The traditional world of banking and finance have long faced numerous problems, from issues with liquidity and accessibility for investors, to problems with transparency and security. Now, tokenization in banking is paving the way to a worldwide revolution. 

So, what is tokenization in banking?

Real World Asset (RWA) tokenization in the banking landscape promises a new opportunity to enhance settlement efficiency, transform currently illiquid markets, and introduce new banking services. The tokenization sector converts real-world assets like stocks, bonds, commodities and even real estate into digital tokens on a blockchain.

Those tokens aren’t just digital representations, they’re programmable assets that can be traded, fragmented, and transferred with ease through the web. A transformation in bank tokenization services could open the door to better security, transparency, and accessibility in the industry, opening new doors for investors and institutions alike. 

Here, we’ll explore the various ways tokenization is already revolutionizing banking, and the opportunities that will continue to emerge as the tokenization market continues to grow, accelerating towards a value of $5 trillion by 2030. 

Tokenization in Banking: Unlocking Liquidity with Tokenized Assets

Investment assets in the banking sector have long suffered from limited liquidity. People can’t simply purchase a piece of real estate, or a private equity stake and immediately sell or trade those assets whenever the market changes. Transactions can take months or even years to complete, limiting the appeal and flexibility of these investment opportunities. 

Tokenization in banking unlocks liquidity in previously illiquid investment models in numerous ways. First, tokenization enables fractional ownership, allowing investors to buy and sell “fractions” of assets. For instance, an institution or individual investing in a real-estate project could sell fractions of a building complex in the form of tokens. This enables project leaders and creators to attract the attention of a wider range of investors. 

Secondly, tokenization allows these real world assets to be traded through secondary markets, similar to stocks. Buyers and sellers can trade these assets 24/7 through an online platform, allowing them to make intelligent, rapid decisions that increase the value of their portfolio. 

As an example, in 2018, a luxury Manhattan condo development became one of the first major properties in the area to be tokenized on the Ethereum blockchain. Investors could choose to own traditional, or digital interests in the project, and those with token assets could sell, or trade them through an online platform. 

This project removed the accessibility barriers of traditional real-estate owners, allowing investors from all over the world to contribute to the project, and diversify their investment portfolios. 

Bank Tokenization Improves Operational Efficiency and Transparency 

Illiquidity is just one of the few issues that tokenization in digital banking can help to overcome. RWA tokenization in the banking and finance world can also tackle inefficiencies and transparency issues in traditional processes. 

From an efficiency perspective, conventional asset transfers often involve long transaction times, multiple intermediaries, and hefty fees. Blockchain-based tokenization reduces a lot of the friction. By storing data on a decentralized, immutable ledger, transactions can be executed faster, more affordably, and – more importantly – with unprecedented transparency.

Consider the costs and delays typically associated with cross-border transactions in banking. Traditionally, sending money overseas could take several days, and incur huge fees. Tokenization in banking streamlines the process. A blockchain-based transfer eliminates the need for multiple banks and intermediaries, speeding up transfer times. 

Plus, because the blockchain creates an immutable ledger of all transactions, it offers access to exceptional transparency, allowing investors to monitor each movement of an asset with clarity and accuracy. Tokenized assets can even be backed by smart contracts, which help to automate compliance and adherence to contractual terms, reducing risks and minimizing human error.

Obviously, there are challenges to overcome in the banking sector, as companies will need to navigate regulatory frameworks that weren’t previously designed to accommodate digital assets. Already, however, solutions are emerging to further enhance the security of these assets, from advanced blockchain protocols, to robust cybersecurity measures on trading platforms. 

Plus, government groups from countries like Switzerland, Singapore, and beyond have begun to implement and create clearer regulations on digital assets. These regulations provide guidelines on asset classification, ownership rights, and investor protections for other countries to follow. 

The Future of Asset Ownership Fractional Ownership Evolves

As mentioned above, the concept of fractional ownership is one of the most significant elements driving the evolution of RWA in banking. In the past, fractional ownership was notoriously complex. Complicated legal structures and administration costs often limited the democratization of investment opportunities, reducing the number of participants that could access investments.

Tokenization in banking simplifies the ownership allocation and management of fractionalized assets, opening the market to new investors. By allowing assets to be broken down into pieces, and sold for a smaller cost than the whole asset, RWA tokenization reduces the barrier to entry for smaller investors, and makes it easier for existing investors to diversify their portfolios. 

For instance, with tokenization in digital banking, anyone can purchase a share in a famous piece of artwork, a real estate project, or even a sustainable initiative. Banks have the opportunity to serve as facilitators here, providing digital platforms for new forms of ownership. 

Some banks are already embracing this opportunity, with the tokenization of commodities like gold, silver, and oil. In 2023, the market cap for tokenized gold even surpassed the $1 billion mark, reflecting a clear rising interest in the opportunity for investors to purchase fractional tokens of precious metals. 

In the past, investing in gold would have required individuals and institutions to either purchase commodities directly, or buy shares in an asset-backed fund. With tokenized gold, however, investors can buy smaller shares of gold holdings on a digital platform, accessing a liquid, tradable asset that’s backed by tangible value. 

RWA in Banking Launches New Asset Classes and Investment Strategies

Tokenization and RWA in banking doesn’t just improve access to traditional and existing assets on a global scale. It also opens the door for a new generation of entirely new asset classes. Investors are exploring new opportunities to invest in fractional shares of intellectual properties, renewable energy projects, and even agricultural assets, through blockchain platforms. 

Tokenization in banking allows banks to expand into new and innovative investment strategies that can help improve portfolio diversification, and even fuel the development of a greener, more sustainable planet. For instance, in 2018, the WePower platform became one of the first blockchain firms to tokenize an entire energy grid. 

It allowed investors to purchase tokens representing future energy output, which they could sell or trade through a digital platform. This not only gave investors a new way to invest in an asset with the potential for significant yield. It also paved the way for rapid innovation in the energy industry.

With platforms like this, energy companies can source funding for renewable projects such as solar and wind farms, without having to rely exclusively on government funds and institutional investors. This means that green energy projects can be developed faster and more efficiently. 

Working with blockchain platforms on the development of new DeFi asset classes and opportunities gives banks a chance to offer more diversified and differentiated financial products to a huge audience. They can target new generations of investors focused on concepts like sustainable energy and green finance, and revolutionize the financial market.

Collaborative Ecosystems: Banks and Fintech Partnerships

Speaking of collaboration in the world of bank tokenization, there are endless opportunities for partnerships to evolve between fintech, blockchain, and DeFi platforms, and traditional banks. Working with financial technology innovators gives existing banks the expertise, infrastructure, and support they need to enable access to programmable digital tokens. 

For example, the Spanish banking giant Santander has worked alongside multiple fintech companies over the years, on a range of projects. In 2018, the bank collaborated with Ripple on the launch of a foreign exchange service that leverages the blockchain to enable same-day international money transfers. This marked one of the first times a bank used blockchain for cross-border payments.

Using RWA in bank services and new solutions and collaborating with the right technology leaders also gives bank an opportunity to support stronger ESG (Environmental, Social, and Governance) investments, and opportunities. For instance, banks can offer institutions and investors access to carbon credit tokens, shares in sustainable projects, and green energy investments.

Santander is one of the banks also powering this transition. In recent years, the company partnered with Agrotoken, an RWA tokenization leader in the agricultural projects market, that offers corn, wheat, and coy farmers a chance to access tokenized grain trading capabilities. Through the bank partnership, farmers can use their tokens on the platform as collateral for loans and financial support.  

This means even small-scale farmers, and those working on strategies to improve sustainability in the agricultural market can access funding faster, without having to rely on traditional resources. 

By working together with Fintech firms, banks can unlock new ways to optimize their services, and bring innovation into the mainstream financial landscape. Plus, they can ensure they’re developing and using platforms that adhere to emerging compliance and security standards. 

Expanding Banking Services Through Tokenization

The rise of tokenization in banking is also reshaping traditional banking services on a significant scale. As noted in the example above from Santander, tokenized RWA in bank services open the door to new possibilities for loans and collateral options.

Since bank tokenization opportunities allow banks to create and trade highly liquid and transferable assets, they can be used to secure loans in a way that’s far less complex than most traditional methods. Tokenization in banking allows people and institutions seeking loans to use everything from tokenized gold, carbon credits, and real estate shares as collateral in a loan contract. 

The blockchain makes it easy to track these assets and confirm ownership, while smart contracts can enable the automatic release of funds when assets are received by a banking institution, reducing operational complexities. An example of a company using RWA in banking processes this way is the “Aave” platform. This platform allows users to secure loans by offering tokenized assets as collateral. 

Users can lock their assets in smart contracts, and borrow money against them, creating a streamlined process for accessing funds. Banks can adopt a similar approach, using tokenization to reduce operational complexities, manage risk better, and provide access to more competitive rates.

Furthermore, RWA in bank processes and tokenization opens the door to new yield generation opportunities through DeFi channels. For instance, banks could offer their clients access to liquidity pools or staking options, creating a diversified portfolio of yield-generating digital assets that traditional banking systems were unable to provide.

The Evolution of Tokenization in Banking

Tokenization in banking is taking the world by storm, particularly as new opportunities to use RWA in banking products and services continue to emerge. With the ability to leverage RWA in bank assets and services, traditional banks can evolve, and grow at an exceptional pace. 

Tokenization can enhance the liquidity of financial and banking assets, improve operational efficiency, and enable democratization in investment through fractional ownership. Plus, tokenized assets gives banks new opportunities to expand into different asset classes, and deliver new services in the loans and lending environment. 

The world is embracing tokenization, meaning, in banking, there are more opportunities to connect with investors and institutions than ever before. Banks that adapt to this revolution have the potential to establish themselves as leaders in a new age of finance. They can partner with fintech companies and blockchain creators to provide innovative solutions that appeal to the needs of modern investors, and meet the demands of a rapidly changing market.

As the world of finance and banking continues to shift towards a greater focus on accessibility, democratization, and transparency, tokenization gives banks the chance to pioneer a new age of financial empowerment. Those that integrate blockchain technology and cutting edge platforms into their strategy won’t just stay relevant in this new landscape. They’ll lead to the charge into a future of unlimited opportunities.