “You’re creating a secondary market in something that’s quite illiquid, in this case not available to you at all. And that is where I think one of the areas is very exciting for the tokenization of assets.”
According to her, the tokenization process is not as important as determining whether a stablecoin can be considered a legitimate form of cryptocurrency. The classification of stablecoins as cash for on-chain settlements is a complex regulatory issue in Europe. Additionally, she mentioned that if stablecoins represent traditional currency, it raises doubts about the necessity of central bank digital currencies.
Tokenization Needs Blockchain Standards
For banks and other institutions to adopt blockchains on a large scale, they need a way for different networks to communicate effectively. Without this capability, they will not be able to take advantage of the numerous efficiencies offered by blockchain settlements.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) serves as an example of a system that enables secure and fast message exchange between banks. While it allows banks to communicate based on a global standard, they still have to carry out clearing and settlements for transfers, which introduces inefficiencies.
Likewise, for blockchains to be an effective means of transferring assets, they must be able to communicate with each other using a universally accepted standard. Only then can institutions fully realize the benefits of efficient settlements.
Recently, Chainlink, a company specializing in developing channels for blockchains to receive real-world data, launched a new Cross-chain Interoperability Protocol (CCIP). This protocol is now live on various platforms such as Chainlink mainnet, Ethereum, Avalanche, Optimism, and Polygon.
The main goal of the CCIP is to facilitate seamless data exchange between blockchains. It incorporates an Active Risk Management (ARM) Network and active rate limits as security measures.
These measures help mitigate the risks associated with bridges that connect blockchains, which have been vulnerable to multi-million-dollar hacks in the past. However, for the CCIP to gain widespread acceptance similar to SWIFT, users must address complex regulatory questions. The Bank of Italy is currently conducting a pilot program that could provide some answers regarding the regulatory implications of tokenized assets' cash value, according to Warden.
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