Citi Perspectives 2024 E-commerce Edition

(or dematerialization) of these paper-based representations of real-world “promises to pay” — and the conferring of ownership rights to the ascribed owner is a great leap forward in terms of enabling new efficiencies and protections. As such, their acceptance should indeed cause no more psychological discomfort than any traditional tokenized equivalent. Dematerialization in finance started with the computing boom of the 1960s and took off following events such as the Big Bang of 1986 when the UK financial markets were deregulated. It’s hardly a new idea, then, so what does the blockchain form of tokenization offer above and beyond existing digital records that makes it an interesting proposition? To understand this, McLaughlin says it’s important first to note two fundamentally different ideologies of tokenization that set up a disagreement between the crypto view of it and that of the regulated financial world. “Blockchains were created as the antithesis of the regulated financial system,” he explains. “Both bitcoin and Ethereum sought ‘trustlessness,’ censorship resistance, and a permissionless world of P2P transacting, without the intermediation of centralized issuers and regulated financial institutions.” The “money” (or cryptocurrencies) in these networks is unlike traditional money in that it is not issued by a nation state and is not a promise-to-pay. Bitcoin has no intrinsic value and therefore its price can often be perceived as arbitrary and often volatile. An essential feature of this “permissionless economic system” is therefore its “proof- of-work” mechanism. In the absence of centralized issuing and governing authorities, this structure must confirm, record, and ensure the integrity of all new transactional data added to a blockchain. In a trustless environment, where transaction anonymity is a feature and not an issue, proof-of-work is one means of establishing consensus around ownership. “But these core pillars of blockchain and tokenization [including the anonymity, decentralization, unregulated digital ‘money,’ etc.] apply only to the crypto community view,” says McLaughlin. “And they are generally not acceptable to regulated financial services.” This is why a fundamentally different view of blockchain tokenization has developed; one that is able to leverage its benefits while overcoming its unacceptability. Uncovering blockchain value Ethereum’s capacity to run 24/7 is a distinct advantage over the regulated world, where “always on” is rare (faster payments systems and card schemes are exceptions). But 24/7 capability is not exclusive to blockchain structures. However, Ethereum’s blockchain structure does have that facility to create and exchange, within its network, tokens representing literally any arbitrary real-world asset. It is perhaps this “general purpose means of representing digital assets” that sets it up as a uniquely useful proposition, McLaughlin hypothesizes. Here’s why. The traditional financial system forces upon the world a series of special purpose proprietary infrastructures, where each performs only one task (in the UK’s CHAPS RTGS system, for instance, the only asset is central bank money in GBP). Ethereum, on the other hand, enables the creation of multi-asset settlement venues, where all types of tokens can be represented and exchanged on a common platform. “And underpinning all of this,” notes McLaughlin, “is the fundamental purpose of blockchain, and that is to be a ‘who-owns-what’ machine.” Enabling this “unambiguous view of asset ownership” is as essential in crypto as it is in a regulated financial services context. But while crypto is self-referential and needs proof-of-work (or any other equivalent trustless consensus mechanism) for validation, in the regulated space almost every financial instrument represents a legal claim of some sort that must be verified. Blockchain obliges in both cases, but in the latter instance needs to be nested within an established legal structure. | 33 Natural Progression: Why tokenization really could be the next big thing