BBH and PolySign on financial services tokenization

Despite all the progress the industry has already made toward asset tokenization, digital assets aren’t fully integrated into the traditional financial services infrastructure or existing legal or regulatory frameworks yet.

For issuers and investors considering tokenizing assets, it is important to seek out service providers that can successfully work with both digital players and traditional financial institutions. The original vision of blockchain was to “rip and replace”, i.e. be a wholly separate alternative to the traditional financial ecosystem.

For example, while there are many blockchains and service providers that enable asset tokenization, most require the assets to be “issued” onto an existing public blockchain like Ethereum or a private blockchain like Corda. This can be challenging because, in many cases, it could require an asset issuer to develop new technical capabilities in order to either replace their current ledger system with a new blockchain solution or develop nodes that can directly operate on existing blockchains in the market.

For many organizations, who do not wish to overhaul their entire systems in order to accommodate DLT, the preferred solution is a platform that caters to both digital players and traditional financial institutions because it may not require asset issuers to make as many major updates to their internal processes.

In particular when it comes to data connectivity, issuers who choose to tokenize assets may want the choice to either interface with a digital asset platform via its application programming interfaces (API) or, if necessary, continue to leverage existing legacy data delivery channels like SWIFT messaging or secure file transfer protocol (sFTP). The idea behind newest technology products — like PolySign’s PolyNet platform as one example – is that they provide options in the ecosystem so that the issuer’s existing provider network is not required to operate complex digital asset systems of their own from the outset of digital asset adoption.

With this type of hybrid approach, as digital asset transactions are completed, they are “memorialized” onto the vendor’s blockchain but can also be reflected on traditional books and records systems at the same time. This enables better interoperability between traditional players and new digital players.

In addition, platforms that employ third generation blockchain technology, which is scalable and allows mass adoption, make it possible to secure digital assets through the use of smart hardware security modules with threshold signatures and multi-party computing as well as end-to-end encryption validation via biometrics.

While asset tokenization in theory has the potential to disintermediate many traditional players, in reality, the road to digital tokenization will be heavily dependent on incremental evolution and cooperation with existing, trusted ecosystem players.

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