Instant transactions, without intermediaries and at lower cost: this is the promise of “tokenization”, a technology that some financiers present as the next revolution in the markets, despite potential risks for their stability.
Tokenization consists of creating the digital copy (a “token”) of a financial asset, such as a stock or a bond, to exchange it on a blockchain (“blockchain”), a database similar to those on which cryptoassets, such as bitcoin, are based.
Thanks to a decentralized register – each computer in the system participates in certifying the validity of a financial transaction – it makes it possible to eliminate some of the intermediaries between the buyer and seller of an asset. From then on, the title can “be sent to any country, in a few seconds”, and with an “extremely low cost” and “24 hours a day”, explains Campbell Harvey, professor of Finance at Duke University, in the United States.
Currently, the purchase of a security takes up to 48 hours to be settled in Europe, because the transaction must be validated by several actors, such as stock exchange operators, clearing houses, which secure it, or central depositories, which record it.
“Éirréevolution”
On Wall Street, the New York Stock Exchange (NYSE) already announced at the start of the year its intention to open a platform allowing “operations 24 hours a day, seven days a week” and “instant settlement”, based on “tokenization”. This would be a major change for stock markets, where for centuries trading can only take place between defined opening and closing times.
Blackrock, the world’s leading asset manager, has also embarked on the digitalization of part of its assets. His boss, Larry Fink, regularly talks about the subject in interviews, which he describes as “the next big evolution” in the markets. “Tokenized” financial assets currently only weigh $30 billion, a drop in the ocean, according to figures from the consulting firm McKinsey. But they jumped 118% last year and could climb to $2,000 billion by 2030.
In a report at the end of March, the French financial lobby Paris Europlace called on us to prepare for this “irreversible development”, as “the contributions” of this technology are “significant”, while being concerned about the advance of the United States in the field. Without European progress, American markets could “absorb an even more significant share of financial activities”.
In France, the technological company Lise wants to be one of the leading figures in this movement: it recently received approval from financial regulators to launch a new stock market entirely based on a “blockchain”. On April 9, it will host its first fundraising, that of the Toulouse industrial defense and aeronautics company ST Group.
“Tokenization allows us to reduce the cost of the listing process, which is currently too expensive for SMEs (small and medium-sized enterprises) in the classic circuit, where you have to pay several intermediaries,” explains Mark Kepeneghian, general director of the company.
Risque pour to financial stability?
The French fund manager Delubac Asset Management also launched recently, by creating a “tokenized” copy of one of its monetary funds, in order to “do a first test”, explains Benoît Vesco, its president.
“This allows us to offer our customers more immediacy in their transactions,” he explains.
Still, “tokenization” could “ultimately create risks for financial stability” if it were implemented on a large scale, the Bank of France warned last summer in a publication. Concretely, the “permanent availability of tokenized asset exchange platforms”, unlike traditional markets, could produce a “price gap” or “liquidity” between the “real” asset and its copy on the “blockchain”, noted the institution.
However, if investors lose confidence in the correlation between the two versions, the system can falter. There is also a risk of creating “new interconnections”, by sharing the same infrastructures, between traditional finance and cryptocurrencies, which are nevertheless very volatile and subject to speculation, according to this publication.
