This is a guest post from the Head of Operations at Bitfinex Securities.
Tokenization is at a crucial juncture. Beyond the realm of cryptocurrency, there is an increasing recognition that tokenizing assets could pave the way for a transformative approach to finance.
Leading banks are actively pursuing initiatives to determine how they can best harness this opportunity. Regulatory sandboxes have been established by governments in key financial hubs, such as the UK and Singapore, to explore how regulations might bolster capital markets infrastructure supported by blockchain technology.
The blockchain and finance media landscape has been filled with headlines celebrating successful projects, including Siemens’ $330 million digital bond, issued last year as a part of a trial initiated by the European Central Bank to settle central bank funds on blockchains.
While these reports have undoubtedly cast tokenization in a positive light, there is a significant drawback. Many of the so-called ‘success stories’ are far removed from the true potential of tokenization and resemble traditional finance transactions in disguise.
Consider the Siemens example. It demonstrated that digital bonds could be settled significantly faster than through traditional means. However, the bond was issued on a private blockchain that required Deutsche Bank for settlement and lacked a mechanism for self-custody.
This, in my view, is not the essence of what a tokenized bond should represent. At its core, tokenization is about disintermediation, empowering users by removing the outdated aspects of the capital markets ecosystem.
Tokenization eliminates the need for transfer agents, central depositories, clearing systems, custodians, and cumbersome compliance reporting, replacing them with quicker, cheaper, and more transparent on-chain alternatives. Concurrently, it provides investors with greater flexibility, allowing for much lower entry points compared to traditional markets.
I worry that traditional financial institutions could further dominate tokenization, seeking ways to create new, innovative products tailored to their existing clientele. Larry Fink’s recent appeal for the SEC to expedite the tokenization of bonds and stocks could signify that we are approaching a watershed moment.
Despite former President Donald Trump’s overtures to the crypto community, the tangible updates regarding the U.S.’s stance on cryptocurrency—such as the strategic bitcoin reserve—have been perceived by some as lackluster. This might be crucial for the current banking sector.
As major crypto entities continue to navigate the industry’s trajectory, this could create an opportunity for the banking lobby to benefit from a crypto-friendly stance from the U.S. administration.
Should we find ourselves with a regulatory landscape that enables traditional finance entities to exploit blockchain technology to their advantage—boosting profits while introducing new offerings for a limited customer base—tokenization could become a significant lost opportunity.
The pool of investors likely to gain from tokenized products from large banks is minimal compared to the broader population. Millions around the globe would eagerly seize the chance to invest in stocks or corporate bonds, but they often find themselves barred from reaching accredited investor status or corresponding thresholds.
Tokenization also provides investors with the chance to regain control over their assets. Technologies like Blockstream’s Liquid Network utilize whitelists for peer-to-peer trading, asset movement across platforms, and even self-custody options.
Looking ahead, we anticipate more detailed voting and dividend distribution functionalities. It’s also crucial to integrate with USDt and BTC for a seamless flow of funds across conventional, real-world assets, and crypto markets.
Currently, our capital markets favor only a select few. Tokenization can help dismantle that structure. We now possess the technology to enable any small business to secure the funding it needs to thrive without relying on traditional banks, while staying within regulatory and compliance frameworks.
For potential investors, even those with just $1 to invest can start building their wealth through tokenized U.S. treasuries. We’re already witnessing this in El Salvador with NexBridge’s USTBL product.
To prevent a takeover of tokenization by traditional finance, we must encourage regulators to recognize the broader promise of this approach. While it is vital that tokenized complex investment instruments are subject to proper regulation, we also need major jurisdictions to clarify how tokenized products can be accessible to retail investors, regardless of their investment amounts.
Tokenization presents a rare opportunity to democratize access to capital. We owe it to the millions of underbanked individuals and businesses worldwide to ensure we don’t lose sight of this potential.
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