The International Monetary Fund (IMF), a United Nations organization that functions as a global lender of last resort, and the Bank for International Settlements (BIS), a supra-governmental central banking agency, published separate reports on the future of the monetary system last week. Both reports discussed cryptocurrencies and central bank digital currencies (CBDCs) and were generally optimistic about tokenization’s potential.
Even CoinDesk’s Chief Content Officer Michael Casey wrote in March that technology had migrated the tokenization of real-world assets from “closed, allowed projects onto public, permissionless blockchain platforms” and implied that this time might be different. (Also, it’s me, hi, I’m the longer-serving colleague mentioned in Casey’s piece who rolled his eyes at the notion that tokenization of real-world assets is viable).
The IMF and BIS report provides an intriguing glimpse into how administrators view cryptocurrencies since they concur that tokenization is the killer application for cryptocurrencies.
The BIS penned, “Today, the monetary system stands on the precipice of yet another significant change. After dematerialisation and digitalisation, the most significant innovation is tokenisation – the process of digitally representing claims on a programmable platform.”
Dematerialization and digitalization have profoundly impacted the global economy and commerce. Tokenization is the futuristic concept of “the process of digitally representing claims on a programmable platform” to use the BIS’s terminology.
Okay, once more, but this time more slowly.
Tokenization is the digital representation of claims on a programmable platform.
Hold fast. Does anything exist?
The digitization of the financial system is the digital representation of financial claims. Does this imply that financial technology companies, which frequently operate programmable platforms, will be the next to innovate? This may be tokenization.
Well, no. In the minds of the IMF and the BIS, tokenization is trading claims on programmable platforms. If a blockchain is involved, tokens will probably represent these claims. Tokens are not just digital entries in a database. Instead, they combine the records of the underlying asset typically found in a conventional database with the rules and logic that regulate the transfer process for that asset.
For a homebuyer, tokenization could entail that their deed is represented as a token on a blockchain, such as Bitcoin or Ethereum. Instead of a deed transfer indicating who the proprietor is, it will be a token transfer.
Currently, tokenized real estate is supported by unstable foundations. Indeed, the “rules and logic governing the transfer process for that asset” could exist on a token platform. Still, as soon as a legal document or legal proceeding governs an aspect of ownership, the entire use case for a token representing that piece of real estate is rendered invalid.
Given the actual contents of the IMF and BIS reports, institutions are far more interested in the tokenization of central bank digital currencies than commodities or real estate tokenization.
First, CBDCs merit a broader examination than will be provided here; however, let’s examine CBDCs solely through tokenization. The best method to summarize the position of central banks on the tokenization of CBDCs is to share a direct quote from the IMF report.
To make a payment, participating banks deposit reserves into this escrow account, and the platform generates a digital escrow certificate for the bank to transmit to other participants on the blockchain.
The existence of a singular or unified ledger is the central concept connecting the IMF, and BIS reports on tokenizing CBDCs. Naturally, these organizations are so mistrustful of non-central bank money that they must establish a centralizing force to guarantee the stability of settlement and “singleness of money.”
Now, it is still being determined what, if anything, will result from these discussions, explorations, and analyses of tokenization. Numerous nations are investigating CBDCs, but only a few have instituted these systems.
Certainty dictates that the technobabble is disorienting. If the IMF, BIS, and other organizations want to create a CBDC with a single, centralized, unified ledger, they don’t need to claim they’re employing cryptocurrency. It is erroneous to conflate Bitcoin and the tokenization of CBDCs. It is, at best, a misconstrued desire for a more technologically advanced monetary system. At worst, it is a treacherous, deliberate diversion from what makes Bitcoin and cryptocurrencies desirable, not because they are digital but because they lack central control. This is precisely what central banks and regulators are attempting to implement.
Signaling innovation is not the same as actually innovating. And tokenization is hardly an enhancement over the current practices of financial institutions. It serves as a diversion. It is worthless.