The financial services sector is changing dramatically because of blockchain technology. Asset tokenization is one of the most recent—and perhaps most revolutionary—innovations based on blockchain technology. Tokenization can lead to the development of a new financial trading system because of the accessibility, cost effectiveness, and transparency it provides. The analysis by Roland Berger & Keyrock, which focuses on the impact of tokenization on stock trading, indicates that as usage rises, benefits from tokenizing equity post-trade might total EUR 4.6 billion by 2030. However, it doesn’t end there. The study makes it obvious that now is the time to act since tokenization can open up opportunities for key financial services operations across the board.
To put it simply, tokenization is the process of transforming any rights or assets into a digital token that can be used, owned, and transferred by the holder directly through a blockchain, obviating the need for a middleman. The study by Roland Berger and Keyrock is focused specifically on investment tokens, which can grant their owner the same voting rights, rights to future cashflows, etc. as traditional shares or bonds can, but in a digitalized form that enables the ownership of these assets to be kept current via a decentralized ledger.
Tokenization significantly reduces costs by eliminating third-party middlemen that are usually engaged in the post-trading process. A smooth data flow also enables increased openness, assuming stakeholder policies and regional laws are in place. The fractionalization of assets through tokenization increases access to new markets while also opening up new opportunities.
But there are several difficulties with tokenization. From investors to issuers, there are substantial obstacles that must be overcome:
- Regulatory framework: The adoption of tokenization, which is in essence a model that operates according to a shared worldwide standard, becomes challenging in the absence of common industry standards or uniform regulatory frameworks.
- Scalability: Scalability is a serious constraint that needs more attention since approval and encryption times into the chain’s numerous blocks take so long.
- Cybersecurity: Setting up effective cyber security measures is difficult due to a number of circumstances, including the coexistence of a centralized and decentralized environment.
- Adoption: Tokenization is still in its infancy, therefore it will probably take some time before it becomes popular; this would need persuading the numerous retail investors and making substantial investments in the new technology.
The complexity and inefficiencies of the present post-trade systems and processes may be reduced by tokenization. For instance, the secure connections between financial institutions and traders made possible by blockchain technology may make it unnecessary to use the clearing procedure and significantly reduce settlement times.
While there aren’t any widespread tokenization applications currently, stock trading is probably going to see them soon for a variety of reasons. Since equities markets have been experimenting with blockchain technology, most proof of concepts already exist. Second, because equity has already become largely dematerialized, the transition is less intimidating. A more seamless transition is also guaranteed by the high rates of technology use in the equities markets. The market’s size also makes it a prime choice for scaling up.
Tokenization of stock post-trading might result in benefits of EUR 4.6 billion by 2030 once the adoption of tokenization takes off, driven by harmonized laws and infrastructure.
The moment to take action is now, that much is obvious. The experience of equities trading demonstrates emphatically that tokenization is not only here to stay but also has the potential to have a significant disruptive impact throughout the financial spectrum, leading to irreversible change.
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