How Tokenized Assets Can Replace Money

In a world where tokenization becomes mainstream, with a wide variety of assets digitally represented on blockchains, these tokenized assets will replace money for everyday payments. That’s the intriguing argument recently made on Forbes by David Birch, a veteran British expert on digital identity and money.

Marcelo M. Prates, a CoinDesk columnist, is a central bank lawyer and researcher.

Instead of selling your mutual fund shares to get dollars that can then be used to buy a car, you could just transfer some of the shares to the dealership over a blockchain. You’d have the car, and the dealership would have tokenized shares that could be kept invested or transferred to the carmaker to pay for replenishing the inventory.

The greater the number of tokenized assets, the easier it gets to use them directly for payments without first cashing them out into bank deposits, CBDCs, or stablecoins, reducing transaction costs. If any asset can be tokenized, fractioned, and then seamlessly transferred on blockchains, you could always use your tokens for payment, no matter what your tokens represent — from securities or Bored Apes to houses or airline tickets.

The general acceptance of tokens rests on the assumption that someone down the network will be willing to take the tokenized asset you hold, making all exchanges possible. Supercomputers and AI would help speed up trades by instantly determining the value of each token and matching counterparties.

But, obstacles

In a system like that, digital money would only add friction and potentially become useless. Or would it? Although fascinating, this reality faces at least two significant hurdles before it can come to pass.

First, the number of transactions could quickly overwhelm even the most efficient blockchain. The U.S. payments system alone processes almost 550 million retail transactions daily using money, in the form of dollars, as a vehicle. This number would increase multiple times if payments were made not with a common vehicle, like dollars or other sovereign currency, but with tokenized assets that could be traded globally.

Read more: Michael J. Casey – Has Tokenization’s Moment Finally Come?

Today, a car can be purchased with one payment transaction, with dollars flowing from the buyer’s bank account to the seller’s bank…