Change the tone of tokenization

Companies see value in putting their real-world assets on blockchain.

For many years, tokenization (creating a digital representation of a tangible asset such as real estate) was just a buzzword in the financial world. But these days, more and more companies are making it happen by factoring it into their corporate finance strategies (i.e. smart contracts, stablecoins, tokenized Treasury bills).

After two years of economic turmoil and persistently high inflation, tokenization has the potential to increase liquidity, facilitate faster payments, reduce costs, and improve risk management. Although major enterprises are still in the early stages of adopting this Web3 technology, they already boast viable use cases.

Take a look at Citi’s new pilot program with global logistics company Maersk. The third-largest US bank has tokenized smart contracts that serve the same purpose as bank guarantees and letters of credit, reducing transaction processing time “from days to minutes.”

Big picture, the company predicts that tokenized assets will increase 80 times in the private market, reaching up to nearly $4 trillion in value by 2030.

“Partnerships like the one made by Citi and Maersk are an important step forward in demonstrating the potential of tokenization to streamline cash management and trade finance,” said Abu Dhabi-based multi-asset fintech provider Capex. Executive Director Paul Turner said.

Visa is also testing tokenization. In September, the payments giant partnered with London-based Paysafe to integrate a tokenization service that is expected to improve customer protection.

Within the same month, Visa led a $12.5 million funding round for AgroToken. The Argentina-based startup is touted as the first platform to convert physical grain into its digital counterpart through tokenization.

Just like any other real world asset [RWAs], grain goes from being a “real world asset” to an investment vehicle. Once ownership is registered on the blockchain, it can be traded, divided, or held securely.

“There is a growing desire to have tokenized real-world assets on-chain,” said Richard Johnson, CEO of Texture Capital, a broker-dealer specializing in tokenized assets.

In the case of agrotokens, farmers can exchange tokenized grains for goods, machinery, fuel, etc. “Grain tokens” can also generate guarantees for requesting loans, exchange into local currency, and be used as a hedge against inflation.

A tokenization project has also started at Société Générale, Johnson’s former company. The French multinational bank, where he previously served as head of quantitative electronic services, is “busy putting more institutional assets on chain.” In December, SocGen made headlines when its Ethereum-based stablecoin EUR CoinVertible began trading on European cryptocurrency exchange Bitstamp.

Subsequently, the asset management arm of Paris-based insurance company AXA used the SocGen stablecoin to purchase 5 million euros ($5.4 million) worth of tokenized green bonds. According to AXA, this format enhances transparency and traceability and speeds up transactions and settlements.

Also in December, DWS Group (formerly Deutsche Asset Management) announced a partnership with blockchain company Galaxy Digital to issue a euro-denominated stablecoin that would “accelerate the mass market adoption of digital assets and tokenization.” confirmed.

Caitlin Long, founder and CEO of Custodea Bank, believes that by 2024, more executives will be using tokens, even if they haven’t yet adopted tokenization. He said that it would encourage them to accept the change. “Every bank CEO knows this technology is coming, and if you’re not planning now, you’re already late,” she added. “Watch what they do, not what they say.”

Many of the new use case long notices revolve around tokenized dollars acting as cash equivalents for accounting and liquidity coverage ratio purposes. One of the key benefits of tokenized dollars, she explained, is that they are programmable and “smart can be built into all kinds of software applications, including contracts and artificial intelligence.” To do.

Tokenized securities are also useful as they are believed to have a narrower margin of error. “I’m always surprised by the inaccuracies in a company’s shareholder and bondholder lists,” Long says. “Tokenization helps correct these inaccuracies while reducing costs.”

token economy

Observers of the “token economy” trend say the conflicting stances could hinder mainstream adoption momentum. On the one hand, there are supporters like Larry Fink of BlackRock. On January 12, the CEO of the world’s largest asset management company praised the U.S. Securities and Exchange Commission (SEC) for finally approving a Bitcoin exchange-traded fund (ETF) after years of back and forth.

BlackRock’s iShares Bitcoin Trust was one of the crypto ETFs that made its trading debut in the United States last month. Fink now hopes the Ethereum ETF will receive SEC approval, something the Gary Gensler-led agency has so far refused.

“These ETFs are a stepping stone towards tokenization, and I believe that is where we are headed,” Fink said in a television appearance.

In contrast, JPMorgan Chase CEO Jamie Dimon told lawmakers at a Senate hearing on Dec. 6 that he has “always strongly opposed cryptocurrencies, things like Bitcoin.” he said.

Dimon did not say whether “etc.c.” includes all tokenization, but claimed his company processes $1 billion in transactions every day on its private blockchain network. It is worth noting that

This “hot and cold” tone highlights a lack of focus on the technology’s usefulness, said Jacques Oleran, CEO of San Francisco-based blockchain startup Scale Labs. (CEO) says. “The benefit of web3 is that it brings power, transparency and ownership to users and employees of networks and markets,” he adds. “Web3 will happen with or without the support of a centralized bank leader.”

The atmosphere is different overseas. During a recent visit to his Token 2049 event in Singapore, O’Holleran noticed that his peers in the Asia-Pacific region were actively encouraging the adoption of tokenization.

The APAC project enjoys “an innovative ecosystem, a supportive regulatory framework, and a vibrant community actively promoting blockchain and tokenization efforts,” he said. “The United States is lagging behind in the race to gain global market share for Web3. We hope this changes.”

Capex’s Turner has a similar opinion. “The U.S. regulatory landscape is still evolving, with different agencies overseeing different aspects, creating uncertainty and preventing clear implementation guidelines,” he added. “The large size of the U.S. economy and financial markets may hinder the incentive to be a first mover in this space.”

Meanwhile, Turner said countries like Singapore should “more actively support regulatory frameworks for tokenization, with the aim of attracting start-ups and businesses to explore the technology and become a global hub for the industry.” “I’m doing it,” he points out.

In November, the Monetary Authority of Singapore launched several tokenization pilots. The campaign included leading US companies including Citi, T. Rowe Price Associates, Fidelity International, BNY Mellon, Franklin Templeton, Apollo, and JPMorgan Chase.

The EU is also preparing for tokenization, Johnson said, noting that regulators are “developing a new rulebook.” The EU adopted the Markets in Cryptoassets Act (MiCAR) in May, establishing an overall framework for cryptoassets markets across the region.

That’s a good thing, Johnson says. [regulators] No new rules needed. “I think that’s wrong.”

Skeptics have also cited suspicious goings-on at some of the crypto industry’s most prominent companies. In 2022, there was, as Johnson calls it, a $32 billion “debacle” involving the cryptocurrency exchange FTX.

Less than a year later, stablecoin issuer Terraform Labs collapsed and crypto finance company Celsius suffered a $4.7 billion bankruptcy. And like FTX’s Sam Bankman Fried, Cerisus founder and former CEO Alex Mashinsky also faced fraud charges.

On-chain security is also an issue. More than $1.8 billion in digital assets went missing last year, according to a study by blockchain company CertiK. This is high despite a 51% decrease compared to 2022, when losses due to hacking and other incidents totaled $3.7 billion.

Betsabe Botaitis, CFO of blockchain software developer Hedera, has simple advice. “Prioritize cybersecurity measures to protect company assets and confidential information.”

“CFOs need to start recognizing that sooner or later their companies will be using digital assets as an embedded part of their operations,” Botaitis said. Their teams “must be prepared to anticipate digital asset positions and report accordingly.”