Tokenization in financial services: Embracing a new ecosystem

The benefits and challenges of tokenization

A growing number of leaders are extolling the opportunities of tokenization in financial services. Its basics are relatively simple: the linking of financial assets to digital tokens traded on distributed ledgers, including blockchains, whereby the tokens reflect the fair value of the underlying assets. While the challenges of tokenization are complex, the benefits of tokenization promise to be transformative.

Looking into a tokenized future

Various financial services providers are projecting that tokenization in financial services could generate trillions of dollars in new value this decade. And while these estimates may elicit skepticism among some, they would likely represent just a tiny fraction of the global market of assets that has the potential of being tokenized. Think of the many sectors with assets that have that possibility: real estate, private equity and venture capital funds, exchange-traded products, and many others. 

Tokenization: Realizing the vision of a future financial ecosystem

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Tokenization: Pathways to scaled adoption for financial services
Tokenization could generate trillions of dollars in new value for the financial services industry (FSI) this decade. But what does tokenization in FSI actually look like? This conversation will delve into understanding tokenization broadly, from the basics to challenges and opportunities that lie within its path to mass adoption.

The foundations of a tokenized future are already in the works. Several financial institutions have launched proofs of concept (PoCs) and have joined industry consortia that are dedicated to developing rigorous cross-industry standards, practices, and solutions to explore the benefits of tokenizatio

Source: Deloitte

So, what are the benefits of tokenization in financial services?

  1. The introduction of new financial products and services would be possible thanks to the digital representation of conventional assets that traditionally have been illiquid; or through the creation of new digital assets represented as tokens, such as nonfungible tokens (NFTs).
  2. Tokenization is likely to help reach new customers thanks to its ability to allow for fractional trading in illiquid assets. These assets might include real estate, artwork, or other valued collectibles. Moreover, tokenization could allow investors themselves to gain access to markets previously closed to them.
  3. Tokenization offers the possibility of new operational efficiencies. That’s because the process would in all likelihood be anchored to a ledger that facilitates smart contracts. These in turn serve to automate and streamline the trading of the underlying assets and facilitate the flows of programmable funds. Furthermore, tokenization could support improvements to the legacy infrastructure of financial services companies.

What early adopters are up against

The path to commercialization and the realization of near-term value may not be easy for early adopters. For some of their challenges, there are already indications that solutions may be at hand. For other challenges, these early adopters should collaborate with more traditional financial institutions, technology vendors, and regulators to unlock the value that they anticipate. Let’s explore five of the main challenges of tokenization early adopters are likely to face.

Setting sail amid uncertainty

Resolving the challenges of tokenization and realizing the benefits of tokenization will likely require considerable time and effort, as well as collaboration among industry stakeholders. The process will be a gradual, multi-front process, and it is very unlikely that any one party will achieve any monumental breakthrough. It will all be incremental. 

Commercial success of tokenization could usher in a new era for the financial services industry. With the path yet to be defined, organizations will likely need to work through complex and diverse challenges including interoperability and secondary markets, regulation and risk management, privacy, legacy systems, and tax and accounting. Early movers that can assess the tokenization effort holistically while tackling each of these hurdles could lead their industry in the future.

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