The Federal Reserve has published a paper exploring the benefits and use cases of tokenizing real-world assets (RWA) on blockchains.
In a paper titled “Tokenization: Overview and Financial Stability Implications,” Fed researchers say RWAs such as stocks, bonds, real estate and commodities are already being tokenized.
According to the paper, asset tokenization harnesses the power of blockchain technology to offer a wide array of benefits.
Says the paper,
“Tokenizations have the potential to provide a variety of benefits, including granting investors access to markets that are otherwise inaccessible or costly to enter. For example, real estate tokenizations might allow for investment in a fraction of the underlying asset, with investors able to purchase shares in specific commercial buildings or residential investments, as opposed to real estate investment trusts (REITs) where investors own shares of a portfolio of real estate investments.
More generally, the programmability of crypto tokens and the ability to leverage smart contracts, allows for additional features that can be embedded into the tokenized asset which might also benefit markets for the underlying reference assets. For example, liquidity-saving mechanisms could be implemented in the settlement of the tokenized asset even if they are not implementable for its real-world counterpart.
These attributes might lower barriers to entry for a wider set of investors, resulting in more competitive and liquid markets, and better price discovery.”
While still in its infancy, tokenization has the potential to become a bigger piece of the crypto ecosystem, the Fed says. In particular, the researchers say that tokenization may find market share by making it easier and simpler for more users to access certain markets, thus creating more liquidity.
“Currently the scale of tokenization is quite small, both when taken together or when measured relative to the market size of each token’s reference asset. However, many projects involving various categories of reference assets are in development, suggesting that tokenization may become a larger part of the digital asset ecosystem. Among the benefits of tokenization, lowering barriers to entry into otherwise inaccessible markets and improving the liquidity of such markets are the most prominent.”
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