For years, many people were talking about the imminent rise of tokenization across various sectors. Businesses, financial institutions, and organizations worldwide are embracing blockchain technology to tokenize a wide array of assets, including currencies, real estate properties, and supply chain inventory.
Recently, the Bank for International Settlements (BIS) unveiled Project Agorá, a collaborative initiative involving seven central banks aimed at establishing a platform for cross-border CBDC payments and tokenized money transfers. This project is just one of several initiatives undertaken by the BIS to explore the potential of blockchain technology.
The BIS will partner with central banks from the U.S., U.K., France, Japan, Switzerland, South Korea, and Mexico, inviting private banks to apply for participation before the project commences. Cecilia Skingsley, the head of the BIS Innovation Hub, emphasized the importance of creating a unified payment infrastructure to enable interoperability among various digital currencies across different payment systems, accounting ledgers, and data registries.
What is tokenization
Tokenization is a process that involves converting real-world assets, such as real estate properties, stocks, or commodities, into digital tokens on a blockchain network. These tokens represent ownership rights or shares in the underlying asset and are recorded securely and transparently on the blockchain ledger. Tokenization offers several benefits, including increased liquidity, fractional ownership, and accessibility to a wider range of investors. It enables asset owners to divide their assets into smaller units, making them more affordable and tradable. Additionally, tokenization enhances transparency and security by immutably recording ownership records on the blockchain, reducing the risk of fraud or manipulation. Overall, tokenization revolutionizes traditional asset ownership and investment models, unlocking new opportunities in the digital economy.
What assets can be tokenized
A wide array of assets across various industries can be tokenized, transforming their ownership rights into digital tokens on a blockchain network. These assets include but are not limited to real estate properties, stocks, bonds, commodities, fine art, intellectual property rights, and even rare collectibles. In fact, many companies are leveraging these possibilities. Like the EU-based NYALA that offers real world asset tokenization to its clients. Additionally, non-traditional assets such as music royalties, carbon credits, and gaming assets can also be tokenized. The flexibility of tokenization allows for the representation of both physical and digital assets, enabling fractional ownership, increased liquidity, and accessibility to a global investor base. As blockchain technology continues to evolve, the potential for tokenizing diverse asset classes grows, offering innovative solutions for asset management and investment.
Summary
While the involvement of the BIS and various central banks in experimenting with these concepts is promising, there are two interconnected issues that may hinder their full potential.
Firstly, the blockchains and ledgers being utilized are private and permissioned, restricting the interoperability they can facilitate. This limitation creates a closed-off environment akin to early internet networks such as AOL, inherently constraining their utility.
Secondly, even if these platforms were open to public development like the open internet, they would struggle to scale to meet the demands of truly global use. For instance, Visa’s systems can handle up to 20,000 transactions per second, while a global ledger supporting the world financial system would require millions or even billions of transactions per second.
The solution lies in a scalable public ledger that remains decentralized, offers unbounded scalability, and supports programmable functionalities such as smart contracts.