Tokenization Growth Depends on Developing Blockchain-Powered Secondary Markets: Moody’s

In simpler terms, a report from Moody’s analysts suggests that blockchain technology can broaden the accessibility of tradable assets represented by tokens.

Blockchain technology enables the conversion of tangible assets into digital tokens, which financial institutions are investigating as a means to enhance market efficiency, reduce costs, and expand reach. For instance, tokenization lets large investments like private equity or real estate be divided into several tokens, making it accessible to a larger pool of investors, according to a previous report from the rating agency.

Financial institutions and governments have recently begun creating digital representations of assets, like last year’s $100 million green bond in Hong Kong. However, according to Moody’s analysts, there is currently a shortage of markets where these tokenized assets can be bought and sold after their initial release.

The report noted that the use of tokenization is being hindered to some extent, while there’s been a significant surge in the development of blockchain-based secondary markets.

The use of blockchain technology and tokenization introduces “major advancements to the way secondary markets operate.” Creating secondary markets for securities based on the blockchain could lead to better liquidity control, increased market transparency with easier access to data, and almost instant transactions, according to the study.

The report pointed out that these secondary markets using blockchain technology overcome various shortcomings of conventional markets. For instance, some assets are hard to reach in traditional markets, while these markets ensure wider accessibility. Moreover, the process of settling transactions in traditional markets can be time-consuming and costly, but these markets streamline the settlement process through advanced technologies. Lastly, operational expenses are significantly higher in conventional secondary markets compared to these new blockchain-powered markets.

The report issues a cautionary note despite the potential for groundbreaking advancements in the blockchain market: Technological challenges and regulatory barriers exist.

“The technology supporting these markets, primarily smart contracts, is prone to risks such as bugs, rug pulls, price manipulations, and oracle failures. These vulnerabilities not only pose financial dangers to participants but also impede the broader acceptance and integration of decentralized finance.”)