Decrypting Tokenization RWA Overhyped Asset Tokenization Will Also Pose Problems
As the European Commission discusses tokenized assets in Brussels, the World Federation of Exchanges (WFE) has released a comprehensive report titled “Decoding Tokenization: Embracing the Future.” The report emphasizes the importance of balanced development in the tokenization field, cautioning against excessive hesitation or blind enthusiasm.
The WFE report states that tokenizing traditional assets should not be seen as a radical change but rather as an innovative evolution in traditional finance. This new approach provides investors and market participants with new opportunities, highlighting the ongoing investment of exchanges in innovation.
Tokenization offers various advantages that have the potential to fundamentally change the financial market, including:
Ownership decentralization: Multiple investors can own a portion of an asset, reducing the capital requirements for individual high-value asset investments.
Enhanced liquidity: Decentralization allows more people to participate in investments, increasing overall market liquidity.
Enhanced trust: By making investments easier, tokenization can promote greater financial inclusion, diversity, and economic growth.
The report points out that not all the touted advantages of tokenization hold up under scrutiny. For example, 24/7 continuous trading can be achieved without tokenization, and decentralized models often face conflicts of interest. Additionally, real-time settlement in tokenized trading may lead to unpredictable timing, affecting market liquidity and trading costs.
Despite over 15 years since the release of the Bitcoin whitepaper, the adoption of tokenization in traditional markets remains limited. This is primarily due to several factors, including:
Technological limitations: Distributed ledger technology (DLT) currently cannot handle high trading volumes in active exchanges. Issues like data storage further complicate its use.
Infrastructure fragmentation: Different DLTs have created fragmented ecosystems, requiring financial institutions to connect to multiple platforms and increasing operational costs.
High implementation costs: Transitioning to DLT requires significant capital investment to build the necessary infrastructure, posing a financial burden on the market.
Regulatory uncertainty: While improving, laws in many jurisdictions still do not fully cover tokenized assets, leading companies to proceed cautiously.
Lack of widespread adoption: Without universal usage, the network effect of tokenization is limited, reducing the incentive for companies and exchanges to update their technology stacks.
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, emphasizes the importance of understanding the basic principles of tokenization and the infrastructure for trading these assets. He stresses that regulators should see tokenization as a natural progression for the financial industry, applicable to specific environments and assets.
Tokenization represents innovation and a modern version of traditional finance, providing new possibilities for investors and market participants. However, its current limitations indicate that it is not a one-size-fits-all solution for all asset types. With ongoing industry innovation and the evolution of regulatory frameworks, the true potential of tokenization will be realized, benefiting the financial market and participants.
RWA
Tokenization
European Commission
