The asset tokenization market is just getting off the ground, but its implications for the financial sector are profound. Asset tokenization is paving the way for a blockchain-based economy. While this major shift in financial market infrastructure may pose significant challenges for its participants, it's projected to bring a myriad of benefits to the market, including the following:

 New business opportunities

Blockchain technology is poised to open up new channels for liquidity by enabling the trading of new assets and optimizing financial services and marketplaces.

 A single settlement standard

A distinctive standard for financial market infrastructure, grounded in blockchain technology, will streamline asset settlement among players.

 Operational process efficiency

Smart contracts will automate operational processes, including various phases of financial instruments' lifecycle.

 Wider access and transparency

For consumers, this technology will allow investment in a broader range of assets and bring more accessible and transparent financial services.

Throughout the many discussions held at Febraban Tech’s recent event in Sao Paulo (June 27-29), this vision and expectation were clearly manifested by most of the experts invited to speak about the future of the "tokenized economy".

A Citibank study, frequently referred to during the discussions, posits that the tokenized asset market could be valued at US$4 trillion by 2030.

Taking a leaf out of Pix and Open Finance's book, asset tokenization via blockchain technology is here to stay – and it's expected to unleash a wealth of opportunities and benefits for financial sector institutions.

Next, we delve into the main talking points from the event about the evolution and challenges of this new digital economy.

Brazil could be at the forefront as a key global player

Brazil is leading the pack in tokenizing the economy. Experts agree that the country has a number of advantages that put it ahead in the race for financial innovation. The large population (and hence market potential) is one factor. Another is the proactive approach of regulatory bodies and the government to participate in innovation and nurture an environment conducive to this market's growth.

"In Brazil, we have several favorable elements, beginning with the decree that designates the Central Bank as the crypto market regulator, which is a positive development," commented Marcos Viriato, Parfin’s CEO and co-founder, on a panel about global custody and regulation, in reference to the June decree that regulates Law No. 14,478, known as the Legal Framework for Cryptocurrencies. "In addition, CVM175 is expected to fuel a fund industry on the order of BRL 350 billion," added the CEO, referencing the resolution set to take effect in October.

Evandro Camilo, Santander's Head of Products for Digital Assets, lauded the government's active involvement with the market and contrasted it with the U.S. "Brazil maintains an excellent dialogue with the market; the efforts, particularly by the Central Bank, are closely linked with innovation, to the extent that we have one of the largest fintech markets," he stated. "In the U.S., the road is harder due to the plethora of regulators and overlapping duties."

Digital Real and big banks’ entry set to accelerate progress

When will the breakthrough happen? This question was a common thread in the main debates. Everyone agreed that we're only at the starting line, but the time to gear up for the new digital economy is now.

It's typical for fintechs to be the trailblazers right now, developing and testing infrastructure solutions and technologies. It's also recognized that the advent of the Digital Real and the entry of major banks will propel the sector further. "The Brazilian Central Bank and the CVM have been discussing regulatory issues in a very productive manner, and the tests show that the Digital Real will be a major player in the chain, as happened with Pix," stated Fernando Freitas, executive superintendent at Bradesco, during a discussion on use cases and practical examples.

Freitas elaborated on how Bradesco is preparing to embrace this shift. "We're not in this alone. This is a market that demands strategic partnerships," the executive said. "There are essential building blocks that we can't do without, like custody to safeguard our customers' keys. We're figuring out how to protect ourselves, how to establish layers that let us feel secure when creating products in this new world. Parfin is one of our partners. We believe that this market will unlock in 4 years," he added.

Privacy and security are critical to win public trust

The advancement of the tokenized economy is closely linked with concerns for the security of new technologies and the protection they afford for assets. For the public, knowing the technology itself matters less than being reassured that their assets will be secure and their data won't be exposed.

It's up to institutions to offer this assurance through the implementation of best practices for the efficient management of digital assets. "Managing different types of custody accounts (whether individualized or not) must be demonstrated through virtual control. The custodian will need a complete view of their accounts, and the technology must support this entire process," stated Marcos Viriato, Parfin’s CEO, during the discussion "Digital asset custody in a global and regulated scenario ".

Institutions should concentrate on consumer education and broadening access

No product or service can thrive without consumer buy-in. It's essential to grasp the public's needs and develop offerings centered around their pain points and demands for the mass adoption of digital assets.

This includes launching more sophisticated products like tokenized international remittances, breaking down geographical barriers, and helping clients understand the benefits they'll reap from this new technology. Banks, in particular, play a significant role in financial literacy.

Febraban Tech 2023 attendees that work in the banking sector also highlighted the immense potential of asset tokenization to democratize access to credit and investments, especially those currently confined to certain customer profiles, like Receivables Investment Funds.

Want to know how to navigate the new digital economy? Talk to our experts!