Exploring transformation of value in the digital age By Michael J. Casey, Chief Content Officer Was this newsletter forwarded to you? Sign up here. |
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Tokenization is once again a buzzword in crypto. In this week's column I make the case that efforts to create tokenized representations of so-called "real-world assets" on blockchains might this time finally stick. In this week's edition of the "Money Reimagined" podcast, my co-host Sheila Warren and I talk to CoinDesk reporter Margaux Nijkerk about the forthcoming "Shapella" upgrade for Ethereum, which will unlock staked ether tokens and its potential impact on decentralization and ether prices. Have a listen after reading the newsletter. |
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Has Tokenization's Moment Finally Come? |
Mentioning "tokenization of real-world assets" to some of my longer-serving colleagues at CoinDesk can elicit eye rolls – they've heard it all before. But at the risk of falling into the "this time is different" optimism trap, I would say the current buzz around "RWA" feels more real and impactful than the 2018 chatter about "security tokens" and "tokenized securities" (which, as Noelle Acheson reminded us recently, are not the same thing.) The idea that blockchain technology and native tokens can represent off-chain assets – financial securities such as stocks and bonds, or commercial rights such as trade receivables and fractionalized real estate or art – has been around for a while. Blockchain purists often reject this model, pointing out that it breaks the "trustless" structure of decentralized blockchains because someone or some centralized institution must now be trusted to identify, represent and attest to the value of the assets on chain. Also, many were dismissive of the underlying models used in early tokenization projects, which were built on permissioned blockchains run by consortia of banks or other companies. Time will tell whether the latest wave of tokenization – which has drawn in large Wall Street banks, the Singaporean government and asset managers such as Wisdom Tree and Hamilton Lane – moves this idea beyond the fringe into the mainstream. But there are reasons to believe it has momentum. |
- One is that technological advances in cryptography since 2018 have encouraged tokenization projects to migrate from those closed, permissioned projects onto public, permissionless blockchain platforms such as Polygon. And that has, in turn, allowed them to tap into the more rapid pace of innovation happening on those chains.
- Another driver behind this advance lies in economic conditions. Inflation and higher interest rates are forcing entities to seek out new markets and trading efficiencies and to free up dormant capital. The pitch behind tokenization is that it achieves all of that.
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Unfortunately, governments, in reaction to the crypto market crash and the FTX debacle, are now swimming against the tide in the tokenization drive. Last month, the Financial Stability Board (FSB) – a multilateral body charged with coordinating regulation to contain systemic risks in international finance – warned that when decentralized finance (DeFi) attempts to "replicate some of the functions of the traditional financial system, [it] inherits and may amplify the vulnerabilities of that system." But the reality is that the fallout from the collapse of FTX, Voyager Digital, Celsius Network et al. stemmed from abuses by centralized entities whose opaque token management practices were possible because they operated off-chain like all other traditional financial institutions. It would be a real pity if such a regulatory mission were to kill off tokenization altogether because, if managed properly, putting the world's stocks, bonds and commercial assets on-chain could well reduce systemic risk, not raise it. A tokenized financial system with traceable, instantly settled transactions would be a more transparent and efficient one, with lower risks of the trade failures that happen when settlement is delayed. |
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| Off the Charts: The 'Going Concern' Effect |
Just when you thought we were done with the contagion effect from failed crypto lending and service institutions, this happened: the share price of Silvergate Bank, a crypto-friendly institution now suffering post-FTX fallout, tumbled, sending token prices lower this week. |
This happened after Silvergate made a filing with the Securities and Exchange Commission late Wednesday in which it asked for two additional weeks to finish its annual report, and said the impact of recent events raises questions about its ability to continue as a "going concern." Those dreaded two words caused a stampede from Silvergate shares that eventually spilled over into bitcoin and ether prices Thursday afternoon. |
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The Conversation: Fixing Events with NFTs |
Today's "Conversation" contains shameless plugs: one for a Twitter Spaces event hosted by CoinDesk Studios head, Sam Ewen, in which I participated, and two, for CoinDesk's groundbreaking new Consensus-NFT ticket project, Microcosms. The Spaces featured fascinating commentary from the likes of Fonz, the CEO and founder of TokenProof, and Fahad Karim, the generative artist with which CoinDesk collaborated for the NFT mint, about the rich opportunity to disrupt the broken industry of live events, which is now monopolized by price-gouging institutions such as TicketMaster. |
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Relevant Reads: Silvergate's Slide |
This week's Silvergate saga had all the hallmarks of the financial contagion that beset the crypto industry last year, with one important distinction: the domino effect here was going the other way. It went from the perceived failure of a traditional financial institution to crypto, not the other way around. That matters little, of course: ultimately the failure of a bank that was one of the few crypto-friendly institutions is all-round bad news for the sector. Here's how CoinDesk's blow-by-blow coverage captured the fallout in a hectic 24 hours: |
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