Op-ed: Tokenization is the tool needed for emerging economies to leap ahead
The concept of ‘leapfrogging’ has been touted as an effective means for developing nations to bypass traditional stages of development and jump directly to the latest version of technologies or emerging tech alternatives. The archetypical example given is the smartphone.
While traditional Western nations went through telecommunications development phases from landline connections to basic cell phones and finally to the adoption of the smartphone, late-movers skipped to the end, avoiding the establishment of costly and inefficient legacy systems. It raises the question of what other technologies are ripe for a similar movement. Could tokenization be a means of leveling the global financial playing field?
Driven by the advent of blockchain technology, tokenization refers to the process of issuing blockchain-based tokens that represent real-world assets. This conversion process is set to disrupt the traditional finance world, with the tokenization market predicted to grow from $2.3 billion in 2021 to $5.6 billion by 2025, with an average annual growth rate of 19%.
Given the multifaceted difficulties in establishing a stable economic infrastructure and the inefficiencies that remain so heavily associated with the legacy banking system, tokenization offers a new and effective means of providing an upshot to growing economies.
New solutions to old challenges
Per figures from the International Monetary Fund (IMF), emerging markets and developing economies are home to 6.77 billion people, far outweighing the number of those living in advanced economies. Volatility fueled by political and economic instability and lack of market accessibility remain key challenges for these regions.
Perhaps unsurprisingly, emerging markets dominate the grassroots adoption of cryptocurrencies, with lower-income countries like Vietnam, Philippines, Ukraine, India, Pakistan, and Nigeria, all featuring prominently in Chainanalysis’ Global Crypto Adoption Index.
Crypto has gained a foothold in these nations for its uses in sending remittances and preserving savings in times of fiat currency volatility, amongst other applications. This trend can be supplemented by broader tokenization of real-world assets, including currency tokenization through stablecoins pegged to the value of localized currencies, revolutionizing on-chain deposits and payments.
Facilitating economic participation
The benefits of tokenization are numerous. It transforms how we invest, trade, and manage traditionally illiquid real-world assets, enhancing flexibility, security, transparency, efficiency, and convenience. Out of all of the benefits, its ability to facilitate increased participation in the economy and create new investment opportunities are major boons for emerging regions.
Take, for example, real estate investment, a typically exclusive market requiring significant entry capital for participation. With tokenization, any asset – in this case, a property – can be fractionalized and sold in part, meaning lower-income investors can buy tokens to own a percentage of a property along with other participants, amongst whom any profits are proportionately split.
Cases such as this are emblematic of what tokenization can offer. Enhancing both market liquidity and participation, opening new fractionalized investment opportunities in everything from fine art to real estate, tokenization rapidly expands investment opportunities within economies that may otherwise take years to get there.
Furthermore, tokenization enables the segmentation and specialization of embedded finance. Cryptography allows it to create robust, secure, and borderless communication systems to integrate multiple financial service providers, fostering innovation through battle-tested building blocks.
Tokenization isn’t a silver bullet. There are limits to leapfrogging. Just as the spread of new technologies often depends on the availability of older ones, it is difficult to imagine a fully tokenized economy taking root in one on its knees. On top of that, there are steep regulatory hurdles to overcome before a framework is established that can accommodate this new tokenized form of asset. Nevertheless, given the figures for crypto adoption within developing countries, it stands to reason that these same nations may very well be the early pioneers of tokenization.
Additionally, blockchain technology and tokenization, in particular, appear to be the perfect means for artificial intelligence to transact without human intervention. As a result, the demand for such solutions is expected to continue increasing exponentially.
As new use cases and experimentation come to the fore, legal and regulatory frameworks evolve, and the rewards for early adopters increase, we will likely see tokenization take off across emerging economies. Those who embrace it will benefit from a powerful economic catalyst capable of propelling them forward, creating new wealth opportunities, boosting financial inclusion, and going someway towards closing the global inequality gap.