Tokenization Offers ‘Enhanced Liquidity,’ but Faces Major Hurdles, BofA Says

Tokenization is the subsequent huge step in how monetary property are housed, and provides benefits over current conventional buildings, Wall Street agency Bank of America (BAC) mentioned in a Friday report, noting that it additionally brings dangers.

At its core, tokenization is the method of changing possession of real-world property, from shares and bonds to actual property, personal fairness, and even artwork, into digital tokens recorded on a blockchain.

Tokenization follows a lineage that started with mutual funds and expanded via individually managed accounts, collective funding trusts, and exchange-traded funds (ETFs), and based on the financial institution’s analysts, this mannequin may reshape the way in which traders entry and handle property by providing an a variety of benefits over conventional buildings.

Among a very powerful advantages are enhanced liquidity, analysts led by Craig Siegenthaler wrote, including that 24/7 buying and selling may open up secondary markets for beforehand illiquid personal property, and sooner, frictionless settlements that remove the multi-day delays widespread in immediately’s monetary markets.

Tokenization additionally permits for fractional possession, the analysts mentioned, lowering funding minimums and broadening entry to portfolios. Transparency is one other benefit, as blockchain ledgers present immutable and publicly accessible data of possession and transactions.

Lower charges are doable by chopping out intermediaries, and sensible contracts can automate key processes equivalent to dividend funds, coupon distributions, and voting rights, whereas additionally serving to to navigate regulatory necessities and even the complexities of personal fairness capital calls, the report famous.

According to knowledge supplier RWA.xyz the worth of real-world property represented on-chain exceeds $28 billion.

Tokenization dangers

Still, Bank of America cautioned that tokenization faces vital hurdles earlier than it might obtain widespread adoption.

Regulatory uncertainty stays the most important problem. While U.S. policymakers have signaled assist, future administrations may reverse course, and plenty of jurisdictions are nonetheless within the means of writing guidelines.

The financial institution mentioned custody is one other concern, as traders danger dropping entry to property if personal keys are misplaced, and institutional-grade custody options are nonetheless creating.

On the expertise facet, vulnerabilities in sensible contracts or blockchain platforms depart room for exploitation, and integration with legacy monetary infrastructure presents extra obstacles, given the reliance of most establishments on conventional methods.

And in the case of publicly traded property, current U.S. markets already supply deep liquidity, low charges, and powerful investor protections, making the case for tokenized variations much less compelling, the report added.

Read extra: Ondo Finance Rolls Out Tokenized U.S. Stocks, ETFs as Equity Tokenization Ramps Up