The Federal Reserve has recently released a comprehensive report titled “Tokenization: Overview and Financial Stability Implications.” Authored by Francesca Carapella, Grace Chuan, Jacob Gerszten, Chelsea Hunter, and Nathan Swem, the report delves into the potential impacts and benefits of tokenized assets in the financial landscape.
Tokenization, in essence, refers to the process of converting rights to an asset into a digital token on a blockchain. The report suggests that tokenization might improve the liquidity of markets for reference assets, drawing parallels with the positive correlation observed between the liquidity of ETFs and their underlying securities.
One of the highlighted examples in the report is the initiative by a Delaware-based company, Real Token LLC, which aims to simplify investment security offerings by placing properties under a Series LLC and offering membership shares for returns. Such tokens can be used as collateral in decentralized finance (DeFi) lending protocols.
As of May 2023, the market value of tokenized assets on permissionless blockchains is estimated to be $2.15 billion.
This encompasses tokens issued by decentralized protocols like Centrifuge and traditional companies such as Paxos Trust. The report also mentions tokenized ETFs like OUSG, OSTB, and OHYG, which reference various established ETFs. These tokens not only represent deposits in the reference ETFs but also qualify as securities.
Gold-backed tokens, such as PAXG and XAUt, represent one fine Troy Ounce of gold custodied by the issuers. These tokens adhere to standards set by the London Bullion Market Association (LBMA) and can be redeemed for the underlying gold, albeit with certain restrictions and fees.
The report also touches upon the potential for tokenized assets to become reference assets themselves in both crypto and traditional financial markets.
Given the volatile nature of crypto asset prices compared to their real-world counterparts, the interconnectivity between tokenized assets and traditional financial systems could pose financial stability risks.
In a notable case study, the report mentions a pilot project launched in Argentina in March 2022. This joint venture between Santander and the crypto-firm Agrotoken aimed to tokenize claims on underlying commodities, leveraging blockchain infrastructure to validate and process transactions and redemptions.