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Understanding of the systemic shift from digitization to tokenization of financial services

The financial industry has seen increased demand for exposure to digital – and crypto – assets across all asset classes. It has spurred interest, demand and investment from institutional finance to digital asset custody to digital asset trading desks, regulatory and compliance frameworks, and audit and risk models.

It is fair to say that digital assets have caused a storm in the financial services industry. While the focus and investment from traditional finance in decentralized finance (DFI) is seen as a progressive step, financial services and institutions need to consider major challenges and obstacles to mainstream digital asset adoption.

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For one thing, the industry is on a large-scale digitization path to modernize aging financial systems that rely on an account-based transaction system. It must ensure that the path to digitization is smooth, minimally disruptive, and brings the financial system shifting assets and payments at the speed of the digital age, taking into account digital commerce and digital delivery of services.

These efforts have brought innovation with application programming interfaces (APIs) to support new business models. These strategic APIs shape not only digital products and services, but also co-creation vehicles to deliver value to the consumer and financial services ecosystem. The industry has seen the growth of full lifecycle API management as a glue to secure businesses and highlight services at the same time, shifting the IT focus from projects to strategic APIs.

More recently, the approach has included financial technology – or fintech – participation and / or modernization technology. It has focused on user experience and APIs, with little attention to systemic elements of the financial services industry, such as payments, treasury, risk models, fraud, regulatory and compliance. While the user experience approach has achieved some success, drawbacks have been revealed for the legacy design parts of tightly coupled designs. Use cases that appear as a financial application ultimately limit financial systems, and assets are locked into the ledger and depend on a relay of batch processes to transfer assets.

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So, how does a financial institution as an industry manage these two different models simultaneously? Developed In a complex transformation with a disruptive twist? On the one hand, the digitization effort focuses on a book-based model, which is largely an existing infrastructure, while on the other hand, the disruptive turn promotes a token-based model, which challenges and negates current digitization efforts. is. How do financial institutions manage the delicate balance in which two worlds can coexist and provide a seamless, eccentric experience?

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Understanding digitization and fintech-led disruption

The financial services industry is in a state of constant flux including recent radical changes. The industry has been witness to several past ground-shifting eras, including the introduction of computing into banking systems, anytime banking with ATMs, and the shift to an “anytime, anywhere” Internet and mobile technology mentality.

Today, the financial services industry is largely focusing on digitization efforts, such as Open banking, Payment Services Instruction-2 (Psd 2), Strong Customer Authentication (SCA) and ISO 20022 For payment harmonization and modernization. Many of these digitization efforts are industry-led, and some operate as a result of regulatory directives. They are efforts to remain competitive and to meet customer demands for digital fiat as an immediate, real-time movement of assets and disposal instruments.

related: Europe awaits implementation of regulatory framework for crypto assets

The challenges facing the financial services industry are immense, including the constant shift in the regulatory landscape, customer expectations of digital natives, the real-time and round-the-clock operations needed to service customer requests, and the exogenous factors of the ecosystem. Creating interesting technology engine conflicts for financial institutions. The legacy infrastructure, which represents both significant investment and past modernization journeys, is now disrupting the speed and scale needed to unlock not only the digital value of products and services, but also that of the entire financial institution.

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With the emergence of each significant change, the financial services industry has been able to adapt and cope with the disruption. The movement led by fintech is another major change, underscored by radically different business models, led by new innovative technologies, business structures and the digitization of the sedentary and consumer experience across every segment of digital business and engagement. Are in This shift — coupled with increased regulation, compliance pressures and disruption from the fintech ecosystem — is forcing the established financial services industry to rethink innovation and business models. This is to keep the system competitive, innovative and malleable for future disruptive changes – such as token-powered Defy.

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Understanding the implications of asset tokenization

we have The establishment That digitization is the first step in many enterprise and unlicensed blockchain projects. Tokenization is the process of converting or claiming any property and rights on a blockchain network into digital representation, or tokens. At this time, it may make sense to distinguish between a (crypto) asset or currency and a token asset.

A (crypto) is a medium of asset or currency exchange or a protocol-driven exchange mechanism that often embodies the same characteristics as real-world currency – such as stability, limited supply, and recognition by networks – while one is supported by common trust. Systems, such as fiat currency. A (crypto) asset or currency also represents a by-product of the trust system, or consensus, as a vehicle to scale back the incentive economic model that rewards and fuels the network’s trust system, making it the network’s trust becomes currency. On the other hand, a token can be many things: a digital representation of a physical good, making it a digital twin, or a layer-two protocol that rides on a (crypto) asset or currency and represents a unit of value is.

The difference between a (crypto) asset or currency and a token Asset Exchange is important for understanding vehicles, valuation models and fungibility Throughout Various value networks that are emerging and presenting challenges around interoperability. The challenges are not only technical, but also the business challenges surrounding the same swap. The tokenization of assets can lead to the creation of a business model that promotes partial ownership or the ability to own an instance of a large asset. Promised asset tokens on blockchain-based business networks are not simply a solution to digitization or inefficiency of time and trust; This also makes New business models and co-creation with network participants that did not exist before.

While the blockchain itself provides technology creation to facilitate exchange, ownership, and trust in the network, it is in the digitization of value elements where asset tokens are required. In short, digitization is a prerequisite for a token. In the context of financial services, digitization of existing services and token-driven DEFI present two parallel business streams, which will converge as the industry aims to provide a unified user experience.

Tokenization implies that account management and claims on assets are driven by cryptographic keys, as opposed to account management and asset management by a system operator called a bank. Although tokenization is more than just account management and an asset claim, it enables divisibility, substitution and non-intermediary business functions, such as asset transfer. It is a fundamental building block and prerequisite for the “Internet of Value”.


Answer the question How does a financial institution manage a delicate balance in which two worlds can coexist and provide a smooth and unique experience? Is a complex one. Encompassing the exponential growth (and complexity) of a digital asset ecosystem, the operational structure that encompasses the complexity of existing infrastructure needs to be adequately considered. This presents both as a huge operational challenge and a big opportunity scenario and avenue for introducing new business models.

It is widely understood and accepted that blockchain technology lays the foundation for a reliable digital transactional network, as a seamless platform, new synergies and co-creation due to new digital interactions and value-exchange in markets and Promotes the development of secondary markets. Mechanism.

Open banking has led to digitization efforts with open APIs. These APIs can be extended to tokenized asset structures and transform the entire business process of various DIFI market structures into consumable units, where different asset classes, markets and DIFI support services have a unique experience hiding the transactional complexity. can be added to.

This article does not include investment advice or recommendations. Every investment and business move involves risk, and readers should do their own research when making decisions.

The views, opinions and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointegraf.

Nitin Gauri IBM is the founder and director of Digital Asset Labs, where he sets industry standards and use cases and works towards making blockchain a reality for the enterprise. He previously served as chief technology officer at IBM World Wire and IBM Mobile Payments and Enterprise Mobile Solutions, and he founded IBM Blockchain Labs, where he led the effort to establish a blockchain practice for the enterprise. Gaur is also an IBM distinguished engineer and IBM master inventor with a rich patent portfolio. Additionally, he serves as research and portfolio manager for Portal Asset Management, a multi-manager fund specializing in digital assets and Defy investment strategies.