Reclaiming tokenisation, or how to avoid a TradFi takeover

The following is a guest post from Jesse Knutson, Head of Operations at Bitfinex Securities.

Tokenization is at a tipping point. Outside of the crypto world, awareness is growing that tokenizing assets really could be a ticket to doing finance differently. 

Traditional banking giants are busy working on projects to understand how best they can tap into this potential. Governments in major financial centers from the UK to Singapore have launched sandboxes to see how regulation could support capital markets infrastructure underpinned by blockchain technology.

The blockchain and finance press have been littered with headlines of successful pilots, including Siemens’ $330 million digital bond, issued last year as part of the European Central Bank’s trial to settle central bank money on blockchains.

These news stories have undoubtedly highlighted tokenization positively. But there’s a problem. Many of the reported ‘success stories’ are so far removed from what tokenization could—and should—be that they are essentially TradFi transactions in disguise. 

Take the Siemens example. It was undoubtedly a success insofar as it proved that digital bonds could be settled much more quickly than is currently possible via traditional means. However, the bond was issued on a private blockchain, which needed Deutsche Bank to facilitate settlement, and it seemed to offer no mechanism for self-custody. 

I believe this is not what a tokenized bond should look like. Tokenization’s core is disintermediation, which empowers users by streamlining the technologically obsolete parts of the capital markets ecosystem.

Tokenization replaces the work of transfer agents, central depositories and clearing systems, custodians, and compliance reporting with cheaper, faster, and more transparent on-chain solutions. At the same time, it offers investors more flexibility, including by offering much lower entry points compared to traditional markets.

I fear that the TradFi behemoths could commandeer tokenization further, looking for ways to create new, innovative products for their client bases. Larry Fink’s recent call for the U.S.’s SEC to “rapidly approve the tokenization of bonds and stocks” could mean we’re edging closer to the point of no return. 

Despite President Donald Trump’s apparent embrace of the crypto community, the concrete announcements we have seen on the U.S.’s position on crypto—notably the strategic bitcoin reserve—have been viewed by some as underwhelming. This could prove pivotal for the incumbent banking sector. 

While the major crypto players are still grappling with where the industry is heading, this potentially allows the banking lobby to capitalize on a crypto-positive U.S. administration.

It will be a missed opportunity for tokenization if we end up with a regulatory environment that means traditional finance players leverage blockchain technology for their own ends, improving their bottom lines while developing new products for their narrow client bases while maintaining the status quo of our current capital markets.

The investors likely to benefit from tokenized products from large banks are minuscule compared to the general population. Millions of people worldwide would relish the opportunity to invest in stocks or corporate bonds, but they can only dream of reaching accredited investors or equivalent thresholds.

Tokenization also offers investors an opportunity to regain control over their assets. Technology like Blockstream’s Liquid Network leverages whitelists to allow peer-to-peer trading, move assets across trading platforms, and even self-custody assets.

In the future, we look forward to more granular voting and dividend payments. Integration with USDt and BTC is also important to allow a low friction flow of funds between conventional, RWA, and crypto markets. 

Our current capital markets are only made for the few. Tokenization allows us to untangle that. We now have the technology to enable any small business to raise the capital it needs to grow without having to engage banks and all within regulatory and compliance guardrails.

For prospective investors, anyone with as little as $1 to invest can start to grow their wealth via tokenized U.S. treasuries. We’re already seeing this in El Salvador with NexBridge’s USTBL product. 

If we’re to avoid a TradFi takeover of tokenization, we need regulators to understand the bigger-picture promise of tokenization. While tokenized versions of sophisticated investment products must be appropriately regulated, we also need all major jurisdictions to provide clarity on how tokenized products can be opened up to any retail investor, regardless of how much they have to invest. 

Tokenization represents a once-in-a-generation opportunity to democratize access to capital. We owe it to the millions of underbanked people and businesses worldwide to not lose sight of this.

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