Industry executives have raised concerns that the widespread tokenization of assets might take longer than expected. Tokenization, the process of creating a digital representation of a physical asset such as a stock or a property deed, can streamline the often-arduous trading process immensely.
While tokenization might be the future, its immediate adoption has hit roadblocks due to the lack of global blockchain standards. Industry leaders at Amsterdam’s Money 20/20 conference said tokenized assets are currently exchanged on the same blockchains used for cryptocurrency, which lack the regulations and compliance standards to make large-scale tokenization possible.
It’s estimated there are currently $85 billion in tokenized assets, but that amount is only expected to grow by 5% to 10% by 2030.
Inescapable Inefficiencies
The sentiment from Money 20/20 was echoed by Hilary Allen, a financial law professor at the American University Washington College of Law, in her recent speech to the U.S. House Financial Services Committee.
Allen said public blockchains are too fragile to handle trillions of dollars in tokenized assets. While the technology was revolutionary when it was introduced years ago, its weaknesses as a large-scale framework have been exposed.
“Blockchains suffer from inescapable inefficiencies and operational fragilities that make them unsuitable as supporting infrastructure for real-world assets,” Allen said. “Permissionless public blockchains are a poor fit for the vast majority of problems people have tried to make it solve.”
Institutional Backing
The discussion around tokenization has picked up steam lately because the technology has been endorsed by some of the largest financial institutions in the world. BlackRock and Franklin Templeton have tokenized money market funds upwards of $1 billion, which is an unmistakable vote of confidence, and BlackRock CEO Larry Fink has been very clear on his stance on digital assets.
“We believe the next step going forward will be the tokenization of financial assets, and that means every stock, every bond will have its own QIP (qualified institutional placement); it’ll be on one general ledger … but the most important thing is we could customize strategies through tokenization that fit every individual,” Fink said. “We would have instantaneous settlement … because it’s just a line item.”