"Blockchain technology and tokenization are intended to make financial services available around the clock and globally in the future. But before the vision of a tokenized economy can become reality, regulatory questions must be clarified.
Imagine if the brightest minds from business and research came together for a weekend on the boardroom of the European Central Bank (ECB). With a view of the Frankfurt skyline, they were tasked with developing an effective and efficient financial market infrastructure. Such a concept would have to address some weaknesses in the existing financial system: Financial services should be available around the clock and seven days a week in a digitalized world. Sending money and other assets shouldn't feel more complicated or take longer than sending a text message - whether the transaction crosses national borders or not. To name just a few anachronisms of the existing system.
Fax machines and other relics of the pre-digital age would presumably no longer play a role in the experts' proposed solution. The blockchain would have a good chance against this. After all, one of the great promises of blockchain is to increase the efficiency of the financial market. Even if many of these promises are now more of a vision than a reality, technology is fascinating an ever larger part of society. This starts with the demand from small investors for cryptocurrencies like Bitcoin, goes to large companies like Siemens, which use the blockchain to issue bonds, and extends to central banks that are thinking about issuing money on the blockchain or are already doing so.
If you want to understand the new world of blockchain technology and its applications for the financial market, it is best to start with a look at the existing financial system. To put it simply, it's about exchanging assets for money - for example when buying a share, a property or a work of art.
The blockchain brings this process into the digital space: As part of so-called tokenization, assets and money are removed from their previous environment and stored on a blockchain as a digital token. The share becomes a stock token and the property becomes a real estate token.
Put simply, tokens are a digital certificate of ownership of the underlying asset or money.
The blockchain takes on the role of the database that stores and manages information such as account balances. The blockchain-based database does not require an administrator. This means that account balances can be managed decentralized for the first time. From a computer science perspective, this is revolutionary and enables exciting new applications. However, a database without an owner - and therefore without a responsible (legal) person - is causing sleepless nights for the regulatory authorities.
The regulatory concerns are valid and must be answered and resolved before blockchain can be truly used in everyday life. And it would be worth it, because tokenization would create fascinating opportunities for our financial market. Assets and money would be on the same platform for the first time in the history of our financial system. As an example: The stock token is on the same platform as the cash token, and both can therefore be exchanged for each other quickly and easily. Real step-by-step transactions become possible. The susceptibility to errors decreases and the processing speed increases. Counter party and settlement risks are minimized when constant data comparison between different financial intermediaries is no longer necessary because everyone is on the same platform. In today's financial market, in order to exchange money for shares, two completely independent ecosystems must first be linked: the share is usually in physical form at a central securities depository, and the money is in the bank account.
In addition to increasing efficiency, blockchain technology also promises new applications. With so-called smart contracts, logic can be embedded in financial market transactions. It's about if-then relationships like a standing order: "If it is the first day of the month, then make a transfer." Smart contracts also make arbitrarily complex logic conceivable that go far beyond what we know today. For example, a payment equipped with logic could imitate an insurance contract against weather risks: "If the temperature is below 0 degrees for more than 30 days between February 1 and March 31, 2024 and more than three liters of precipitation falls per square meter, then transfer amount X on account Y."
So far this is the theory. In practice, there are one or two challenges that mean that the vision of a tokenized economy has not yet become a reality. Exactly what challenges there are, how we can address them, how Bitcoin and other cryptocurrencies fit into this picture and why many experts agree that there is no way around blockchain and tokenization - that's what we'll be discussing here once a month from now on." [1]
1. Effizienter, schneller, sicherer? - Die Vision der tokenisierten Ökonomie
Frankfurter Allgemeine Zeitung (online) Frankfurter Allgemeine Zeitung GmbH. Oct 10, 2023. Von Alexander Bechtel
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