Since its creation in 2009, cryptocurrency has gone from a niche phenomenon to the mainstream. Now, more and more banks are interested in this technology and are looking for ways to use it. One such way is asset tokenization.
What is the role of asset tokenization in attracting banks to cryptocurrency and how is it used in Ukraine?
Tokenization is the process of converting real assets, such as stocks, bonds, real estate, or even works of art, into digital tokens. These tokens can then be used for trading, investing, or other purposes. Tokenization of assets has become one of the most discussed topics in the field of finance and cryptocurrency. This process, which consists in the transformation of real assets into digital tokens, opens up new opportunities for banks and other financial institutions in the field of cryptocurrency. Asset tokenization allows banks to attract new customers and expand their services. Thanks to tokenization, banks can offer their customers access to digital assets, such as cryptocurrency, without the need to own physical assets. This makes cryptocurrency more accessible to a wider audience, particularly those who previously had no opportunity to invest in this type of asset.
This procedure allows banks to attract new sources of financing. Instead of traditional lending, banks can issue tokens that represent a certain value of an asset. These tokens can be sold to investors, which allows banks to obtain the necessary funds for the development of their projects. This approach is more flexible and efficient, as it allows financial institutions to raise funds without the need to use traditional instruments.
What are the benefits of tokenization?
Asset tokenization helps banks reduce risks and increase transparency in financial transactions. By using blockchain technology, token transactions can be recorded and verified in real time. This reduces the risk of fraud and abuse, as all transactions are recorded in a distributed database that cannot be changed without the consent of all network participants. Blockchain technology provides transparency in financial transactions, allowing customers and regulators to track all transactions and verify their legitimacy.
It should also be mentioned about the economic advantages that tokenization of assets brought to banks. Instead of traditional financial transactions, which require significant costs for data processing and storage, tokenization allows transactions to be carried out faster and more efficiently. Banks can reduce infrastructure and staff costs as many processes can be automated using blockchain technology. In addition, asset tokenization allows banks to attract new revenue streams such as transaction and asset management fees. The main advantage of asset tokenization for banks is increased liquidity. Traditionally, assets such as real estate or securities can be difficult to sell or transfer. Tokenization allows banks to convert these assets into digital tokens that can be easily bought and sold on the blockchain. This allows banks to realize their assets faster and gain access to money that can be used for new investments or expansion of operations. Instead of selling entire assets, banks can issue tokens that represent shares of those assets. This allows investors to purchase a share of an asset even if they do not have enough money to purchase the entire asset. This approach opens up new opportunities for small investors who previously did not have access to such assets.
Cons of tokenization:
Tokenization of assets poses challenges for banks. One of them is the issue of regulatory responsibility. Tokens are digital assets and their issuance and trading are subject to regulatory requirements. Banks must ensure that they comply with all requirements and regulations regarding the issuance and trading of tokens. This may require additional efforts and resources from banks. New technologies and infrastructure are required to use this system. Banks must have appropriate systems in place to issue and manage tokens, as well as to trade them on the blockchain. This may require significant investment in the development and implementation of new technologies. Banks must also ensure the security and protection of digital assets from cyber attacks and other threats.
Why are banks interested in tokenization?
There are a number of reasons explaining the growing interest of banks in tokenization:
- Cost reduction and efficiency gains: Tokenization can automate many processes, resulting in cost savings and increased efficiency for banks (McKinsey & Company Report, 2022).
- The World Bank Report says that tokenized assets can help banks enter new markets and offer their products and services to a wider range of customers.
- Thanks to tokenization, banks are able to create fundamentally new products and services that were previously impossible
- Increased competitiveness: the introduction of tokenization allows banks to increase their competitiveness in a rapidly changing financial market.
Currently, banks use tokenization in several ways:
- Issuance of own cryptocurrencies (stablecoin): Some banks have already issued their own stablecoins – cryptocurrencies tied to the exchange rate of traditional currencies such as the US dollar (JPMorgan Chase, 2021).
- Tokenization of traditional assets: Banks have begun to tokenize stocks, bonds, and real estate, opening up new investment opportunities for them (Goldman Sachs, 2022).
- Creation of platforms for trading tokens: Some banks have developed special platforms for carrying out transactions with tokenized assets (Citibank, 2023).
- Adoption of decentralized financial (DeFi) services: Individual banks are experimenting with decentralized financial services such as blockchain-based lending and deposits (HSBC, 2023).
Tokenization of assets in Ukraine
Ukrainian banks are also interested in tokenization, although for now their steps in this direction are cautious.
Savings Bank:
In 2021 Savings Bank announced plans to issue its own stablecoin tied to the hryvnia. No stablecoin has been released yet, but the bank continues to explore this technology.
Alfa-Bank Ukraine:
In 2022, Alfa-Bank Ukraine launched a platform for trading cryptocurrencies. The platform offers Bitcoin, Ethereum, Litecoin and Bitcoin Cash trading.
Unex Bank
Unex Bank together with Mastercard and fintech startup Weld Money launched the first cryptocurrency payment card in Ukraine, weld, which allows you to pay for goods and services in cryptocurrency wherever cashless payments are available. Weld card is a digital payment card based on Debit Mastercard, which is tied to a cryptocurrency wallet on the platform Weld Money.
PrivatBank is exploring the possibilities of using tokenization for various areas, such as payments, trade and asset registration. So far, the bank has not announced any specific plans in this area.
- Tokenization of assets in Ukraine is still at an early stage of development, and there are several reasons for this:
- Uncertainty of regulation – in Ukraine, there is still no clear regulation of cryptocurrencies and tokenized assets.
- Cyber Security – Tokenized assets may be vulnerable to cyber attacks.
- Volatility of cryptocurrencies – they can be very volatile, which can lead to losses for investors.
Forecasts and prospects of tokenization of assets in Ukraine
Ukraine is one of the countries with the most active use of cryptocurrencies. So, last year, according to Merchant Machine research, Ukraine was in second place in the world in terms of this indicator, sharing the top three with the USA and Great Britain. At the moment, cryptocurrencies and digital assets are not prohibited in Ukraine, but they do not yet have a clear regulatory regulation. However, digital assets by their very nature do not necessarily “fit” into one or another jurisdiction, and regardless of the further fate of the legalization of crypto-assets, Ukrainians can find legal ways to participate in this market, be they entrepreneurs, investors, contractors or clients.
However, there are also obstacles to the transition of the economy (that is, real assets) to the digital space. First, unlimited access to assets, excessive ease of registration and closing accounts can lead to some chaos. Secondly, there is still no single approach to tokenization, which affects many factors – asset management and role distribution, security, integration with traditional payment systems, etc. Therefore, in many aspects, state regulation of this process is necessary, and in a few years it is quite possible to expect the arrival of some kind of general consensus both among blockchain projects and from the point of view of their interaction with existing government institutions.
