Tokenization: The Future of Payments or a Distant Dream?

In his statement, Marcelo Prates explains why it is unlikely for universal payments to be conducted with fractionized assets in the near future.

Tokenized Assets The New Money?

🌟 In a world where tokenization becomes mainstream, with a wide variety of assets digitally represented on blockchains, these tokenized assets will replace money for everyday payments. 🌟

That’s the intriguing argument recently made by David Birch, a veteran British expert on digital identity and money, on Forbes. But is this bold statement justified, or is it just wishful thinking? Let’s dive into this fascinating topic and explore the potential obstacles and opportunities that tokenization brings.

Tokenization: From Mutual Funds to Car Dealerships

Imagine a world where selling your mutual fund shares to buy a car becomes a thing of the past. Instead, you can transfer some of your shares directly to the dealership over a blockchain. You get the car, and the dealership receives tokenized shares that can be kept invested or transferred to the carmaker to replenish their inventory. 🚗💸

The concept is simple: the more assets that can be tokenized, fractioned, and seamlessly transferred on blockchains, the easier it becomes to use them directly for payments without the need to cash out into bank deposits, central bank digital currencies (CBDCs), or stablecoins. This not only reduces transaction costs but also opens up a world of possibilities for everyday payments.

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The Pros and Cons of Tokenized Payments

The general acceptance of tokens relies on the assumption that someone down the network will be willing to take the tokenized asset you hold, making all exchanges possible. Supercomputers and AI would play a crucial role in facilitating trades by instantly determining the value of each token and matching counterparties. 🖥️💰

But let’s not overlook the hurdles that stand in the way of widespread adoption. One significant challenge lies in scalability. The current blockchain infrastructure might struggle to handle the enormous volume of transactions if tokenized assets fully replace traditional money. The US payments system, for instance, processes almost 550 million retail transactions daily using dollars as a vehicle. Scaling this up to tokenized assets trading globally could pose a daunting task. 🌐

Another challenge is interoperability between different blockchains. If tokenized assets exist on various blockchains, and sellers don’t have addresses or wallets in all these blockchains, facilitating transactions becomes complex. Interoperability solutions exist, but they often come with additional costs and risks. Moving tokens from one blockchain to another can leave them vulnerable to theft or loss. 🔗💸

The Legal Quagmire

Replacing money with tokenized assets also raises legal concerns. Besides its function as a medium of exchange, money acts as a checkpoint for compliance requirements, especially in anti-money laundering and counter-terrorism financing efforts. Financial institutions play a vital role in identifying clients, monitoring transactions, and reporting suspicious activities. But if everyday payments solely rely on tokenized assets, regulators would struggle to gather the necessary information and enforce the relevant rules. Who would be responsible for flagging or blocking suspicious transactions? Every seller out there? 🕵️💸

Blockchain forensics and automated supervisory tools can assist regulators in tracking transactions, but suspending or blocking suspicious transactions amid billions, if not trillions, of payments across jurisdictions remains a significant challenge. This becomes even more daunting in truly decentralized blockchains, where no identified parties manage or control transactions. 🌐🛡️

The Reality Check: Tokenization’s Limitations

As appealing as tokenization might be, replacing fiat money is far from simple. For practical and legal reasons, sovereign money still reigns supreme for everyday payments. Tokenization, even if widely adopted, won’t change this reality anytime soon.

So, What’s the Future of Tokenization in Payments?

While tokenization presents exciting possibilities, it’s essential to temper our expectations. Overcoming the challenges surrounding scalability, interoperability, and legal compliance will require significant efforts and innovation. However, as technology advances and regulations adapt, tokenized payments could gradually play a more prominent role in our financial landscape.

🌟References: 1. Forbes – Can Tokenized Assets Replace Money for Everyday Payments? 2. The State of Tokenization – The Momentum is Building 3. Bitcoin-Accepting Vendors Increased by 174% – BTC Merchant Tracker 4. Hedera and Algorand Blockchains Collaborate to Build DeReC Alliance for Assets Recovery 5. Decentralized Storage Platform CESS Raises $8M From 13 VC Funds

📣 What are your thoughts on the future of tokenization in payments? Share your insights and let’s discuss! And if you found this article interesting, don’t forget to share it with your friends on social media. Together, let’s unravel the mysteries of the digital world! ✨💻

Edited by Benjamin Schiller.

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