In a world where tokenization has become mainstream and various assets are digitally represented on blockchains, tokenized assets will replace fiat currencies in everyday payments. Dew.
This is an interesting argument made recently by British digital identity (DID) and currency expert David Birch in Forbes.
Tokenized assets for payment
For example, instead of selling a mutual fund to get dollars and using it to buy a car, you could transfer a portion of your mutual fund to a dealer on the blockchain. You get the car, and the dealer gets a tokenized mutual fund that they can hold on to or transfer to the automaker to replenish their inventory.
The more assets are tokenized, the easier it is to use them directly for payments without converting them into bank deposits, central bank digital currencies (CBDCs), stablecoins, etc., and the lower transaction costs become.
If you can tokenize any asset, split it up on the blockchain, and seamlessly transfer it, you can always use it to pay for whatever the token represents, from securities and Bored Ape NFTs to houses and airline tickets. be able to.
Of course, this assumes that someone on the network is willing to accept the tokenized assets you hold, so any exchange is possible.
Additionally, supercomputers and AI will help speed up transactions by instantly determining the value of each tokenized asset and matching counterparties. In such a system, digital money may become useless as it only adds to the hassle.
But is it really so? It’s an attractive idea, but there are at least two major hurdles to making it a reality.
Huge trading volume
First, even the most efficient blockchain may be unable to keep up. In the United States alone, nearly 550 million transactions are processed using dollars each day.
This number would be many times higher if payments were to be made using globally tradable tokenized assets rather than a common means of fiat currency.
Currently, cars can be purchased with a single dollar transaction, with the dollars transferred from the buyer’s bank account to the seller’s bank account. On the other hand, in a system based on tokenized assets, a car can be purchased by combining tokenized securities with Bitcoin or tokenized fractional ownership of a warehouse.
In this case, at least three payment transactions would be required to complete a single purchase, one for each type of tokenized asset. But things get even more complicated when the tokenized assets reside on different blockchains, or when the seller’s address or wallet is on a different blockchain.
Interoperability between blockchains is possible, but usually comes with additional costs and risks. If a bridge or some protocol has to be used to move tokens from one blockchain to another, there is a high risk that the tokens will be stolen or lost.
Financial institutions as gatekeepers to prevent illegal activities
The second hurdle for tokenized assets to replace currency is legal. In addition to its traditional functions, fiat currencies today also serve as compliance checkpoints.
In most countries and regions, preventing money laundering and terrorist financing falls to financial institutions that help people and businesses move money.
In other words, financial institutions play an important role in this effort. Financial institutions must understand their customers, identify the recipients of transactions, develop tools to prevent suspicious and fraudulent transactions, and promptly report anything suspicious to authorities.
And all of these actions take place as funds move. From a legal and regulatory perspective, this can be said to be a strategy that relies on institutions that facilitate the flow of funds.
If fiat currency were to be replaced with tokenized assets in everyday payments, this strategy would lose its central operational base and gatekeeper.
Without common assets channeled through specific institutions, regulators will struggle to collect the necessary information and enforce relevant rules.
Who is responsible for blockchain payments?
If anyone can use and even mix different tokenized assets to make payments on the blockchain, who is responsible for flagging or blocking suspicious transactions? Will all the sellers be involved?
Blockchain forensics and automated supervisory tools will help regulators track transactions in real time. However, with billions and trillions of payments made every day across jurisdictions, it is difficult to suspend or block suspicious transactions, especially those that are decentralized and not controlled or controlled by a single party. This seems impossible with blockchain transactions.
As crypto enthusiasts already understand, replacing fiat currency is not an easy task.
Whether for practical or legal reasons, fiat currencies remain the king of everyday payments, even though there are now many alternatives. Even with the proliferation of tokenized assets, this reality is unlikely to change anytime soon.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Original text: How Tokenized Assets Can Replace Money