Last week, the International Monetary Fund (IMF) – a United Nations organization that effectively operates as a global lender of last resort – and the Bank for International Settlements (BIS) – a supergovernmental central banking organization – published separate reports on the future of the monetary system. Both reports mentioned crypto and central bank digital currencies (CBDCs) and were generally positive about the potential for tokenization.
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It’s not just the big government organizations either. Earlier this year, the head of JPMorgan’s digital asset platform said “tokenization is a great app for traditional finance,” Goldman Sachs said it was exploring “real asset tokenization,” and a recent research report published by the financial company Bernstein claimed that “tokenization could be a $5 trillion opportunity.
Even CoinDesk’s Chief Content Officer, Michael Casey, wrote in March how technology has migrated the tokenization of real-world assets from “closed projects with permissions to public, permissionless blockchain platforms” and suggested that, yes, this time would be different. can be. (Besides, it’s me, hi, I’m the longer-serving colleague mentioned in Casey’s piece who rolled his eyes at the idea that tokenization of real-world assets is viable).
In any case, the IMF and BIS reports provide an interesting insight into how the bureaucrats view crypto, as they both converge around the idea that tokenization is the killer application for crypto.
The BIS wrote: “Today the monetary system is on the verge of another major leap. After dematerialization and digitization, the most important development is tokenization – the process of digitally representing claims on a programmable platform.”
Breaking this down quickly, dematerialization and digitization have both happened and done wonders for the global economy and trade. Dematerialization, as in keeping ledger entries by banks instead of requiring the movement of physical currency with each transaction and digitization, as when that practice of entering ledgers moved from paper to digital. Tokenization, meanwhile, is the forward-thinking idea that is “the process of digitally representing claims on a programmable platform,” to use the words of the BIS.
Okay, one more time, but slower this time.
Tokenization is the process… of representing claims… digitally… on a programmable platform.
Hold on. Is this something?
Digitization of the monetary system is clearly the digital representation of financial claims. Does this mean financial technology companies, which often use programmable platforms, are next? Is that tokenization?
Read more: Crypto Ban may not be the best approach to balance risk, ask: IMF
No. Tokenization, in the eyes of the IMF and BIS, is the practice of trading claims on programmable platforms. If a blockchain is involved, those claims will likely be represented as tokens. Tokens are not just digital entries in a database. Rather, they integrate the records of the underlying asset normally found in a traditional database with the rules and logic that govern the transfer process for that asset.
For a home buyer, tokenization can mean having their deed represented as a token on a blockchain such as Bitcoin or Ethereum. Instead of a deed transfer indicating who the homeowner is, it comes from the transfer of a token.
Admittedly, tokenized real estate is on shaky foundations these days. Of course, the “rules and logic governing the transfer process for that asset” may exist on a token platform, but at the exact moment a legal document or court proceeding governs some aspect of ownership, you invalidate the entire use case for a token representing that piece of real estate.
Given the factual content of the IMF and BIS reports, it appears that institutions are less focused on commodities or real estate tokenization and much more interested in central bank digital currency tokenization.
A what to do with a what-now?
First, CBDCs deserve a broader consideration than is offered here, but let’s focus on taking CBDCs strictly from the lens of tokenization. The best way to summarize where central banking institutions stand on CBDC tokenization is to simply share a quote straight from the IMF report:
To make a payment, participating banks deposit reserves into this escrow account and the platform creates a digital proof of surety that the bank can transfer to the ledger between other participants. In the simplest case, the receiving bank would receive a tokenized reserve from the sender’s bank and credit the recipient’s account at the same time. The recipient’s bank can then sell the tokenized reserves to another participant on the platform in exchange for domestic reserves. Many operations other than simple settlement are possible…
The central idea that links the IMF and BIS reports on tokenizing CBDCs is the existence of a single or unified ledger. These organizations of non-central bank money are so mistrustful (of course they are) that they need to create a centralizing force to ensure the stability of settlement and the ‘unity of money’.
The BIS defines this unified ledger as “a ‘common location’ where money and other token objects come together to enable seamless integration of transactions and to open the door to entirely new types of economic arrangements.”
Now, we’re not sure what will come of these discussions and explorations and tokenization studies, if anything at all. Numerous countries are researching CBDCs, but only a handful have implemented these systems.
One thing is certain: the technobabble is dizzying. If the IMF, the BIS and organizations like them want to create a CBDC with a single, unified, centralized ledger, they don’t have to pretend to use cryptocurrency to do so. Confusing things like Bitcoin and the tokenization of CBDCs is misguided. At best, it is a misunderstood desire for a more technically supported money system. At worst, it is an insidious, deliberate distraction from what makes Bitcoin and crypto attractive – which are attractive not because they are digital, but because they lack central control. Exactly what the central banks and regulators are trying to bring in.
Simply identifying innovation is not really innovation. And tokenization is hardly an improvement on what financial institutions are already doing. It’s a distraction. It is nothing.