As the European Commission discusses tokenized assets in Brussels, the World Federation of Exchanges (WFE) has released a comprehensive report titled Decrypting Tokenization: Embracing the Future. The report addresses the importance of balancing developments in the tokenization space and avoiding excessive hesitation or blind enthusiasm.
(To promote the tokenization of real-world assets RWA, the Financial Supervisory Commission established a task force)
Tokenization is the road to traditional financial innovation
The WFE report states that tokenizing traditional assets should not be seen as a radical change, but as an innovative evolution of traditional finance. This new approach provides new opportunities for investors and market participants and highlights the exchange’s continued investment in innovation.
Benefits of Tokenization
Tokenization offers a variety of advantages that promise to revolutionize financial markets, including:
Spread ownership: Multiple investors can own a portion of an asset, reducing the capital requirements for individuals investing in high-value assets.
Enhanced liquidity: Decentralization allows more people to participate in investments, increasing overall market liquidity.
Enhance trust: By making investing easier, tokenization can promote greater financial inclusion, diversification and economic growth.
Don’t expect too much from tokenization
The report says that not all the hyped benefits of tokenization hold up.
For example, 24/7 continuous trading can actually be achieved without tokenization, and disintermediation models often face conflicts of interest. In addition, instant settlement in tokenized transactions can lead to unpredictable timing, affecting market liquidity and transaction costs.
Why tokenization adoption will always be limited
Even though it’s been more than 15 years since the Bitcoin white paper was released, tokenization still has limited adoption in traditional markets. This is mainly caused by the following factors:
Technical limitations: Distributed ledger technology (DLT) is currently unable to handle high trading volumes on active exchanges. Issues such as data storage issues further complicate its use.
Infrastructure fragmentation: Different DLTs create fragmented ecosystems, requiring financial institutions to connect multiple platforms, increasing operational costs.
High implementation costs: Moving to DLT requires significant capital investment to build the necessary infrastructure, placing a financial burden on the market.
Regulatory uncertainty: Despite improvements, laws in many jurisdictions still do not adequately cover tokenized assets, leaving businesses cautious.
Lack of widespread adoption: Without widespread use, tokenization has smaller network effects, reducing the incentive for enterprises and exchanges to update their technology stacks.
Regulation is important for RWA tokenization development
Regulation plays a crucial role in the development of tokenization. A clear and supportive regulatory framework can alleviate some concerns about tokenized assets. James Auliffe, manager of regulatory affairs at the World Federation of Exchanges, noted that it is critical to understand the fundamentals of tokenization and the infrastructure for trading these assets. He emphasized that regulation should view tokenization as a natural progression of the financial industry, suitable for specific environments and assets.
Tokenization is not a panacea
Tokenization represents an innovative and modern version of traditional finance, opening up new possibilities for investors and market participants. However, its current limitations mean that it is not a one-size-fits-all solution for all asset types. As the industry continues to innovate and regulatory frameworks evolve, the true potential of tokenization will be realized, benefiting financial markets and participants.
This article Decrypting Tokenization: RWA is over-hyped and asset tokenization will also create problems first appeared on Chain News ABMedia.
