Lack of liquidity, technical complexities impede tokenization: OECD

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A lack of a robust ecosystem, liquidity, industry standardization, and legal clarity are among the key hurdles that keep tokenization from making a mainstream impact, a new report says.

The report by the Organisation for Economic Co-operation and Development (OECD) explored the eight top impediments to tokenization globally, which have kept the sector from exploding despite ambitious targets from experts. Some, like BCG, have estimated that tokenization could unlock $16 trillion in value by 2030, although more recent estimates have been modest, such as McKinsey’s $2 trillion.

The OECD is an intergovernmental organization with 38 members that fosters world trade and economic progress.

At the top of the list of hurdles is a lack of liquidity and the absence of an ecosystem. The report notes that tokenization lacks a critical mass of investors, making issuers hesitant to commit to tokenizing assets. It’s a cyclical conundrum, as investors hesitate to delve into tokenized assets due to a lack of liquidity. OECD believes that a catalyst is needed to solve this, such as sovereign bond issuances on a public blockchain. However, financial institutions have taken the lead in issuance, and in most instances, the clients are their fellow banks.

In an extension of this first challenge, the OECD says a lack of scale has impeded adoption. Yet again, scale can only come from expanding the scope from pilots to live products, which depends on a rise in investor numbers.

A more unique challenge is the lack of payments integrated into blockchains. The OECD believes that tokenized money, such as central bank digital currencies (CBDCs), enables delivery-versus-payment (DvP), allowing for payment to be made on-chain.

This challenge is tied to using private networks and permissioned blockchains in tokenization. A public decentralized blockchain, like BSV, would enable seamless and instant payments using BSV as a Bitcoin-based stablecoin. However, even in such a scenario, the OECD says participants would still face “counterparty and liquidity risks.”

“As such, an ideal payment instrument for DvP would be wholesale CBDC…Tokenised deposits (tokenised commercial bank money) could also be an alternative. In the future, a common interface for CBDCs and tokenised assets could be envisaged by central banks,” the report noted.

Other challenges include the lack of custodians for tokenized assets, the presence of multiple blockchain networks, a lack of interoperability among these networks, and a lack of global tokenization standards.

There are also legal issues. For instance, most jurisdictions have yet to legally recognize tokens as tantamount to legal ownership of the underlying assets.

These challenges are being addressed gradually. Luxembourg recently passed Blockchain Law 4, which simplifies the process of issuing and managing tokenized securities. One of the key amendments was eliminating the need to involve a central securities depository (CSD). The law introduced the concept of a control agent who issues the token, maintains custody and oversees its reconciliation.

Still, market experts believe tokenization will revolutionize the financial industry.

“By tokenizing those assets, it enables natural efficiency. It may even be bigger than the internet. It’s fundamentally rethinking the way the markets work,” says Rob Krugman, the chief digital officer at Broadridge (NASDAQ: BR). The fintech giant has tokenized trillions of dollars worth of repos over the years but has yet to fully integrate blockchain.

Watch: Tokenized was built with blood, sweat and tears