Understand the systemic shift from digitization to tokenization of financial services


In the financial industry, the demand for exposure to digital and crypto assets has increased across all asset classes. This has resulted in interest, demand and investment from institutional financing, ranging from the custody of digital assets to trading in digital assets to regulatory and compliance frameworks as well as audit and risk models.

It’s fair to say that digital assets have taken the financial services industry by storm. While traditional finance’s attention and investment in decentralized finance (DeFi) is hailed as a progressive move, there are tremendous challenges and hurdles that financial services providers and institutions must address in order to mainstream digital asset adoption.

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For one, the industry is on a massive digitization path to modernize aging financial systems based on a ledger-based transaction system. It must ensure that the path to digitization is smooth and minimally disruptive, and that the financial system, which is moving assets and payments at the speed of the digital age, keeps pace with digital commerce and service delivery.

These efforts have led to innovations in application programming interfaces (APIs) to support new business models. In addition to taking the form of digital products and services, these strategic APIs also take the form of co-creation vehicles to add value to the consumer and financial services ecosystem. The industry has seen lifecycle growth in API management as the glue used to secure businesses and deliver services at the same time, shifting IT focus from projects to strategic APIs.

More recently, the approach has included financial technology or fintech partnerships and / or the modernization of technology. It has focused on the user experience and API, neglecting the systemic elements of the financial services industry like payment, treasury, risk models, fraud, regulation and compliance to name a few. While the user experience approach has had some success, the flaws have surfaced with older design parts of tightly coupled designs. The use cases that manifest as financial application ultimately correspond to the constraints of the financial systems and the assets locked in the general ledger and rely on the propagation of batch processes to move assets.

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How does a financial institution manage these two drastically different models together as the industry evolves in a complex transformation with a disruptive turn? On the one hand, the digitization effort is focused on a ledger-based model, which is largely the existing infrastructure, while on the other hand, the disruptive turn promotes a token-based model that questions and negates the current digitization efforts. How do financial institutions create the delicate balance where two worlds can coexist and provide a seamless, unique experience?

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Understand digitization and fintech-supported disruptions

The financial services industry is in constant flux, including the recent radical changes. The industry witnessed many earlier breakthroughs, including the introduction of computers into banking systems, all-time banking with ATMs, and the internet and mobile technology that shifted the mindset to “anytime, anywhere”.

Today, the financial services industry is largely focused on massive digitization efforts with initiatives like Open Banking, Payment Services Directive-2 (PSD 2), Strong Customer Authentication (SCA) and ISO 20022 to harmonize and modernize payments. Much of these digitization efforts are industry-led, and some stem from a regulatory policy. They strive to stay competitive and meet customer demands for instant asset movement in real time and digital fiat as a settlement tool.

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The challenges facing the financial services industry are immense, including constant changes in the regulatory landscape, customer expectations of digital natives, the need for real-time and round-the-clock operations to meet customer demands, and the exogenous factors of ecosystem creation interesting technology engine battles for financial institutions. Existing infrastructure, which represents both significant investments and past modernization journeys, is now hampering the speed and scope required to unlock the digital value of not just products and services, but the financial institution as a whole.

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With every significant change, the financial services industry was able to adapt and withstand the disruption. The movement led by Fintech is another major shift underpinned by radically different business models led by new innovative technologies, business structures and the digitization of the experiences of neighbors and consumers in all segments of digital business and engagement. This shift – combined with increasing regulation, compliance pressure and disruptions from the fintech ecosystem – is forcing the established financial services industry to rethink innovations and business models. This is to keep systems competitive, innovative, and malleable for future disruptive shifts that may occur – like DeFi, which is powered by tokenization.

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Understand the impact of asset tokenization

We have found that digitization is the first step in many blockchain projects for companies and permissions. Tokenization is the process of converting or claiming an asset and rights into a digital representation or token on a blockchain network. At this point it may be advisable to distinguish between a (crypto) asset or a currency and a tokenized asset.

A (crypto) asset or currency is a medium of exchange or a protocol-controlled exchange mechanism that often has the same characteristics as a real currency – such as durability, limited supply and recognition by a network – and at the same time is supported by a common network of beliefs, such as a Fiat currency. A (crypto) asset or currency is also a by-product of trust systems or consensus to support the incentive economy model that rewards and fuels a network’s trust system and makes it a network’s trust currency. A token, on the other hand, can be many things: a digital representation of a physical good that makes it a digital twin, or a layer two protocol that is based on the (crypto) asset or currency and represents a unit of value.

This distinction between a (crypto) asset or currency and a token asset is important to understand the exchange vehicles, valuation models, and fungibility in various value networks that are emerging and challenging interoperability. The challenges are not only technical, but also business challenges related to fair swaps. Asset tokenization can lead to the creation of a business model that encourages a fraction of ownership or the ability to own an instance of a large asset. The promised asset tokenization in blockchain-based corporate networks is not just a digitization or a solution for the inefficiencies of time and trust. It also creates new business models and co-creations from synergies of network participants that did not previously exist.

While blockchain itself provides the technology constructs to facilitate exchange, personal responsibility and trust in the network, the digitization of value elements is of crucial importance in the digitization of value elements. In essence, digitization is a kind of requirement for tokenization. In the context of financial services, the digitization of existing services and token-controlled DeFi represent two parallel business flows that will converge if the industry wants to offer a unified user experience.

Tokenization means that account management and claims to assets are controlled by cryptographic keys, as opposed to account management and asset management by a system operator called a bank. While tokenization is more than just account management and claims to an asset, it allows for divisibility, fungibility, and disrupted business functions like asset transfer. It is a fundamental building block and prerequisite for an “Internet of Value”.


The answer to the question How does a financial institution strike the delicate balance where two worlds can coexist and provide a seamless and unique experience? is a complicated one. The operational structure, which encompasses the complexity of existing structures while taking into account the exponential growth (and complexity) of a digital asset ecosystem, needs to be adequately considered. This is both a monumental operational challenge and a vast landscape of opportunity and a way to unlock new business models.

It is well known and recognized that blockchain technology forms the basis of a trustworthy digital transaction network which, as a disintermediate platform, encourages the growth of marketplaces and secondary markets due to new synergies and joint creation due to new digital interactions and value sharing mechanisms.

Open Banking has led the digitization effort with a number of open APIs. These APIs can be extended to tokenized asset structures and transform the entire business process of various DeFi market structures into consumables, whereby different asset classes, marketplaces and DeFi support services can be combined into a unique experience that hides the transaction complexity.

This article does not contain any investment recommendations or recommendations. Every step of investing and trading involves risk, and readers should do their own research in making their decision.

The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Nitin Gaur is the founder and director of IBM Digital Asset Labs, where he develops industry standards and use cases and works to make blockchain a reality for the company. Previously, he was the chief technology officer of IBM World Wire, as well as IBM Mobile Payments and Enterprise Mobile Solutions, and founded IBM Blockchain Labs, where he led the company’s blockchain practice. Gaur is also a well-respected IBM engineer and inventor with an extensive patent portfolio. He also acts as research and portfolio manager for Portal Asset Management, a multi-manager fund specializing in digital assets and DeFi investment strategies.


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