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 — belongings in all asset courses. 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 belongings 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 contemplate to make digital asset adoption mainstream.

Related: Why institutions suddenly give a damn about Bitcoin

For one factor, the {industry} is on an enormous digitization path to modernize growing old financial techniques which are reliant on a ledger-based transaction system. It should make sure that the path to digitization is clean, minimally disruptive and brings the financial system that strikes belongings and funds to the velocity of the digital period, maintaining with digital commerce and digital supply of services.

These efforts have introduced innovation with software programming interfaces (APIs) to help new enterprise fashions. These strategic APIs not solely take the form of digital merchandise and services but in addition of co-creation automobiles to ship worth to the client 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 tasks to strategic APIs.

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

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 during 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 latest radical shifts. The {industry} has been a witness to many earlier ground-shifting eras, together with the introduction of computing into banking techniques, anytime-banking with ATMs, and the web and cell know-how shifting the mindset to “anytime, anywhere.”

Today, the financial services {industry} is basically targeted on large digitization efforts with initiatives corresponding 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 consequently of a regulatory directive. They are efforts to keep aggressive and meet buyer calls for for immediate, real-time motion of belongings 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 fascinating know-how engine struggles for financial establishments. The legacy infrastructure, which represents each important funding and previous modernization journeys, is now impeding the velocity and scale required to unlock the digital worth of not solely merchandise and services but in addition of the entirety of the financial establishment itself.

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

With the emergence of each important 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 enterprise fashions which are led by new progressive applied sciences, enterprise constructions and the digitization of adjoining and client expertise in each section of digital enterprise 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 enterprise fashions. This is to preserve techniques 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 tasks. 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 foreign money and a tokenized asset.

A (crypto) asset or foreign money is a medium of alternate or a protocol-driven alternate mechanism that usually embodies the identical traits as a real-world foreign money — corresponding to sturdiness, restricted provide and recognition by a community — whereas being backed by a typical perception system, corresponding to a fiat foreign money. A (crypto) asset or foreign money additionally represents a byproduct of belief techniques, 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 foreign money of the community. A token, on the different hand, might 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 foreign money and represents a unit of worth.

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

While blockchain itself gives the know-how constructs to facilitate alternate, possession and belief in the community, it’s in the digitization of worth parts the place asset tokenization is crucial. 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 enterprise streams, which is able to converge as the {industry} goals to present a unified person expertise.

Tokenization implies that account administration and claims on belongings are pushed by cryptographic keys, as opposed to account administration and asset administration by a system operator known as a financial institution. Though tokenization is extra than simply account administration and claims to an asset, it permits divisibility, fungibility and disintermediated enterprise features, corresponding 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 during which two worlds can coexist and supply a seamless and singular expertise? is a sophisticated one. Adequate thought wants to be given to the operational construction that encompasses the complexity of present constructions, whereas additionally encapsulating the exponential development (and complexity) of a digital asset ecosystem. That presents each a monumental operational problem and as an enormous alternative panorama and avenue to embark on new enterprise fashions.

It is extensively understood and accepted that blockchain know-how 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 might be prolonged to tokenized asset constructions and switch the complete enterprise course of of varied DeFi market constructions into consumable models, the place varied asset courses, marketplaces and DeFi help services might 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 below are the writer’s alone and don’t essentially mirror 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 circumstances and works towards making blockchain for the enterprise a actuality. He beforehand served as chief know-how 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 follow for the enterprise. Gaur can 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 belongings and DeFi funding methods.