Tokenisation is no threat to TradFi – it’s the future

It’s no secret that some segments of the traditional financial world remain sceptical about tokenisation.

Despite the fact we’re starting to see real-world examples of successful tokenised issuances, there are still some vocal naysayers.

This was recently epitomised by an opinion piece published by the Financial Times, which cautions that traditional markets could be tainted by tokenisation. The article expressed the view that there is no place for public-permissionless blockchains in real-world asset (RWA) tokenisation and that “some of the purported benefits…are overhyped.”

There is particular cynicism about the efficiency gains of tokenisation, suggesting that existing markets are “efficient enough” and that boosting efficiency might somehow be counterproductive over the long term.

In our view, this article overlooks the underlying functionality of blockchain technology and offers too narrow a view, biassed in favour of protecting the status quo.

No technological system is perfect – our existing, cumbersome financial infrastructure included. But the view that tokenisation could tarnish our financial markets is fundamentally flawed, and could undermine the innovation that is so desperately needed to bring our archaic financial rails into the twenty-first century. 

Blockchain isn’t crypto

According to the article, “regulators around the world have expressed concerns about the integration of crypto and traditional financial markets”, particularly when it comes to public permissionless blockchains.

Firstly, while there has been considerable debate in some jurisdictions about how to approach digital asset regulation, this is not true of all countries. Plenty of regulators around the world have taken a progressive stance and see a role for digital asset infrastructure in our future financial system. Some of the most forward-thinking approaches are coming from small to mid-sized economies that have struggled to access global capital markets and where pushback from layers of technologically obsolete intermediaries is less influential.

The second – and most important reason – why the article is misguided in our view is that crypto is not the same as blockchain. Crypto covers a whole spectrum of digital currencies. From stablecoins pegged one-to-one to the world’s most recognisable fiat currencies to memecoins with no underlying utility, cryptocurrencies are known for their wild price swings.

Let’s be clear – real-world asset tokenisation is not about trading crypto’s volatility. It’s about utilising the technology behind Bitcoin to finally bring our financial infrastructure out of the dark ages.

By their nature, blockchains can enhance the transparency and security of financial transactions while eliminating the need for intermediaries in cross-border payments and settlements. As the backbone of tokenisation, they typically rely on trade-offs between three critical aspects: security, scalability, and decentralisation. 

Institutions with a TradFi mindset – the Financial Times included – often view the decentralised nature of blockchains as incompatible with financial markets. Securities and many RWAs are inherently centralised; shareholders need to be known, issuers need regulatory oversight, and company ownership and financial details need disclosure.

Yet blockchain technology can marry the security and immutability that comes from decentralisation with the controls and oversight financial institutions need when issuing and trading securities. The Liquid Network, a Bitcoin sidechain, is just one example. It allows the amounts and types of assets being transferred to be encrypted, which ensures transaction details are only visible to the parties involved and not to the public, unlike standard Bitcoin transactions.

Public permissionless blockchains are already bridging the gap between TradFi and digital assets. And with blockchain innovation never standing still, we will see growing numbers of use cases. 

Future-proofing capital markets

In many ways, capital markets have been uniquely resistant to internet-era technological changes, with the way securities are issued, traded, settled, and custodied, remaining largely unchanged. Major financial markets require central depositories, delayed settlement (T+3 for equities in the UK for instance), and have limited trading hours.

Since Swift was founded in 1977, our financial systems have mostly relied on relaying messages from one system to another. In contrast, RWA platforms offer real-time settlement, 24/7/365 trading and the ability to self-custody assets, move assets to other platforms and even trade them peer-to-peer. It’s no surprise that these advantages have caught the attention of banking leaders like BlackRock, Standard Chartered, Citi, and HSBC.

And with the recent switch to T+1 in the US, Canada and Mexico, financial infrastructure needs to innovate – and fast. The same message-based systems that trading has relied on for so long are not fit for purpose in a financial landscape that is prioritising speed and efficiency. 

While there is much debate about which ecosystem is best for RWA tokenisation, blockchain is the solution for this need for speed. The fact that Swift itself – a symbol of the old guard – is experimenting with blockchain shows that it will be part of our financial system in some form or another.

The FT article questions whether making financial infrastructure more efficient will “introduce too many fragilities and be counterproductive in the long run.” We would argue the opposite: not making our financial rails more efficient would be counterproductive over the long term. Assuming that our current system is “efficient enough” is to accept the higher levels of counterparty and settlement risk that come with today’s delayed settlement times. We can and should do better.

The financial inclusion reality

The efficiency improvements that blockchain technology can deliver are clearly important. But there’s a bigger picture we cannot ignore – the generational opportunity tokenisation presents to small and mid-sized economies.

Traditional capital markets often overlook developing countries. Access to capital, especially for smaller businesses from emerging markets, is limited or too expensive to be a viable option. Yet businesses need capital to grow. If they cannot access capital from banks, they will forever be condemned to limited growth and opportunities. 

Tokenisation removes the need for traditional financial intermediaries, meaning issuers seeking to raise capital can bypass banks entirely. Companies that have long been forgotten by the traditional financial system can now access much-needed capital at much lower cost.

Rather than being “overhyped”, the financial inclusion benefits could be transformational if tokenisation is allowed to thrive.

Embracing opportunity

Global capital markets now stand at a crossroads. We could accept that our legacy systems are “efficient enough”. But this would not do justice to the potential of blockchain.  

Tokenisation provides an opportunity to update the technology behind capital markets and increase access to capital globally. Rather than being “problematic” as suggested by the FT, permissionless public blockchains can deliver the scale, efficiency and privacy controls required to leverage the benefits of tokenisation.

The status quo bias exemplified by publishing this opinion piece risks holding back much-needed innovation. There is a lot the old world can learn from the new, and financial markets, regulators and policymakers must embrace new technology as we move forward into a new era of finance.

The post Tokenisation is no threat to TradFi – it’s the future appeared first on Bitfinex blog.