Tokenization could be a boon to crypto — or trigger disaster

It’s been a common thread of the crypto industry for years: A new blockchain-based application is coming to life, promising to be the tipping point for widespread adoption, only to be thwarted by bad actors.

FTX positioned itself as a regulation-friendly exchange promising a bright future for all until it collapsed due to mismanagement of investor funds and fraudulent behavior. Crypto lender Celsius was also brimming with potential until it went bankrupt and was $1.3 billion short of funds. Bad business practices have continually undermined progress in the crypto space.

We now face another opportunity for mainstream adoption – the tokenization of real-world assets (RWAs). Tokenization is about representing real assets such as real estate, art or goods as digital tokens on a blockchain. Tokenized RWAs have the potential to create a new financial market and give existing traditional financial markets a long overdue overhaul that combines the choice and flexibility of DeFi with the security and regulatory characteristics of TradFi. This means we can finally deliver on the promise of DeFi and bring the benefits of blockchain to the masses and offer a potential “Kodak moment” to market participants who aren’t keeping up.

But as with most technical innovations, we must use them responsibly. The success of tokenization depends on the responsible actions of market participants. The crypto industry is running out of chances to regain trust and prove its reliability to the general public. If implemented properly, tokenized RWAs could lead to mass cryptocurrency adoption, if not, they could be one of the last nails in the coffin for the industry, manifesting the technology with unfulfilled promise.

year of tokenization

While decentralized finance has been expected to democratize access to high-yield investments as there are no geographic barriers, no seed capital required and 24/7 market access, the unregulated and volatile nature of the space has meant that this has not yet been realized.

Tokenization could be the missing piece of the puzzle. The landscape of traditional finance has far more assets, liquidity and regulation. By adopting the underlying premise of DeFi, namely transparency, 24/7 trading, automation, composability and self-custody, and incorporating the stability of TradFi assets and channels, tokenization can transform the way we trade financial markets, build and shape, change dramatically.

This promise has not gone unnoticed in the industry. Blockworks named tokenization its “Crypto Topic of the Year” for 2023, and tokenized gold hit a combined market cap of over $1 billion in April.

It’s not just the crypto space either. Mainstream organizations like Goldman Sachs, Blackrock, and Siemens are all beginning to look at representing assets on the blockchain. In fact, BlackRock CEO Larry Fink recently said that tokenization will be “the next generation for markets.” There is genuine hope that tokenization will result in blockchain technology finally entering an era of meaningful real-world applications.

consumer protection and transparency

If we have learned anything over the past 10 years in both the financial and crypto markets, it is that bad business practices will eventually catch up with companies. Tokenized RWA providers need to learn from the mistakes of their predecessors if tokenization is to accelerate mainstream adoption and prevent another FTX or Celsius crisis.

Unfortunately, we are already seeing insufficient disclosures, inadequate consumer protection, and whitewashing of regulatory details creep in with tokenization. There are some companies operating in this space that do not disclose the underlying assets held, giving investors no indication as to whether their balance sheets are clean, or little identification of the specific players in the value chain. Organizations base their tokens on a “contract for difference” rather than the real asset, which gives the buyer no claim to the underlying security and thus no bankruptcy protection in the event of issuer bankruptcy. The ordinary consumer is unable to see this difference and its significant disadvantages.

Tokenized RWA providers clearly have a role to play here when it comes to consumer protection, but this also needs to be matched by a robust regulatory framework. While other areas of crypto regulation may be complicated, RWAs are quite simple in comparison. Since the tokens are real stocks, bonds and securities, they are undisputedly regulated only as such. This prevents the space from falling into murky waters where these assets become freely transferable and risking them falling into the hands of those who shouldn’t have access to them, such as users from sanctioned countries.

The final frontier of mainstream acceptance

The time to act is now. A recent EY market survey of tokenization found extremely optimistic metrics for adoption: 57% of institutional investors are said to be interested in investing in tokenized assets, and 40% are interested in starting this year or next. These numbers are stunning.

And it’s not just the institutions. Based on our media analysis, we have seen widespread interest in tokenization, with media mentions of the topic increasing by 204% over the last year.

Tokenization holds tremendous potential for widespread crypto adoption. However, if we don’t learn from the past, we are doomed to repeat past mistakes. For the industry to move forward, tokenization providers must take meaningful steps to ensure transparency, security, and accountability.

If we get this right, we can revolutionize traditional finance and bring the benefits of decentralized infrastructure to a wider audience. With the reputation and future of the industry at stake, now is the time to act.