Understanding the systemic shift from digitization to tokenization of financial services

The financial {industry} has seen an increase in demand for publicity to digital — and crypto — property in all asset lessons. This has led to curiosity, demand and funding from institutional finance, ranging from digital asset custody to digital asset buying and selling desks, regulatory and compliance frameworks, and audit and threat fashions. 

It is honest to say that digital property have taken the financial services {industry} by storm. While the consideration and funding from conventional finance in decentralized finance (DeFi) is hailed as a progressive step, there are huge challenges and hurdles that financial services and establishments want to think about to make digital asset adoption mainstream.

Related: Why institutions suddenly give a damn about Bitcoin

For one factor, the {industry} is on a large digitization path to modernize ageing financial methods which are reliant on a ledger-based transaction system. It should be certain that the path to digitization is easy, minimally disruptive and brings the financial system that strikes property and funds to the pace of the digital period, maintaining with digital commerce and digital supply of services.

These efforts have introduced innovation with utility programming interfaces (APIs) to help new business fashions. These strategic APIs not solely take the form of digital merchandise and services but additionally of co-creation autos to ship worth to the shopper and financial services ecosystem. The {industry} has seen a development of full lifecycle API administration as a glue to safe companies and expose services at the identical time, which shifts the IT focus from initiatives to strategic APIs.

Lately, the method has concerned financial technology — or fintech — partnerships and/or modernizing technology. It has targeted on person expertise and the API, with little consideration to the systemic parts of the financial services {industry}, akin to cost, treasury, threat fashions, fraud, regulatory and compliance, to identify a number of. While the person expertise method has achieved some success, the deficiencies have surfaced for legacy design components of tightly coupled designs. The use instances that manifest as a financial utility finally meet up with the financial methods’ limitations, and property locked in the ledger and reliant on the relay of batch processes to transfer property.

Related: DeFi needs real-world adoption, not just disruptive pioneering

So, how does a financial establishment handle these two drastically totally different fashions in tandem as the {industry} evolves in a posh transformation with a disruptive twist? On one hand, the digitization effort focuses on a ledger-based mannequin, which is basically the present infrastructure, whereas on the different hand, the disruptive twist promotes a token-based mannequin, which challenges and negates the present digitization efforts. How do financial establishments handle the delicate steadiness through which two worlds can coexist and supply a seamless, singular expertise?

Related: CeFi and DeFi will finally meet in 2021 — Let’s hope they hit it off

Understanding digitization and fintech-led disruption

The financial services {industry} is in a relentless state of flux, together with current radical shifts. The {industry} has been a witness to many earlier ground-shifting eras, together with the introduction of computing into banking methods, anytime-banking with ATMs, and the web and cellular technology shifting the mindset to “anytime, anywhere.”

Today, the financial services {industry} is basically targeted on huge digitization efforts with initiatives akin to open banking, Payment Services Directive-2 (PSD 2), strong customer authentication (SCA) and ISO 20022 for cost harmonization and modernization. Many of these digitization efforts are industry-led, and a few are pushed because of this of a regulatory directive. They are efforts to keep aggressive and meet buyer calls for for immediate, real-time motion of property and digital fiat as settlement devices.

Related: Europe awaits implementation of regulatory framework for crypto assets

The challenges the financial services {industry} faces are immense, together with fixed shifts in the regulatory panorama, buyer expectations of digital natives, the want for real-time and around-the-clock operations to service purchasers’ requests, and ecosystems’ exogenous elements which are creating attention-grabbing technology engine struggles for financial establishments. The legacy infrastructure, which represents each vital funding and previous modernization journeys, is now impeding the pace and scale required to unlock the digital worth of not solely merchandise and services but additionally of the entirety of the financial establishment itself.

Related: Stablecoins present new dilemmas for regulators as mass adoption looms

With the emergence of each vital change, the financial services {industry} has been ready to adapt and face up to the disruption. The motion led by fintech is one other main shift, underpinned by radically totally different business fashions which are led by new progressive applied sciences, business buildings and the digitization of adjoining and shopper expertise in each phase of digital business and engagement. This shift — coupled with mounting regulation, compliance pressures and disruption from the fintech ecosystem — is forcing the established financial services {industry} to rethink innovation and business fashions. This is to maintain methods aggressive, progressive and malleable for future disruptive shifts which will happen — like DeFi pushed by tokenization.

Related: Tokenization of assets is not taking off, but it really should

Understanding the implications of asset tokenization

We have established that digitization is the first step in lots of enterprise and permissionless blockchain initiatives. Tokenization is the course of of changing or claiming an asset and rights right into a digital illustration, or token, on a blockchain community. At this time, it might be prudent to draw a distinction between a (crypto) asset or forex and a tokenized asset.

A (crypto) asset or forex is a medium of change or a protocol-driven change mechanism that always embodies the identical traits as a real-world forex — akin to sturdiness, restricted provide and recognition by a community — whereas being backed by a typical perception system, akin to a fiat forex. A (crypto) asset or forex additionally represents a byproduct of belief methods, or consensus, as a car to again the incentive financial mannequin that rewards and fuels the belief system of a community, making it a belief forex of the community. A token, on the different hand, could be many issues: a digital illustration of a bodily good, making it a digital twin, or a layer-two protocol that rides on the (crypto) asset or forex and represents a unit of worth.

This distinction between a (crypto) asset or forex and a tokenized asset is necessary for understanding the change autos, valuation fashions and fungibility across varied worth networks which are rising and posing challenges round interoperability. The challenges aren’t simply technical, but additionally business challenges round equitable swaps. Tokenization of property can lead to the creation of a business mannequin that fuels fractional possession or the capacity to personal an occasion of a big asset. The promised asset tokenization on blockchain-based business networks isn’t just digitization or an answer to the inefficiencies of time and belief; it additionally creates new business fashions and co-creations from synergies of community contributors that didn’t exist earlier than.

While blockchain itself supplies the technology constructs to facilitate change, possession and belief in the community, it’s in the digitization of worth parts the place asset tokenization is important. In essence, digitization is kind of a prerequisite to tokenization. In the financial services context, digitization of present services and token-driven DeFi current two parallel business streams, which is able to converge as the {industry} goals to present a unified person expertise.

Tokenization implies that account administration and claims on property are pushed by cryptographic keys, as opposed to account administration and asset administration by a system operator referred to as a financial institution. Though tokenization is extra than simply account administration and claims to an asset, it allows divisibility, fungibility and disintermediated business features, akin to asset switch. It is a elementary constructing block and prerequisite for an “internet of value.”


The reply to the query How does a financial establishment handle the delicate steadiness through which two worlds can coexist and supply a seamless and singular expertise? is an advanced one. Adequate thought wants to be given to the operational construction that encompasses the complexity of present buildings, whereas additionally encapsulating the exponential development (and complexity) of a digital asset ecosystem. That presents each a monumental operational problem and as a large alternative panorama and avenue to embark on new business fashions.

It is extensively understood and accepted that blockchain technology lays the basis for a trusted digital transactional community that, as a disintermediated platform, fuels the development of marketplaces and secondary markets due to new synergies and co-creation due to new digital interactions and value-exchange mechanisms.

Open banking has led the digitization efforts with a raft of open APIs. These APIs could be prolonged to tokenized asset buildings and switch the total business course of of varied DeFi market buildings into consumable items, the place varied asset lessons, marketplaces and DeFi help services could be stitched right into a singular expertise hiding the transactional complexity.

This article doesn’t comprise funding recommendation or suggestions. Every funding and buying and selling transfer entails threat, and readers ought to conduct their very own analysis when making a call.

The views, ideas and opinions expressed listed here are the creator’s alone and don’t essentially replicate or symbolize the views and opinions of Cointelegraph.

Nitin Gaur is the founder and director of IBM Digital Asset Labs, the place he devises {industry} requirements and use instances and works towards making blockchain for the enterprise a actuality. He beforehand served as chief technology officer of IBM World Wire and of IBM Mobile Payments and Enterprise Mobile Solutions, and he based IBM Blockchain Labs the place he led the effort in establishing the blockchain observe for the enterprise. Gaur can also be an IBM distinguished engineer and an IBM grasp inventor with a wealthy patent portfolio. Additionally, he serves as analysis and portfolio supervisor for Portal Asset Management, a multi-manager fund specializing in digital property and DeFi funding methods.