Main challenges and solutions found in the asset tokenization market
In a previous post, we have been writing about trends and benefits around asset tokenization technology that brings transparency, security, efficiency while increasing liquidity to all investors.
In this blog, the analysis will continue one step further by focusing on challenges and available solutions applied to this framework.
What are the challenges of the asset tokenization?
Every advance has its disadvantages, challenges, and even its detractors. In the context of asset mobilization, the challenges can be divided into two buckets – technology challenges and regulatory/legal challenges.
On the technology side, there are potential risks related to the virtual environment:
- 51% attack – although highly unlikely for most public blockchains, if a bad actor gains control of a majority of a blockchain’s network they can manipulate the consensus algorithm and alter the blockchain
- Smart contract errors – digital asset transfers often rely on smart contracts, but the code in the smart contract can occasionally contain errors that can be manipulated to reverse or force transactions
- Interoperability – there are several different blockchains currently being used for asset mobilization from private blockchains owned by financial institutions such as J.P. Morgan’s Onyx network to public blockchains like Ethereum and also permissioned blockchains like Ripple which have elements of both. Each type has its advantages but there is a lack of interoperability between chains without (usually centralized) digital token exchanges.
- Scalability – there are question marks whether current blockchain networks can scale to facilitate the volume of transactions that happen in today’s financial markets. If networks become overloaded, congestion can occur, and transaction settlement can be delayed (or become expensive)
On the regulatory side, the legal status of smart contracts presents some challenges - there is very little to no case law which considers the legal implications of using smart contracts. There is a consensus forming within legal circles that smart contracts should and can be treated the same as traditional contracts (with some caveats), but this is not written into law yet.
Case Study Box Out - Société Générale
In 2019, Société Générale issued a EUR100m covered bond as a security token, directly registered on the Ethereum blockchain. The ensuing tokens were rated Aaa/AAA by Moody’s and Fitch.
The purpose of the transaction was to prove that blockchain is a trustable, legal and compliant solution for securities issuance.
The added value for issuers stems from the transparency on investors and on the secondary market, as well from the high product optionality through the use of smart contracts.
The added value for investors lies primarily in better price discovery on OTC markets as well as faster transactions.
NTT DATA Solutions applied to this framework/context
Due to the growing interest and demand in digital innovation within financial services and the great possibilities offered using blockchain, at NTT DATA we collaborate with ioBuilders to offer our clients the best and latest solutions. This partnership allows us to offer blockchain integration solutions that can be adapted to our clients’ needs and provide them real business value.
Being more specific, on the cash management side, NTT DATA in sum with ioBuilders are working to implement solutions that connect core banking systems with the blockchain network, digitalizing accounts and tokenizing balances, enabling the use of regulated digital money on-chain. This improves the bank’s value offer for a wide range of products such as faster cash pooling and netting, payments, VBA…
The solution provides the possibility of integration via APIs and automation through smart contracts.
We provide all the required tools and resources for the digitalization and integration of blockchain into a traditional system, which makes it possible to create markets, issue, and list digital assets on it, do orders matching, clearing and settlement, and provide lifecycle management tools, such as tokenization and detokenization, configuration of the specs of the asset and all the lifecycle phases such as maturity and coupons, from a single API integration.
Our clients from Industrial and Corporate space are benefiting from these solutions through M2M and IOT payments, cash pooling, settlement platforms and automated contract payments with data notarization.
Traditional industries are also expanding their business models into digital marketplaces and settlement platforms thanks to some of our services, including escrow functionalities and third-party service connectivity running on decentralized ledger technology.
On the other hand, at NTT DATA we were conducting research into security tokens and other aspects of blockchain technology and concluded a capital alliance with the US firm Securitize Inc. on June 16, 2021, as it is a global operator in this field. Securitize provides a global distribution and issuing platform for “security tokens”, digital securities and rights based on blockchain technology. This partnership allows us to strengthen the relationship with Securitize and promote the digital securities business in Japan and around the world.
After all, challenges still remain: the technology is still evolving, and the regulatory and legal framework remains unclear. But once these hurdles have been overcome this technology will reduce the costs and friction associated with asset trading as well as increase liquidity and transparency.