Tokenization—the process of converting valuable assets like cash or real estate into blockchain-based tokens—is gaining immense traction. Major financial institutions worldwide are implementing pilot projects to explore its potential. For instance, UBS has introduced UBS Tokenize, JP Morgan has developed its tokenization platform, and Visa is now enabling banks to issue custom tokens.
Why Tokenization?
Tokenization, which transforms tangible assets into blockchain-based tokens, allows institutions to harness blockchain’s advantages while sidestepping complex legal challenges. Essentially, it provides the benefits of crypto technology without the volatility. This seamless integration with traditional banking is driving tokenization forward as the future of digital assets, attracting major financial players.
How Tokenization Operates
Picture having a million dollars sitting idle in the bank (it’s an appealing thought). Imagine the bank issues one million BankTokens (BT), each redeemable for cash at any time. Your cash now exists as 1,000,000 BT, a versatile digital form.
You need to cover mortgage payments, so you transfer 100,000 BT to another bank that converts your tokens into its own. When paying for your child’s college fees, you send 250,000 BT to the institution’s payment system, which converts the tokens back into dollars in the college’s account.
Next, you invest the remainder in a real estate asset worth $2 million, which has its value represented as 2 million RealEstateTokens (RET). You transfer your remaining 650,000 BT and instantly receive 650,000 RET, representing a stake in the property.
It’s astonishing how quickly funds are mobilized with tokens. This efficiency is why financial institutions are embracing tokenization.
The Advantages of Banks
Tokens offer greater efficiency. Blockchain technology enables banks to manage and transfer funds with increased speed and ease.
Tokens enhance security. Despite frequent headlines, blockchain remains highly resilient against fraud and cyberattacks, as all transactions are transparently recorded on the blockchain.
Tokens enable new financial products. Beyond real estate, any valuable asset—such as fine art, derivatives, or cash—can be tokenized, opening the door to novel financial offerings.
Tokens generate revenue. Banks can collect transaction fees for every tokenized exchange, increasing earnings as more tokenized products enter the market.
Tokens cut costs. While implementing blockchain technology requires an initial investment, the long-term impact is a reduction in operational costs, ultimately boosting profitability.
The Advantages for Consumers
Most consumers likely won’t even notice the shift.
In the previous example, the mention of 1,000,000 BT isn’t literal—you won’t see a balance of BankTokens in your account. This would be overwhelming, especially for some older customers. Instead, tokenization will work behind the scenes.
When you check your account, it will still show a balance of $1,000,000. However, thanks to tokenization, accessing and spending those funds will be quicker and easier.
While consumers benefit from a seamless experience, the primary advantage goes to the bank. Tokenization enables banks to purchase other tokenized assets—such as bonds or commodities—with nearly instantaneous settlement.
How Can One Invest in the Move
Investing here is straightforward. Since most banks are opting to build their tokens on Ethereum, simply buying and holding ETH can be a strategic move.
While a few institutions are developing their blockchains, this approach is costly and complex. Additionally, bridging a proprietary blockchain with Ethereum introduces security challenges.
Creating a separate blockchain is like launching your payment network instead of using Visa—why go through the trouble when everyone already uses Visa?
Similarly, Ethereum is already widely adopted, with the largest ecosystem of tools, developers, and active users. For most banks, choosing Ethereum as the foundation for tokenization is an obvious choice despite its imperfections.
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