Tokenization

Over the past 30 years, we have witnessed global expansion in the financial market. The primary driver behind this exponential growth has been "digitization." The rapid emergence of the digital world has led to the global expansion of various markets, including trading platforms. As market liquidity increased, investments and transactions also surged. More and more participants began trading in stocks and commodities. While the digitization of trading granted extensive market access, the underlying custody and settlement processes did not progress as rapidly.

Could tokenization be the solution to this?

Securitization began with the pooling of home mortgages, driving the growth of financial systems, especially in the US and the UK. However, due to factors such as low lending standards and insufficient regulatory oversight, the global financial system was undermined. Given its increased transparency feature, we can foresee tokenization as a solution to all these problems.

Furthermore, a compelling reason for tokenization is its ability to enable illiquid assets to serve as collateral in lending markets and be utilized in various ways.

Role of Blockchain in Tokenization?

Blockchain is a powerful technology that eliminates the need for an intermediary by employing complete decentralization. Its high transparency and trackability make it a trustless system. Tokenization is closely associated with this technology, utilizing various smart contracts (computing software) to create a more efficient system that addresses the issues highlighted by asset settlement and securitization.

In simple terms, tokenization is the process of converting real-world assets into digital assets, providing a platform for interaction between both types of assets. Real-world assets, including real estate, trading commodities, and financial bonds, can be converted into tokens on the blockchain.

Who Is Making Use of Asset Tokenisation?

1. PAX Gold (PAXG): This asset-based token is regulated and managed by the New York State Department of Financial Services, with a total market capitalisation of 327 billion US dollars.
2. DBS Bank Bond worth 15 million US dollars: DBS, a Singapore-based bank, issued its first tokenised bond in 2021, enabling investors to access a broader market.
3. Overstock.com Security Token Offering (STO): Overstock is a technology-driven online retailer and one of the largest security offerings.

What Does the Future Hold?

Blockchain is an emerging technology, supported by VCs and driven by millions of web developers. There is a high probability of widespread adoption of this technology, leading to the development of asset-based tokens.

Over the past few years, many established companies, including J.P. Morgan, Morgan Stanley, and HSBC, have embraced digital assets in their operations. As blockchain technology continues to expand into traditional finance, more use cases will emerge.

An example of tokenisation across multiple protocols is the ability to leverage the specific benefits of collateral-backed stablecoin, USD Coin (USDC), on various platforms:

1. Ethereum: Leading protocol for decentralised finance applications.
2. Algorand: Enables enterprise-scale applications.
3. Solana: Provides scalability and settlement finality, with increased adoption by DeFi projects.
4. Stellar: Optimised for payment use cases.
5. Tron: Maintains a deep ecosystem of support for stablecoins.

So, as we step into this new era of digital assets and token economies, let us carry with us the vision of a world where value knows no boundaries, and opportunities are within reach for everyone willing to participate. The journey of tokenization has just begun, and the possibilities are limitless.