Revolutionizing Finance: How Tokenized Assets May Replace Money

• The Future of Tokenization in Everyday Payments
• How Tokenization Could Change Payment System
• Obstacles to Tokenized Payments
• Legal Hurdles
• Conclusion

The Future of Tokenization in Everyday Payments

Tokenization, the digital representation of assets on blockchains, is steadily becoming mainstream. This has led to the prediction that these tokenized assets may eventually replace money for everyday payments. This argument was recently presented on Forbes by David Birch, an esteemed British authority on digital identity and money. Marcelo M. Prates, a central bank lawyer and researcher, also shares this viewpoint.

How Tokenization Could Change Payment System

Imagine selling your mutual fund shares to buy a car. Instead of converting your shares into dollars, you could transfer some of the shares directly to the dealership over a blockchain. You would have the car, and the dealership would have tokenized shares that they could keep or transfer to the carmaker to pay for replenishing the inventory.

The more tokenized assets there are, the easier it will be to use them directly for payments without first converting them into bank deposits, CBDCs, or stablecoins. This could reduce transaction costs. If all assets can be tokenized, divided into fractions, and quickly transferred on blockchains, tokens could be used for payments regardless of what they represent - from securities or Bored Apes, to houses or airline tickets.

Widespread acceptance of tokens is based on the assumption that someone in the network will be willing to accept the tokenized asset you hold. This would make all exchanges possible. Supercomputers and AI could assist in speeding up trades by rapidly determining the value of each token and matching counterparties.

Obstacles to Tokenized Payments

Despite the fascination with this reality, there are at least two significant hurdles that must be overcome. First, the sheer number of transactions could quickly overwhelm even the most efficient blockchain. The U.S. payments systems alone handles almost 550 million retail transactions daily using money as a vehicle. This number could increase dramatically if payments were made globally with tokenized assets, instead of a common vehicle like dollars or other sovereign currencies.

In the tokenized system, purchasing a car would require multiple payment transactions for each type of tokenized asset used. This process could become even more complex if tokenized assets exist on different blockchains or if sellers do not have addresses or wallets on all these blockchains to receive the tokens offered in payment. Though interoperability between blockchains is possible, it often comes with additional costs and risks.

Legal Hurdles

The second hurdle for tokenized assets to replace money is legal. Currently, money serves as a checkpoint for compliance requirements. Most jurisdictions delegate the prevention of money laundering and terrorism financing to financial institutions. These institutions must know their clients, identify transaction beneficiaries, develop risk-based tools to prevent suspicious transactions, and alert authorities if anything looks amiss.

If money is replaced by tokenized assets in everyday payments, this compliance strategy loses its central operational point. Regulators may struggle to gather the information they need and enforce the rules without a common asset flowing through specific institutions.

While blockchain forensics and automated supervisory tools could help regulators monitor transactions in real time, the ability to suspend or block suspicious transactions amid trillions of payments happening daily across jurisdictions seems unrealistic, especially for transactions on truly decentralized blockchains.

Conclusion

Replacing fiat money is not a straightforward task. Whether for practical or legal reasons, sovereign money still dominates everyday payments despite the many alternatives currently available. Widespread tokenization, while promising, is unlikely to alter this reality in the near future.

Edited by Jonathan Stoker