Tokenization: Can It Unlock Fintech-Driven Growth?
- By CDOTrends editors
- November 07, 2022
A study by ValueExchange, in partnership with Digital Asset, found that manual processes and legacy systems in today’s financial sector will not be able to continue meeting human, regulatory, and technical challenges across the trade cycle in the coming decades.
Their report, titled “Doing Tokenisation Right,” draws on over 3 years of extensive market research and interviews with over 45 leading exchanges, depositories, brokers, custodians, and service providers.
The research revealed that transaction settlement costs are rising 14% each year, primarily driven by a growing need for human resources. This exacerbates cost pressures and enhances risk — financial institutions must hire people to correct inaccuracies in data entry and process payments more quickly.
“The digital landscape in finance is changing at pace, but, to date, corporate action errors cost 70% of the market over USD 2 million per annum”, said Barnaby Nelson, chief executive officer of ValueExchange.
To address these concerns, tokenization can substitute a payment account number with a string of random numbers, speeding up transaction settlement. Rather than passing complete private account data through multiple systems of varying security, personal information is converted to a unique digital identifier.
The actual data the token references is securely stored in highly secure vaults. The tokens are worthless to fraudsters and offer no way of accessing a system or performing malicious activity.
“We have to change our mindset around what we want to achieve with digital assets,” said Eric Saraniecki, co-founder and head of strategic initiatives at Digital Asset.
“The tendency today is to focus on building the platform that will lead the world. But tokenization doesn’t mean digitization – it means connecting to a bigger ecosystem," he added.
Tokenization offers businesses several benefits: reduced risk, increased efficiency, and improved returns for investors. Although most interviewees see these benefits, they believe it is essential to understand the business case and potential obstacles before implementing them.
The “Doing Tokenisation Right” report shows that, through tokenization, the nature of security will change. The digital object created by this process can be used as a new form of capital for members of the community it serves.
Finally, the study highlighted that its benefits become more profound and lasting as tokenization evolves. Projects have begun to move beyond operational efficiencies to more long-term results.
ValueExchange is a company that conducts research, benchmarks, and sales-enablement programs in the global financial services industry. Meanwhile, Digital Asset is an enterprise software firm that modernizes legacy systems in this sector.
Image credit: iStockphoto/NatalyaBurova