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S&P: tokenization is the future of the banking world

Here comes a new endorsement for tokenization from the banking world.

The US rating agency S&P Global Rating, the most famous internationally, has stated that the Covid-19 pandemic will lead to a rapid acceleration of several innovation processes. These include the tokenization of the banking world and the revolution in payment systems

Many analysts think that the future of the banking world is in the hands of FinTech and crypto companies. The rating agency thinks so as well. 

“If physical assets were in digital form, tokens for example – writes S&P Global Rating – it would be much easier to divide them, improving their liquidity and potentially increasing financial inclusion“.

The importance of tokenizing banking services

The most likely use of such tokens will involve raising capital and financing, in particular for start-ups and small and medium-sized enterprises. While reporting a growing interest in tokenization by investors in recent months, the agency notes that the coronavirus pandemic has shown the importance of digitizing the financial sector.

Tokenization offers several advantages, including the ability to divide assets

Increasing their liquidity opens the door to investors or borrowers who would otherwise be excluded. In addition, S&P Global Rating is convinced: 

“that the technology could allow deserving new players to enter the market, further challenging the revenues of traditional banks and asset managers”.

Consequently, compared to the pre-Covid world, the expectation is now for a greater propensity on the part of the big names in the world of finance to experiment with new products and start new collaborations with players in the FinTech or crypto world. 

However, as with any type of innovation, we clearly have to clash with the status quo. In this specific case, we are faced with a series of significant obstacles to overcome.

The main obstacles to surmount

Having said that, before arriving at the actual integration of crypto processes and tokenization into the banking world, the sector will have to solve at least three problems. 

Among the obstacles, the report entitled “Building A Token Collection” mentions: 

  • the willingness of regulators to implement a regulatory framework for tokenization, 
  • the possible technological glitches, 
  • how to guarantee the security of property rights.

“It remains to be seen,” the agency continues, “whether tokenization will seriously replace certain typical financial products”.

It definitely could have: 

Positive effects on specific business areas, such as capital increase plans, SME financing projects and the liquidation of illiquid assets”.

In addition, compared to the asset management products available at the moment – mostly aimed at wealthy customers – tokenization of assets could provide access to new customers who would be guaranteed cheaper costs and greater efficiency.

The best cases of tokenization in the financial world

According to a study conducted by Greenwich Associates based on responses from 109 financial technology and blockchain executives around the world, raising fresh capital for start-ups and private capital placements are considered the best uses for tokenization.

The best way to take advantage of tokenization of traditional assets is considered by the respondents to be investments by private equity groups. In second place among the cases that are particularly suitable for security token issuance, there is mention of a case of capital increase for a startup and in third place the financing of new products.

Thanks to the absence of a limited number of intermediaries and the rationalization of back office operations, tokenization enables the exchange of goods in an efficient and more economical way. This reduces clearing and control times and ultimately also reduces counterparty risk.

At the same time, using smart contracts should lower administration costs and ensure compliance with regulations. With the blockchain, transaction data can be accessed securely at any time: 

“This eliminates many of the inefficiencies that hamper the financial system”.

Increased security, transparency and speed of transactions

Decentralized, immutable and transparent ledger technology, continues the agency, “could considerably improve data integrity and security by providing a more secure exchange of goods or information for security tokens.

An example of this is what happened on June 17th. On that day Mastercard announced that it had tokenized the credit card credentials of users in 12 countries who make purchases on the website of e-commerce giant Amazon.

By replacing the numbers, codes and names of the cards with tokens, the level of security is increased, as the token can only be used by the specific merchant and is updated regularly.

“The move to similar e-commerce systems could accelerate in the future, as evidenced by the trend to digitize a whole range of operations and services during the lockdown period”.

Finally, tokenization would allow registration of the ownership of the token holder, increasing transparency for transaction partners who presume that anonymity is not allowed and also clarifying the rights of different stakeholders. 

Daniele Chicca
Daniele Chicca
Graduated in foreign languages and literature at the University of Bologna, with a year of undergraduate at the UCL in London. A professional journalist since 2007, in time he specialized in finance, economics, and politics. After three years with Reuters in Milan, he worked for several newspapers, contributing among other things to an increase in progressive traffic on the website Wall Street Italy and offering services of various kinds for Radio Rai and press agencies AGI and TMNews (formerly Apcom). At the moment he is responsible for the drafting, the editorial line and the coordination of an important economic and financial information website.