Tokenization is the next big step in how financial assets are housed and provide benefits over existing traditional structures, Wall Street Firm Bank of America (BAC) Said in a Friday report and noticed that it also brings risks.
At its core, the tokenization is the process of converting ownership of assets in the real world, from shares and bonds to real estate, private equity and even art, to digital tokens recorded on a blockchain.
Tokenization follows a lineage that began with mutual funds and expanded through separately controlled accounts, collective investment trusts and stock exchangeed funds (ETFS)And according to the bank’s analysts, this model could reshape the way investors gain access to and manage assets by offering a number of benefits over traditional structures.
Among the most important benefits are improved liquidity, analysts wrote by Craig Siegenthaler, and added that around the clock could open secondary markets for previous illiques private assets and faster, friction-free settlements that eliminate the multi-day delays that are common in today’s financial markets.
Tokenization also allows for fraction, the analysts said, reducing the investment minimum and expanding access to portfolios. Transparency is another advantage as blockchain headbooks provide unchanging and publicly available items of ownership and transactions.
Lower fees are possible by cutting out intermediaries, and smart contracts can automate key processes such as dividend payments, coupon distributions and voting rights while helping to navigate regulatory requirements and even the complexity of private Equity capital calls, the report noted.
According to data provider RWA.xyz exceeds the value of assets in the real world represented on the chain, $ 28 billion.
Tokenization risks
Still warned Bank of America that tokenization faces significant obstacles before it can achieve widespread adoption.
Regulatory uncertainty is still the biggest challenge. While US decision makers have signaled support, future administrations were able to reversing course, and many jurisdictions are still writing rules.
The bank said that custody is another concern as investors risk losing access to assets if private keys are incorrectly placed and custody of institutional qualities is still developing.
On the technology side, vulnerabilities in smart contracts or blockchain platforms provide space for exploitation, and integration with Legacy Financial Infrastructure presents further obstacles considering most institutions on traditional systems.
And when it comes to listed assets, existing US markets already offer deep liquidity, low fees and strong investor protection, making the case for tokenized versions less convincing, the report added.
Read more: Ondo finance rolls out tokenized US stocks, ETFs like equity tokenization ramps up
