Crypto payments helped drive early innovation and adoption of blockchain technology, but the core benefits of improved access, efficiency and liquidity are now powering the newest transformational application of this technology—real world asset tokenization. And business leaders are taking notice.
Seventy-two percent (72%) of respondents to Ripple’s 2023 New Value Report said they expect to explore tokenization as a means of driving innovation within the next three years.
To be successful, these businesses will need to build an asset tokenization strategy that accounts for the elements and industries best able to unlock the full potential of blockchain.
Unlocking Business Value
The growing interest in and examples of tokenization can be traced back to the wide range of benefits that blockchain technology enables. From tokenization of financial assets and real estate to ownership and event ticketing and carbon credits, tokenization is helping to maximize business revenue through streamlined management, increased accessibility and greater liquidity.
One of the main benefits is greater transparency. Transaction data stored on a blockchain is immutable, fostering greater security of sensitive information and a more trustworthy ecosystem. For inefficient markets like the voluntary carbon credits market that suffers from opacity and double counting, this represents a major leap forward in credibility.
Tokenization can also improve access to an asset class by reducing traditional barriers to entry, lowering costs or asset prices and eliminating geographical boundaries. This enables companies to offer customers a wide array of real world assets that were once out of reach. For instance, a real estate project in one corner of the world can now be tokenized and made available to investors in the other, at a price point that is more accessible.
But the benefits of tokenization can only come to fruition when the markets for these tokenized assets become more liquid and have a strong secondary market.
Companies can further benefit from the operational efficiencies of tokenized assets on the blockchain including faster transactions, reduced management fees, and lower costs. As one example, the XRP Ledger (XRPL)—an open-source, decentralized, public blockchain—was purpose-built for financial use cases and has enabled over 2.6 billion transactions to settle in real-time, error-free, for more than a decade.
Additionally, because of the decentralized nature of blockchain and distributed ledger technology (DLT), tokenized asset markets can be accessed 24/7/365 regardless of time zone or traditional market hours. As previously mentioned, blockchain transactions are immutable which dramatically improves the traceability of a tokenized asset. Each of these benefits have positive impacts on the bottom line or can be passed along to end-users to create a competitive advantage within the marketplace.
Industries at the Forefront of Tokenization
While tokenization will undoubtedly touch all corners of the world, certain industries are particularly poised to thrive in the emerging token economy. Bolstered by the foundational elements outlined above, first movers joined by a reliable crypto liquidity provider will help lead the charge in adopting tokenization.
As bank-issued stablecoins continue to gain traction, financial institutions will play a pivotal role in the payments ecosystem. Using blockchain to power a modern payments solution, stablecoins can enable merchant settlement, cross-border payments, treasury functionality and tokenized loyalty programs among other use cases with faster settlement times, lower costs and greater transparency.
Asset management funds are also undergoing a seismic shift. A BNY Mellon survey found that ninety-seven percent (97%) of respondents said they believe tokenization would revolutionize the industry. This sentiment was echoed in Ripple’s 2023 New Value Report, with over half of global finance leaders indicating plans to use digital asset custody within the next three years. Businesses are eager to convey the advantages of tokenized assets to their clients.
Traditional banks are also well-positioned to prosper in a token economy. By offering a unified platform to hold various assets, — fiat, digital currencies (e.g. stablecoins, cryptocurrencies) and tokenized assets — banks can provide a comprehensive view of an individual’s financial portfolio, fostering greater customer trust and engagement.
Building Blocks for a Tokenized Economy
As businesses gear up for a tokenized future and seek to capitalize on these benefits, they must plan for four key elements that will serve as the foundation for success: enabling liquidity, on/off ramps, custody, and compliance.
- Enabling Liquidity: Liquidity refers to the ability to buy or sell an asset without causing a dramatic change in the asset’s price. Liquidity facilitates core treasury functions, supports business growth, and protects asset holders against risk.
- On/Off Ramps: The process of seamlessly converting traditional assets to digital assets and vice versa is known as on- and off-ramping. This functionality is essential for enabling the easy conversion and transfer of value, and bridging the gap between different forms of currency or assets. Businesses will increasingly rely on crypto-native payment service providers (PSPs) for this purpose.
- Custody: Security is paramount in the world of tokenization. Custody refers to the secure storage of digital assets which underpins all transaction-related activity on a blockchain—from trading, staking, lending, buying, selling and beyond. Robust, institutional-grade crypto custody solutions ensure the safety of digital assets and provide a seamless experience for users.
- Compliance: Compliance is non-negotiable. Businesses engaging in tokenization must adhere to current and future regulatory standards to ensure the legality of their operations. A well-structured compliance framework builds trust and credibility, supporting a conducive environment for growth.
The Path Forward
Tokenization is actively transforming the future of business. As companies harness the value that tokenization can deliver — from enhanced transparency to universal access to unprecedented liquidity — they must be prepared to navigate the intricacies of this evolving landscape. In the third and final part of our series, we’ll address the liquidity challenges that businesses may encounter in a tokenized economy and how to overcome them.