- Tokenization is anticipated to reshape financial and non-financial infrastructure, turning traditional markets into a vibrant token economy within the next 5-15 years.
- Financial Institutions (FIs) and corporates are adopting Distributed Ledger Technology (DLT), including tokenization, to increase efficiency, reduce costs, and optimize capital allocation.
Emerging at the forefront of the financial and technological landscape, tokenization is signaling the dawn of an infrastructural revolution that may redefine the transfer, storage, and settlement of value across all industries. This seismic shift, anticipated to occur within the next 5-15 years, holds the potential to transform the financial paradigm at a pace that dwarfs the adoption rate of groundbreaking innovations like the radio, television, and email.
Harnessing the Power of DLT/BCT for Enhanced Efficiency
By deploying Distributed Ledger Technology (DLT) or Blockchain Technology (BCT), along with smart contracts and tokenization, Financial Institutions (FIs) are exploring new avenues for 24/7 real-time or customizable settlement. These technologies promise a decrease in credit risk, reduction in various costs, increased liquidity for previously illiquid assets, and a more efficient capital allocation.
"We view oracle networks as critical for next-generation DLT/BCT use cases like the tokenization of traditional assets."
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Corporates, on the other hand, are leveraging the same advancements to generate additional revenues, automate labor-intensive processes, optimize supply chains, bolster customer loyalty, and contribute to environmental sustainability efforts, among other benefits. The adoption of DLT/BCT among FIs and corporates is expected to pick up pace as the opportunity cost of unutilized efficiencies continues to rise.
Tokenization in Action: Real-World Use Cases
The scope of tokenization is expansive, with numerous Financial Institutions (FIs) and corporates successfully leveraging it to their advantage. For instance, Citi decreased processing time from 5-10 days to a mere 3 hours by issuing a tokenized Letter of Credit (LC). Meanwhile, KKR and Hamilton Lane transformed private equity funds using tokenization, reducing the minimum investments from a hefty $5 million to an accessible $10k-$100k.
Disentangling Tokenization from Crypto
Although both based on the DLT principle, it’s essential to distinguish between blockchains, often associated with cryptocurrencies, and the distributed ledgers used for tokenization of traditional assets. Blockchains provide public and permissionless access, while using tokens as incentives for processing transactions and securing the network. Conversely, distributed ledgers used in FI and corporate contexts are typically private and permissioned, ensuring controlled access and data privacy. In this context, tokens are not a requirement for network security or transaction processing as the “skin in the game” comes in the form of participants’ reputations.
Imagining the Future of the Token Economy
In the near future, the ubiquity of tokenized assets might result in our financial portfolios including not just stocks, bonds, and cash, but tokenized interests in private equity funds, carbon credits, royalty rights to music, and even tokens powering blockchain operating systems. As such, the term ‘token portfolio’ may simply become ‘portfolio’. With the rise of the token economy, we are set to witness a transformation that not only disrupts but redefines global financial markets as we know them today.
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