Staci Warden, the CEO of Algorand, believes that tokenization can ensure crypto’s survival. For this to become a reality, banks and counterparties must act harmoniously, even as companies like Chainlink try to take the lead in cross-chain interoperability.
Speaking at the Financial Times Crypto and Digital Assets Summit, Warden said it is good for banks to adopt blockchains. Yet technology won’t change the financial plumbing unless all players move at the same time.
How tokenization creates new markets
People who are not accredited investors or high net worth individuals cannot participate in certain parts of the economy. This inadequacy is a niche in which tokenization can create new markets that trade fractions of high-value assets, adding additional liquidity to the space.
Read more: What is the impact of Real World Asset (RWA) tokenization?
Some capabilities take advantage of back office inefficiencies. An airline in Argentina called FlyBondi is working on tokenizing tickets.
The blockchain allows the airline to tokenize a ticket. The original buyer can sell this tokenized asset on a secondary marketplace if they no longer need it, Warden said.
“You’re creating a secondary market for something that is quite illiquid, and in this case not available to you at all. And that’s where I think one of the areas is very exciting for the tokenization of assets.”
She said the tokenization process is trivial compared to whether you can consider, for example, a stablecoin crypto as a valid store of value. Whether stablecoins can be considered cash for on-chain settlements is a topic of regulatory complexity in Europe. She added that stablecoins, if they represent fiat money, call into question the need for central bank digital currencies.
Read more: What is tokenization on Blockchain?
Tokenization needs Blockchain standards
If banks and other institutions want to adopt blockchains at scale, they need a way for different networks to communicate. Otherwise, they will not be able to take advantage of the many efficiency benefits of blockchain settlements.
Where Banks Are Adopting Blockchain | Source: AppInventiv
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is an example of a system that allows banks to exchange messages securely and quickly. It allows banks to communicate to a global standard, but banks must still perform the necessary clearing and settlement for transfers. These features introduce inefficiencies.
Likewise, if blockchains are to become an effective means of transferring assets, they must be able to communicate with each other according to a globally accepted standard. Only then will institutions be able to reap the full benefits of settlement efficiency.
Chainlink, a company that develops channels for blockchains to receive real-world data, recently went live with a new Cross-chain Interoperability Protocol (CCIP). The protocol has launched on the Chainlink mainnet, Ethereum, Avalanche, Optimism and Polygon.
The purpose of the protocol is to enable seamless data exchange between blockchains. It has an Active Risk Management (ARM) network and active rate limits as security measures.
These measures neutralize the risks of so-called bridges connecting blockchains that have been victims of multi-million dollar hacks in the past. But before CCIP becomes as widely adopted as SWIFT, users will need to answer a number of complex regulatory questions. The Bank of Italy is running a pilot that could answer some regulatory questions on the issue of the cash value of tokenized assets, Warden said.
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