The Middleman’s Shadow in the Tokenization Complex

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As markets evolve and reach maturity, it’s expected that the influence of these intermediaries will gradually diminish. Cryptocurrencies like Bitcoin and Ethereum, giants in the realm of decentralization, have constructed extensive networks with developers who address issues not for financial gain, but out of a sense of responsibility or benevolence. In this context, scale might make centralization more palatable, yet intermediaries remain an integral part of the system, just transformed into different roles.

Exploring the tokenization of tangible assets, the role and meaning of intermediaries expands, not just technically, but also in terms of regulations. Test environments called sandbox regimes are cropping up in multiple locations, and they underscore one fact: Central Securities Depositories (CSDs) will remain relevant, possibly playing a more significant part than ever before. The larger, globally interconnected CSDs, known as International CSDs, seem primed to assume an even more essential role.

At the core of the issue: some critics view tokenization initiatives as nothing more than a show. The reason being, these tokens aren’t created natively on a blockchain, but instead serve as representations of assets that still remain under the control of traditional intermediaries – entities that Distributed Ledger Technology (DLT) was intended to replace. It’s correct that non-native tokenization restricts the technology’s full potential, preventing it from delivering the seamless, decentralized future many anticipate. Despite their shortcomings, these initiatives can be seen as an overture – a stepping stone that enables industry players to explore DLT without completely leaving behind familiar ground.

While some might argue that a Central Securities Depository’s (CSD) internal ledger is needlessly duplicative, given the inherent immutability and automation of blockchain technology, it’s important to note that regulators find this redundancy reassuring.

While efficiency might be our usual goal, here it’s more about stability and comfort. Criticisms may not always be heard. However, the task for industry players is to demonstrate how tokenization, even when working with intermediaries, can pave a promising future.

Today, gigantic investment firms are blazing a trail using blockchain technology, yet they face challenges with its restrictions such as limited scalability, poor interoperability, and privacy concerns that still exist. However, it appears that tokenization is proving to be effective even amid these hurdles. This seems plausible given the real-world benefits that improved collateral management and increased asset mobility are already delivering in terms of operational efficiencies.

As an analyst, I’m shifting the focus from eliminating intermediaries entirely, but instead, I’m advocating for a transformation of their role. This transformation involves harmonizing traditional financial institutions with cutting-edge technology until native tokenization finds its optimal position.

Please keep in mind that the opinions shared within this article belong solely to the writer and may not align with the views of CoinDesk Inc., its stakeholders, or associated entities.