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Why tokenization is transforming finance and banks



Source: Observatorioblockchain / Jose Maldonado

The potential of tokenization to transform finance, banks and other financial institutions is enormous. There are several examples in this regard. For example, the Banco Santander bond tokenization pilot on the Ethereum network, an event that took place in 2019. Other institutions, such as Citibank, have also carried out various experiences in this regard.

What is blockchain tokenization and why is it transforming the world?

Recently, the financial institution HSBC launched Orion, a DLT-based bond tokenization platform, which can be used to issue tokenized sterling bonds under Luxembourg law. The solution enables the digital bond to be tokenized as the currency used for settlement, enabling atomic settlement or delivery versus payment (DvP). All this, thanks to the Hyperledger Fabric technology , which underlines the quality of this enterprise free software development.

Finance Tokenization

Experiences such as those of the NY FED, Citibank or HSBC are just a sample of the potential of tokenization in the field of finance. The objective of all these institutions is to reduce the risk of their operations. Many of these corporations move billions of euros/dollars a day. Many times, instead of real currency, they mobilize financial instruments that are not easy to keep track of and audit safely.

Why will blockchain-enabled tokenization transform the world?

Therefore, banks are the first interested in having a regulation that allows the free application of this type of technology in their products and services. Blockchain technology has been in operation for more than 14 years as a fundamental pillar of cryptocurrencies such as Bitcoin. In all this time it has demonstrated its safety and suitability. This means that the global financial future depends not only on the arrival of digital money and CBDCs, but also on the tokenization of all financial instruments. A step that will mean the absolute transformation of the financial system as we know it today.

CBDC to settle trades

Recently, the New York Federal Reserve (NY FED) and the BIS Innovation Center unveiled the Cedar Project. This is a joint study to study how CBDC (central bank digital currency) can help the financial system to quickly settle operations carried out in foreign currency (FX), using the capabilities of tokenization and its potential to improve banking operations.

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The intent of the report is to improve payment settlement times, which typically take an average of two to three days to complete. In this sense, CBDCs could enable an atomic operation that would make such payments instantaneous. Except in special cases for KYC/AML reviews, which would take a maximum of 24 hours. The study not only focused on the speed of operations, it was also interested in security, cost reduction, auditability and carrying out operations at all times, under a 24/7/365 scheme.

The report, in addition to highlighting the capabilities of CBDC technology and tokenization, praises the capabilities of CBDCs for a global financial operation that does not conflict with time zones, security, and much less compliance with applicable international regulations.

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Competing with the digital Yuan

NY FED highlighted that the study seeks to complement the reports that could lead the Federal Reserve (FED) to make a final decision on the generation of a digital dollar that directly competes with the digital Yuan or other currencies that may arise in the future. Likewise, the NY FED underlines the importance of shortening the times of Payment versus Payment (PvP) operations and improving the capabilities of the global financial system to deal with an ever-increasing flow of capital. The main risks and critical points of the current system have to do with speed, external effects on the service and counterparty risk. All of these weaknesses can be easily overcome by using CBDCs in payments, based on the tests run.

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