The Double-Edged Sword of Tokenization: A Closer Look

Tokenization, the trend of linking crypto tokens to traditional financial assets, is sparking debates in the finance world. While some see it as a revolutionary step, others warn of potential pitfalls. The global securities regulator, IOSCO, recently highlighted these concerns in a report. The idea behind tokenization is to create digital tokens on a blockchain that represent real-world assets like stocks or bonds. This process has gained traction this year, with new tokenized products hitting the market through online brokers. However, IOSCO points out that this trend comes with risks. One major issue is the uncertainty around ownership. Investors might not always be clear if they own the actual asset or just the token. Additionally, relying on third-party token issuers introduces counterparty risks. IOSCO also warns that tokenization could be affected by the volatility of the broader crypto market. Despite these risks, some big players like Nasdaq are diving into tokenization. Proponents argue that blockchain can reduce trading costs, speed up settlements, and even attract a younger crowd to investing. However, IOSCO notes that these efficiency gains are not always clear or consistent. The report also mentions that while interest in tokenization is growing, actual adoption is still limited. Market participants often still rely on traditional infrastructure, rather than fully embracing blockchain technology. Moreover, issuers rarely disclose concrete evidence of the efficiency gains they claim.