The recent Sibos conference in Toronto, an annual gathering for the global banking industry, highlighted a significant buzzword: tokenization. This blockchain-based concept revolves around the digitization of real-world assets (RWAs), and it's currently at the forefront of discussions in the financial world.

This isn't the first time blockchain has piqued the interest of banks, as some may remember the "blockchain, not bitcoin" narrative from the past. However, the landscape has evolved somewhat since then, as CoinDesk’s Ian Allison describes in detailing why banking giants are diving into the tokenization of real-world assets.

Convergence of Public and Private Blockchains: Traditionally, banks have favored permissioned blockchains and have focused on creating closed networks. These heavily-regulated, KYC-conscious institutions were motivated by the promise of cost-saving efficiencies, associated with streamlining an army of broker-dealers, custodians, transfer agents and central securities depositories.

Conversely, public blockchain ecosystems, like Ethereum, have been expanding to diversify their assets, particularly for the burgeoning decentralized finance (DeFi) sector. Sergey Nazarov, co-founder of Chainlink, predicts that public blockchain protocols will become the preferred destination for banks looking to tokenize real-world assets, as they offer diversified collateral and attractive yields.

Regulatory Caution in the U.S.: In the United States, regulatory caution has been a significant factor. After the cryptocurrency market's volatility and incidents like the FTX exchange collapse, regulators have discouraged financial institutions from engaging with cryptocurrencies. Meanwhile, Europe and Asia have provided more regulatory clarity, potentially giving them a head start in this emerging landscape.

Ethereum's Role: Ethereum could be called the natural or native blockchain when it comes to tokenization. Since 2015, several permissioned forks of Ethereum have been created, such as the Quorum protocol designed with banks in mind. Ethereum itself has evolved, from the proof-of-work consensus mechanism to proof-of-stake; and plans to enhance scalability and data layers on Ethereum could make it more attractive to enterprises.

Public Blockchain Move: Despite regulatory uncertainties in the U.S., a $1.4 trillion investment firm has embraced public blockchains. They've been exploring blockchain technology since 2019 and have successfully run a mutual fund as a token on the public blockchain. Their move is driven by cost-efficiency and the belief that public blockchains offer a level of innovation and utility that private blockchains can't match.

Token Services: Banks and institutions seem to be steadily gravitating towards Ethereum, with a slew of announcements related to that blockchain ecosystem at Sibos. With new Ethereum-based platforms emerging, involving elements like tokenized cash or trade finance pilots, for instance, banks recognize the importance of interoperability between these permissioned blockchain applications. The aim is to provide clients with cross-border liquidity and streamlined operations.

The journey toward tokenization of real-world assets is going to be a long one, particularly given the current regulatory climate around crypto. But a new era in banking beckons, where we will see a convergence of public and private blockchains, as banks cautiously reshape the financial industry.

To dive deeper into the evolving landscape of cryptocurrencies and blockchain technology, join us at State of Crypto: Policy and Regulation on Oct. 24, 2023, alongside lawmakers, regulators and leading counsels to discuss these issues and explore possible solutions.

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