The effects of tokenizing assets on the economy are being investigated by the Federal Reserve.
Tokenization of assets and Risk-Weighted Assets (RWA) are the subjects of a new working paper from the Federal Reserve. These novel financial instruments are attracting a lot of interest because of the radical changes they might bring to investing methods and established markets as the financial landscape continues to shift.
Tokenization, the report argues, has the same five fundamental components as stablecoins: a blockchain, a reference asset, an evaluation mechanism, storage or custody, and redemption mechanisms. These components help to bridge the gap between crypto markets and reference assets, shedding light on the effect that the latter have on the former.
Tokenized assets on permissionless blockchains are expected to reach a staggering $2.15 billion in market value by May 2023, as reported in the research. Tokens from both newer, decentralized protocols like Centrifuge and more established firms like Paxos Trust are included in this value.
Time series data collection is complicated by the wide range of tokenization methods and degrees of openness. Insights from DeFi Llama data, on the other hand, show that tokenization is becoming more popular inside the DeFi ecosystem.
While the DeFi ecosystem’s total value locked (TVL) has been around the same since June 2022, real-world asset-related categories have expanded, both in absolute value and as a share of the ecosystem as a whole. DeFi has secured almost $700 million of the expected $2.15 billion in tokenized assets.
The article illustrates how investors may now participate in real estate and other sectors that were previously beyond of their price range thanks to asset tokenization. Because of its programmability and smart contract capabilities, it may use procedures that save liquidity throughout settlement processes, hence increasing productivity.
Tokenizations also make it possible to borrow money against the value of tokens, opening up a new kind of finance. Settlement times for tokenized asset transactions are often much shorter than those for transactions utilizing conventional reference assets.
There are significant concerns about financial stability, despite the promise of tokenization. There are worries regarding the stability of crypto-asset markets and their possible effects on the established financial system, notwithstanding the fact that the present value of tokenized markets is still very tiny in comparison to wider financial systems.
Tokenization redemption procedures connecting the digital asset ecosystem to the conventional financial system are the key source of worry in the long run. Stress transmission vulnerabilities may emerge if reference assets are illiquid. The article demonstrates that the liquidity, price discovery, and volatility of ETFs are highly correlated with their underlying assets, which raises similar problems to those in the ETF market.
With the growth of tokenization, more and more conventional financial institutions may be directly or indirectly exposed to the cryptocurrency markets via the purchase or collateralization of tokens. This modification brings in fresh dynamics and linkages, which may affect market behavior in unanticipated ways.
