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By Ralf Kubli, board member at the Casper Association
With BlackRock touting tokenization as a paradigm shift for the economy, Siemens unveiling its first digital bond, and HSBC bolstering its ranks in prep for greater interest, the tokenization market is red hot.
Citi’s latest “Money, Tokens and Games” report expects the tokenization market to reach between $4 trillion to $5 trillion by 2030 — an 80-fold increase from the current value of tokenized real-world assets. These projections clearly demonstrate the immense growth potential of converting physical assets or financial instruments into digital tokens on a blockchain. The result? Increased liquidity, enhanced security, and reduced costs.
But there’s a catch. Current tokenization models do little to innovate beyond what already exists. That’s because most tokenization platforms only store a PDF of the term sheet in the token. Worse even, many only represent the asset side, not the liability side — cash flows are nowhere to be found in a way that computers can understand them. In other words, an asset-backed token gets created and appended to a blockchain with a PDF of the Term Sheet. This means that tokenized assets, designed to be more efficient and automated, still require human intervention to calculate cash flows, which can introduce errors and discrepancies.
For tokenization of financial assets to reach its full potential, we must tackle the lack of standardization and ensure that the underlying liabilities and cash flows are machine-readable and executable via smart financial contracts. By zeroing in on the cash flow obligations of the parties and standardization in this way, we can ensure this emerging technology not only elevates existing systems but also sidesteps the lack of transparency and verifiability that led to the 2008 financial meltdown and recent collapse of Silicon Valley Bank.
Smart financial contracts in tokenization
Smart financial contracts enable the terms of an agreement — the underlying cash flows and liabilities of a given tokenized asset such as a bond — to be machine readable and machine executable, making financial instruments more transparent, verifiable and continuously auditable. By implementing open banking standards and standardizing smart financial contracts, we can create a tokenization ecosystem where cash flows are machine-readable and executable at an algorithmic level, making financial transactions smoother and reducing risk.
The ACTUS (Algorithmic Contract Types Unified Standards) initiative is paving the way for smart financial contract standardization in the world of tokenization. The ACTUS framework can be employed by banks, regulators, accounting firms, and tech companies to monitor and analyze financial stability, enhance financial reporting, and define terminology, algorithms, and data models that describe patterns of cash flows.
The primary focus lies in offering an intelligent, machine-readable, and machine-executable algorithmic representation financial agreements and related cash flows and the current status of risk factors (market risk, counterparty risk, and behavioral risk) while maintaining a clear distinction with the future states of these risk factors.
By establishing a common language and taxonomy for financial contracts, this standardization will enable the seamless integration of smart financial contracts into existing banking and financial systems. For tokenization to really thrive, this taxonomy should cover a wide range of financial instruments and clearly define each contract type’s terms, conditions, and parameters to ensure tokenized ecosystem consistency and interoperability.
Seizing the untapped potential
By embracing smart financial contract standardization ensuring the payment obligations and cash flows are algorithmically defined, we can unlock the true potential of tokenization and create a more robust and resilient financial system.
The road ahead may be challenging, but with industry-wide collaboration, a clear strategic vision, and a commitment to smart financial contract standardization, the tokenization revolution can surpass its current limitations and deliver on its promise to redefine finance for the better.
Blockchain is the single most important technology in finance since the introduction of computers in banks. As an industry, we need to seize this opportunity and work toward a more progressive, secure, and accessible tokenization market. We can all benefit from collaborating to improve the market and secure a more stable economic future.
About the author:
Ralf Kubli is a board member at the Casper Association and an experienced executive with a strong background in blockchain, cryptocurrencies, and decentralized technology. Ralf holds an MBA from Cornell and an M.A. in History from the University of Zurich.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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