DIGITAL ECONOMY - Tokenization’s growing influence on US finance
Executive preview:
Over the next few years, asset tokenization and digital money use cases will likely extend into more corners of the financial infrastructure but are unlikely to fully replace key activities provided by incumbent institutions. For financial institutions, the growth of tokenized assets will drive demand for on-chain settlement of payments, and a main question will be whether transactions occur mainly in stablecoins , tokenized deposits or tokenized money market funds (MMFs). The GENIUS Act established a federal framework for payment stablecoins, a narrow form of digital money fully backed by a segregated pool of high-quality, liquid reserve assets, such as US Treasury reserve and bank deposit assets, that is not fractionally lent out. Tokenized deposits, by contrast, have credit risk associated with the issuing banks but would be covered by depositor insurance to the same extent as traditional bank deposits.
Herein, we consider three scenarios differentiated by the pace of tokenization of real-world assets and the related use of on-chain cash settlement forms of payment. These scenarios imply different answers to deeper questions of who controls the movement, settlement and custody of financial assets and who maintains the primary customer relationship.
- In our "steady growth" base case, by far the most likely, tokenization starts to scale in select assets but incumbent asset managers, banks and infrastructure providers retain central roles. Stablecoins (including bank-issued stablecoins), tokenized deposits, and possibly tokenized treasury funds would be used as principal on-chain settlement instruments. However, the overall hierarchy of the financial system will largely stay the same despite changes in operating models across certain subsectors.
- In a "low growth" scenario, asset tokenization and digital money would stay confined to narrow use cases, with only modest changes to the financial system. Regulatory friction, unresolved legal questions and low demand from end-users would continue to slow the rollout of tokenized markets, and the benefits of tokenization and digital money would remain insufficient or too uncertain to spur widespread investment by major institutions. Lacking clear near-term cost advantages or strong client demand, incumbents and financial market intermediaries would have little incentive to overhaul existing processes, and new digital assets would stay mostly on the fringes of finance.
- In a more disruptive "rapid growth" scenario, tokenization of assets expands materially with potential for incumbent disintermediation. Stablecoin usage would grow substantially, but a dominant on-chain settlement asset may remain unclear, depending on the economics of financial intermediation. Though unlikely, this scenario is important to incumbents' strategic planning because it would affect not just how assets are held and transferred, but how money moves and, therefore, how value is captured across payments, funding and intermediation.