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The Next Big Thing in Financial Services? Tokenization, According to McKinsey

 

The rise of digital assets has been one of the most talked-about trends in recent years. Bitcoin, Ethereum, and other cryptocurrencies have captured the imagination of investors and entrepreneurs alike. But digital assets are not just about speculation. They have the potential to revolutionize many industries, including financial services.

One of the key ways that digital assets can transform financial services is through tokenization. Tokenization is the process of representing an asset on a blockchain. This can be done with any type of asset, including financial instruments, real estate, and even physical goods.

Tokenization has a number of potential benefits for financial services. It can make it easier to trade assets, reduce costs, and improve transparency. For example, tokenized securities could be traded 24/7, which would make it easier for investors to buy and sell them. Tokenized real estate could be fractionalized, making it more affordable for investors to own a piece of property. And tokenized physical goods could be tracked more easily, which could help to reduce fraud.

Of course, tokenization also has some challenges. One challenge is that it is a complex process that requires specialized knowledge. Another challenge is that there is still a lack of regulatory clarity around digital assets.

Despite these challenges, tokenization is a promising technology that has the potential to transform financial services. As the technology matures and regulatory clarity increases, we can expect to see more and more applications of tokenization in financial services.

 

Key Takeaways from McKinsey

 
  • Advances in cash tokenization aka stablecoins
    Approximately $120 billion of tokenized cash is now in circulation in the form of fully reserved stablecoins (for example, USD Coin). Stablecoin on-chain volumes have routinely exceeded $500 billion monthly. Some banks have launched or will shortly launch tokenized deposit capabilities to improve the cash settlement leg of commercial trades.
  • Emerging regulatory framework out the US
    In the past six months, the European Union has moved to approve Markets in Crypto-Assets (MiCA) legislation. Five other regions including Hong Kong, Japan, Singapore, the United Arab Emirates, and the United Kingdom have published new guidelines that enhance the regulatory clarity for digital assets.
  • Increasing market readiness and infrastructure maturity
    We are currently seeing greater experimentation and planned expansion of capabilities (often through partnerships) among capital market incumbents, with some working on integrating or rolling up necessary capabilities to become a one-stop shop for asset tokenization and distribution. 
 

Here are some additional thoughts on the potential impact of tokenization on financial services:

  • Tokenization could make it easier to access financial services. By tokenizing assets, it would be possible to create new financial products and services that are more accessible to a wider range of people. For example, tokenized securities could be made available to retail investors who would otherwise be unable to afford them.
  • Tokenization could reduce costs. By eliminating the need for intermediaries, tokenization could reduce the costs of financial transactions. This could make financial services more affordable for businesses and consumers.
  • Tokenization could improve transparency. By tracking assets on a blockchain, tokenization could make it easier to track the movement of assets and to prevent fraud. This could improve the overall efficiency and safety of financial markets.

Tokenization is a powerful technology that has the potential to transform financial services. As the technology matures and regulatory clarity increases, we can expect to see more and more applications of tokenization in financial services.

To learn more about tokenization, please read the full article on McKinsey’s website:

https://www.mckinsey.com/industries/financial-services/our-insights/tokenization-a-digital-asset-deja-vu#/

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