Tokenization needs blockchain to thrive

The Financial Stability Board recently reported on blockchain and other decentralized financial technology, and its findings suggest distributed ledgers can boost tokenization.

Tokenization represents a new frontier of financial instruments such as payments and investments that will require significant research and development as it marches forward into mainstream applications.

There are some misconceptions around tokenization that are worth exploring. For example, the concept of a deed is a legal document that represents a property asset. The same is true for a stock or bond certificate. These pieces of paper are accurately called a “token,” if you view a token as a symbol or representative unit of something else. A deed was the first ever “tokenization” of a property, and made it much more easily traded and transported than the asset it represents.

Cryptographic tokenization is just the next iteration of asset representation. The concern here now it has become easy for someone to purchase an asset without having seen the asset itself. The risks mentioned in this report are not at all unique to the issues of tokenization.

The benefits of blockchains are the solution for this, and it’s up to token issuers to produce the highest level of clarity regarding the asset behind their token. Platforms like Ethereum’s IPFS enable immutable document access, so token issuers and purchasers can provide all necessary financial documents, audits, inspections, etc., directly to those who own the token. Here, we see tokenization providing both market liquidity and liquidity of information, something unavailable in legacy platforms.

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