According to Bloomberg, cryptocurrencies, which were initially conceived as an alternative to traditional banking during the 2008-2009 financial crisis, are now being embraced by many Wall Street banks and financial institutions. These institutions are not only engaging in cryptocurrency business, such as Bitcoin ETFs, but are also beginning to adopt the underlying blockchain technology.
The process known as 'real-world asset tokenization' involves representing real assets like bonds, stocks, art, or even ownership shares in office buildings as digital tokens on a blockchain. Ownership of these tokens equates to ownership of the asset and can be transferred almost instantly by moving the token from one digital wallet to another. This process can eliminate settlement delays that arise from clearing transactions and recording them across multiple record-keeping systems, and from using numerous intermediaries.
By placing contractual information, such as terms of ownership and conditions of transfer on a blockchain, assets can be bought and sold in pieces and traded outside of market hours. Tokens can also be programmed to behave in specific ways, such as being released to a seller once goods are delivered to a buyer. Tokenized assets could potentially attract younger customers who may not have a brokerage account but already trade cryptocurrency.
In March, it was suggested that all assets, including stocks, art, houses, golf courses, and exclusive memberships, could theoretically be tokenized. Even products like Nike sneakers are being represented on blockchains to verify their authenticity when the physical pair is traded.
However, US banking regulators have yet to approve innovations such as deposit tokens and have expressed concern that instant settlement could exacerbate bank runs. This is due to the potential for customers to use programmable tokens to automatically withdraw funds from banks during times of crisis. Despite these concerns, regulators in other parts of the world are more open to these innovations.
Tokenization could potentially disintermediate some companies, such as broker-dealers, which currently facilitate many financial transactions. The exact setup of a tokenization project is also crucial. With blockchain, there's only one record for each asset, and the holder of that asset owns it. Therefore, if a token is transferred to the wrong address or is stolen, it may be lost forever if a public blockchain is used. This is why many banks are developing or have developed their own private blockchains. These blockchains will need to communicate with each other if the banks want to handle substantial interbank transactions. Given the significant investment of money and talent into this functionality, it's likely a matter of when, not if, this will happen.