DeFi Asset Tokenization – Tokenization Drives Efficiency to Influence the Role of Regulated Markets

September, 2023


Regulatory pressures, cybersecurity threats, competition from technology startups, and economic uncertainty pose significant headwinds for financial institutions. Consequently, their focus has shifted toward cost optimization and improving profitability. Financial markets are increasingly pivoted toward improvement in process efficiency, such as in trading processes and settlement times. Broadening market accessibility and increasing liquidity across key asset classes, which were hitherto restricted to only a few investors, have become important for sustainable growth in the banking and financial services industry. Further, the increased urgency for cost transformation in the past few years and shrinking operating margins have become key driving forces for financial services market transformation. With today’s market conditions demanding new levers for cost transformation, digital technologies are playing a crucial role in enabling the shift from traditional ways of delivering services and driving innovation in financial services.

Avasant’s whitepaper on DeFi asset tokenization covers how multiple forces, including macroeconomic factors and technological shifts, are shaping the future of financial services and how DeFi asset tokenization helps address the current challenges. The tokenization of financial assets, whether liquid or illiquid, can transform multiple industries. Tokenization can benefit all regulated financial instruments, including equities, bonds, commodities, and other tangible assets such as real estate and precious metals. While the tokenized securities market is in its early stages, there is huge potential in terms of growth and adoption. According to the World Economic Forum, the market for digital securities has the potential to reach $24 trillion by 2027, representing 10% of the global GDP. Blockchain-based asset tokenization can drive efficiency by reducing transaction costs, speeding up transactions, increasing liquidity, improving transparency and security, simplifying regulatory compliance, broadening market accessibility, enabling customization and programmability, and facilitating easier asset management.

However, the road to tokenization is plagued by multiple challenges. Despite the immense potential of blockchain technology, multiple factors restrict the growth of DeFi asset tokenization. For instance, country-specific regulations around the tokenization of financial assets are still in the initial stages in most countries. Implementing and integrating DLT-based systems into existing or legacy IT systems are also key challenges. Further, the risks of money laundering and fraud that stem from the lack of proper oversight and the right monitoring practices can result in anonymous transfers and transactions without revealing asset ownership.

These challenges need to be addressed to drive the mass adoption of DeFi tokenization. Therefore, the role of service providers becomes critical as they bring the combined expertise in domain and technology know-how and skill sets.