美联储-代币化：概述和金融稳定影响 Tokenization Overview and Financial Stability Implications 2023

FinanceandEconomicsDiscussionSeries

FederalReserveBoard,Washington,D.C.

ISSN1936-2854(Print)

ISSN2767-3898(Online)

Tokenization:OverviewandFinancialStabilityImplications

FrancescaCarapella,GraceChuan,JacobGerszten,ChelseaHunter,NathanSwem

2023-060

Pleasecitethispaperas:

Carapella,Francesca,GraceChuan,JacobGerszten,ChelseaHunter,andNathanSwem(2023).“Tokenization:OverviewandFinancialStabilityImplications,”FinanceandEco-nomicsDiscussionSeries2023-060.Washington:BoardofGovernorsoftheFederalReserveSystem,

/10.17016/FEDS.2023.060

.

NOTE:StafworkingpapersintheFinanceandEconomicsDiscussionSeries(FEDS)arepreliminarymaterialscirculatedtostimulatediscussionandcriticalcomment.TheanalysisandconclusionssetfortharethoseoftheauthorsanddonotindicateconcurrencebyothermembersoftheresearchstafortheBoardofGovernors.ReferencesinpublicationstotheFinanceandEconomicsDiscussionSeries(otherthanacknowledgement)shouldbeclearedwiththeauthor(s)toprotectthetentativecharacterofthesepapers.

1

Tokenization:OverviewandFinancialStabilityImplications*

GraceChuan2,JacobGerszten3,ChelseaHunter4,NathanSwem5,andFrancescaCarapellat1

1,2,3,4,5FederalReserveBoardofGovernors

August3,2023

Abstract

Inthispaperweoutlinetokenization,whichisanewandrapidlygrowingfinan-cialinnovationincryptoassetmarkets,andwediscusspotentialbenefitsandfinancialstabilityimplications.Tokenizationreferstotheprocessofconstructingdigitalrep-resentations(cryptotokens)fornon-cryptoassets(referenceassets)

.1

Aswediscussbelow,tokenizationscreateinterconnectionsbetweenthedigitalassetecosystemandthetraditionalfinancialsystem.Atsufficientscale,tokenizedassetscouldtransmitvolatilityfromcryptoassetmarketstothemarketsforthecryptotoken’sreferenceassets.

Keywords:tokenization,crypto-assets,blockchain,decentralizedfinance,DeFi,Finan-cialstabilityandrisk,financialinnovations,interconnections

JELClassificationNumbers:D49,D53,G00,G10,G20,G23

*Theopinionsaretheauthors’anddonotrepresentthoseoftheFederalReserveSystemoritsstaff.

†Correspondingauthor:E-mailFrancesca.Carapella@

1Foradditionalinformationandotherdetailsoftokenization,pleasesee:Thetokenisationcontinuum().

2

1.Tokenizationdesignfeatures

Theterm“tokenization”referstotheprocessoflinkingreferenceassetstocryptotokensviadesignfeaturesthatlinkthetoken’spricetothevalueofthetoken’sreferenceasset

.2

Inthestrictestsense,tokenizationwouldallowforacryptotokenholdertohavealegally

enforceableownershipclaimoverthetoken’sreferenceasset.3

Sofar,tokenizationprojectshavebeentypicallyfinancedanddevelopedbysmallventure-capitalbackedcryptocompa-nies.Inaddition,financialfirmssuchasSantander,JPMorgan,andFranklinTempleton,haveannouncedcryptorelatedprojectsorpilotprogramsrelatingtotokenization

.4

Asisthecasewithstablecoins,tokenizationshavewidelyvaryingdesignfeaturesandcharacteristics

.5

Ingeneral,atokenizationinvolvesfivedesignfeatures:1)ablockchain,2)areferenceasset,3)amechanismtoassessthevalueofthereferenceasset,4)ameanstostoreand/orprovidecustodyforthereferenceasset,and5)amechanismtofacilitateredemptionsofthetokenand/orthereferenceasset.Takentogether,thesecomponentsgeneratelinksbetweenthecryptomarketsandthemarketsforthereferenceassets.Thesedesignchoicescanhelpdistinguishtokentypesandhelpdetermineeachtype’simpactontraditionalfinancialmarkets.

Thefirsttokenizationdesignelementthatweoutlineistheunderlyingblockchainonwhichthecryptotokensareissued,stored,andtransacted.Somecryptotokensareis-suedonprivatepermissionedblockchains,andothersareissuedonpublicpermissionlessblockchains.Apermissionedblockchainisgenerallycontrolledbyacentralizedentitythat

grantsapprovaltoselectedusersinanisolatedecosystem.6

Cryptotokensissuedonpermis-sionlessblockchains(Bitcoin,Ethereum,Solana,etc.)arebroadlyaccessibleandcanbeusedwithfewerrestrictions.Cryptotokensonpermissionlessblockchainscanalsobeincorporated

intodecentralizedfinance(DeFi)protocolssuchasdecentralizedexchanges.7

Cryptotokenissuersretainfarlesscontrolovercryptotokensissuedonpermissionlessblockchainsthandoissuersofcryptotokensonpermissionedblockchains.PleaseseeTable

1

forexamplesoftokensissuedonpermissionedandpermissionlessblockchains

.8

Anothercomponentoftokenizationsisthecryptotoken’sreferenceasset.Referenceassets

2Whiletokenizationcanoccuronnon-blockchaindistributedledgers,inthispaperwefocusonblockchain-basedtokenizations.

3Foradditionalinformationandotherdetailsoftokenization,pleasesee:

Aldasoroetal.

(2023)

4Foranexample,see

TheClearingHouse

(2022)

5See

Azaretal.

(2022),and

Baughmanetal.

(2022)(amongmanyothers)formoreinformationregarding

variousstablecoindesignfeatures.

6Formoreinformation,see

Polgeetal.

(2021)

7See

Carapellaetal.

(2022)formoreinformationonDeFi

.

8Theissueroftokenizedassetsonapermissionedblockchaincancontrolthegovernanceoftheblockchain,theleveloftransparencyontheblockchain,andtheusesofthetokenizedasset.

3

canbecategorizedinvariousways:off-chainvs.on-chain,tangiblevs.intangible,etc

.9

Off-chainreferenceassetscanbephysical(e.g.realestateandcommodities)orintangible(e.g.intellectualpropertyrightsandtraditionalfinancialsecuritieslikestocksandbonds)andexistoutsideofthecrypto-assetecosystem

.10

Tokenizationswithphysical/off-chainreferenceassetsgenerallyinvolveanoff-chainagent,suchasabank,toassessthevalueofthereferenceassetandprovidecustodialservices.Tokenizationsthatreferenceotheron-chaincrypto-assetscanincorporatesmartcontractstoprovidecustodyandvaluationassessments.

Thefinaldesignelementofmanytokenizationsisamechanismforredemption.Similartocertainstablecoins,tokenizationsallowforcryptotokenholderstoexchangecryptotokenswiththetoken’sissuerforthereferenceassets

.11

Atokenredemptionoptioncanexistforbothoff-andon-chainreferenceassetsandgeneratesalinkbetweenmarketsforthetokenizedassetandmarketsforthereferenceasset,aswediscussinmoredetailbelow.Also,tokenizedassetscanbetradedinsecondarymarkets,suchascentralizedcryptoexchangesandDeFiexchanges.

Sometokenizationsthatreferenceotheron-chaindebtorequitysecuritiesdonotincor-porateredemptionmechanisms,butstillconferownershiporotherrightstothecryptotokenholder.Inthesecases,thetokenizationprocessinvolvesrepresentingthelegalclaimsoverthecashflowsassociatedwithotheron-chainfinancialassets,oranyotherobligationsoftheentityissuingthosefinancialassets.

2.Thecurrentsizeoftokenizationmarkets,andspe-

cificexamplesoftokenizedassets

Usingpressreleases,newsarticles,andpublicdatasources,weestimatethatthemarketvalueoftokenizedassetsonpermissionlessblockchainsis$2.15billionasofMay2023.ThisincludesawiderangeoftokensissuedbydecentralizedprotocolssuchasCentrifugeandtraditionalcompaniessuchasPaxosTrust

.12

Acomprehensivesetoftime-seriesdataisdifficulttoobtainduetothewidevarietyoftokenizationdesignsandvaryinglevelsof

9Forafulldescriptionoftypesofreferenceassets,see

OECD

(2020)

.

10AnexampleistheissuanceoftokenizedcorporatebondsthroughObligate’sdecentralizedfinanceplat-formbyMuffTradingAG,aSwissphysicalcommoditiestradingboutiquespecializinginsourcingpreciousmetalsandrawmaterialsfromSouthAmerica.See

Sandor

(2023)

.

11See

Baughmanetal.

(2022)foradiscussionofstablecoinredemptionmechanisms

.

12Tokenissuersonpermissionedblockchainstendtoreleaselessdatathanissuersonpermissionlessblockchains.Therefore,ourestimateofthetotalsizeofthetokenizationmarketonlycontainsprojectsonpermissionlessblockchains.

4

transparency.Therefore,wecaptureasubsetoftokenizationprojectsbyutilizingopen-sourcedatafromDeFiLlamainFigures

1

and

2

tohighlightthegrowingtrendoftokenizationinDeFi.Figure

1

showsthattotalvaluelocked(TVL)intheentireDeFiecosystemhas

remainedroughlyconstantsinceJune2022.13

However,inFigure

2

weshowthattheTVLincategoriesrelatedtorealworldassetshavegrownsinceJuly2021,bothinabsolutevaluesandasashareoftheoverallDeFiecosystem.AsofMay2023,roughly$700millionofourestimated$2.15billionarelockedinDeFi.

Manynewtokenizationprojectshavebeenrecentlyannouncedwhichreferencemanytypesofassetsincludingagriculturalcommodities,gold,otherpreciousmetals,realestate,andavarietyoffinancialsecurities.

InTable

2

welistexamplesoftokenizationstoillustratetherangeofreferenceassets.SpecificexamplesofrecentlydevelopedtokenizedassetsreferencingagriculturalcommoditiesincludeSOYA,CORA,andWHEAwhichreferencesoybeans,corn,andwheatrespectively.ThesetokenswerepartofapilotprojectlaunchedinMarch2022inArgentinabyajoint-

venturebetweenSantanderandthecrypto-firmAgrotoken.14

Theclaimsontheunderlyingcommoditiesembeddedinthesetokens,andtheinfrastructuretovalidateandprocesstrans-actionsandredemptions,aredesignedtobesufficientlyrobusttoallowforSantandertoacceptthesetokensascollateralforloans.SantanderandAgrotokenstatedthattheyhopetointroducesimilarlydesignedcommoditiestokensinthelargermarketsofBrazilandtheUSinthefuture

.15

Otherexamplesofnon-financialreferenceassetsaregoldandrealestate.Themarket

capitalizationoftokenizedgoldisroughly$1billionasofMay2023.16

Twocoinsdominate99%ofthismarket,PaxGold(PAXG)issuedbyPaxosTrustCompanyandTetherGold(XAUt)issuedbyTGCommoditiesLimited.BothissuersequateeachoftheircoinstoonefineTroyOunceofgoldthatiscustodiedbytheissuersthemselvesandmeetsthestandardssetbytheLondonBullionMarketAssociation(LBMA).PAXGandXAUtareredeemablefortheunderlyinggoldsubjecttoidiosyncraticrestrictionsandfees

.17

PAXGcanalsobe

13Totalvaluelocked(TVL)referstothetotalvalueofalldigitalassetsthatarelockedorstakedinsmartcontractsondecentralizedfinanceplatforms.FormoreinformationonTVL,see

Carapellaetal.

(2022)

.

14InDecember2022Agrotokenraisedas5millionseedroundledbyXperimentVC.Formoreinformation,see

Engler

(2023)

.

15Formoredetails,see

Santander

(2022)

.

16

/view/tokenized-gold/.

17Forexample,PAXGcanberedeemedforUSD,allocatedgold,orunallocatedgold,seeappendixforfurtherdetails.Redeemersarechargedaminimumof20basispointsonthevalueoftheunderlyinggold.AllocatedgoldcanonlybedeliveredtovaultsinLondonandunallocatedcanonlybecreditedtoaLocoLondonbankaccount.XAUtcanberedeemedforonlyallocatedgoldwhichmustbedeliveredtoaSwissaddressandtheredeemerischarged25basispointsonthegoldpriceintheSwissgoldmarketandcostofdelivery.

5

redeemedforUSDatcurrentgoldpriceswhileXAUtcanberedeemedforproceedsfromTethersellingtheunderlyinggoldintheSwissgoldmarketonholders’behalf.Overall,thesetwodesignsaresimilar,resultinginsimilarpricesinPAXGandXAUtthatalsocloselyfollowthepriceofgoldfutures.

Relativetocommoditieslikeagricultureandgold,referenceassetslikerealestatearelessuniform,withlessliquidmarketsandvaluesthatarehardertoassess,andinvolvemorecomplexlegalandtaxprocessesforownershipandtransactions.Theseissuesposesignificantchallengesfortokenizations.OneexampleofatokenizedrealestateprojectissuerisRealTo-kenInc.(RealT)whichcollectsaninventoryofresidentialpropertiesandtokenizesavarietyoflegalrightsonthem.EachpropertyisownedbyalimitedliabilityCompany(LLC)thatis

legallyindependentofRealTokenInc.18

Thepropertyitselfisnotdirectlytokenized,ratherthemembershipinterestsintheLLCaretokenized.Therefore,eachpropertycorrespondstoitsownLLCwhosemembershipcanbefractionalizedintosharesforco-ownership.Forexam-ple,tokenizedpropertiesbyRealTare“REALTOKEN-15634-LIBERAL-ST-DETROIT-MI”

and“REALTOKEN-25097-ANDOVER-DR-DEARBORN-MI.”19

RealTokenswereprimar-ilydevelopedforinternationalinvestorsasawaytoowndomesticUSrealestateandcollectrentalincome.AsofSeptember2022,RealTtokenized970unitsofpropertyvaluedatover$52million

.20

Finally,therearetokenizationsreferencingfinancialassetssuchasstocks,bonds,andexchange-tradedfunds(ETFs).Tokenizedstocksprovidetokenholderswithsimilareco-nomicexposuresasholdersofthereferencestock.However,thepricesofthetokenizedstockanditsreferencestockmaydiffer,partlyduetotheformerbeingabletotrade24/7andpartlyduetothetoken’sintrinsicproperties,suchasprogrammabilityandcomposability

invariousDeFiapplications,whichmayalsoaffectthetoken’sliquidity.21

WeillustratethesedynamicsinFigures

3,

4,and

5

thatshowthepricesofMeta(META)andMETA’scorrespondingcryptotoken(BittrexFB)aswellaseachoftheirvolumes

.22

Therearetokenizedversionsofexistingstocksissuedontraditional,regulatedexchanges

18

https://faq.realt.co/en/articles/3922308-who-holds-the-deed-to-the-house-who-owns-t

he-property.

19See

/currencies/15634-liberal-st-detroit-mi-48205/

and

/currencies/realtoken-25097-andover-dr-dearborn-mi/.

20

RealT

(2022)

.

21See

Paz

(2021).Furthermore,insomecases,holdingthetokenizedstockdoesnotautomaticallytransfer

shareholderrights.Seeitem10intheAppendixforfurtherdetails.

22BittrexannouncedonNovember14,2022thatitwouldshutdowntheofferingoftokenizedsecuritiesduetothecollapseofFTXandAlameda.ThesesecuritieshadbeenofferedthroughBittrex’srelationshipwithFTXandAlameda.Formoreinformation,seeBittrex’sannouncement,

BittrexGlobal

(2022).Today,

thetokenizedstockistradedonDeFiexchangeDeFiChainDEXwhichishowpricesafterNovember14,2022arederived.

6

andtokenizedversionsofstocks,suchasOSTK(OInc.),thatareentirely

issuedonablockchain.23

TheSwissbasedplatformAkionariatisanexampleofafirmthatcurrentlyofferstokenizationservicesofstocksforSwisscompanies.U.S.companiessuchasAmazon(AMZN),Tesla(TSLA),andApple(AAPL)eachhavetokenizedstocksthatarecurrentlyorhavebeenpreviouslytradedoncryptoexchangessuchasBittrexandFTX

.24

Inearly2023,OndoFinancelaunchedOUSG,OSTB,andOHYG,tokenizedETFsrefer-encingBlackrockU.S.TreasuriesETF,PIMCOEnhancedShortMaturityActiveETF,andBlackrockiBoxxHighYieldCorporateBondETFrespectively.Thesetokensrepresentde-positsinthereferenceETFsandqualifyassecurities,butOndoFinancealsoholdsa“small

portion”ofUSDCandUSDinreserveforliquiditypurposes.25

OndoFinanceisthemanagerofthesefundswithClearStreetservingasprimebrokerandcustodianofthesecuritiesandCoinbaseservingascustodianofthestablecoins.

3.PotentialBenefitsofTokenization

Tokenizationshavepotentialtoprovideavarietyofbenefits,includinggrantinginvestorsaccesstomarketsthatareotherwiseinaccessibleorcostlytoenter.Forexample,realestatetokenizationsmightallowforinvestmentinafractionoftheunderlyingasset,withinvestorsabletopurchasesharesinspecificcommercialbuildingsorresidentialinvestments,asopposedtorealestateinvestmenttrusts(REITs)whereinvestorsownsharesofaportfolioofrealestateinvestments.

Moregenerally,theprogrammabilityofcryptotokensandtheabilitytoleveragesmartcontracts,allowsforadditionalfeaturesthatcanbeembeddedintothetokenizedassetwhichmightalsobenefitmarketsfortheunderlyingreferenceassets.Forexample,liquiditysavingmechanismscouldbeimplementedinthesettlementofthetokenizedasseteveniftheyarenotimplementableforitsreal-worldcounterpart

.26

Theseattributesmightlowerbarrierstoentryforawidersetofinvestors,resultinginmorecompetitiveandliquidmarkets,andbetterpricediscovery.

Tokenizationsmightalsofacilitatelendingthroughtheuseoftokensascollateral,asinthecaseoftokenizedgraindiscussedabove,wherelendingsecuredbythereferenceassetmightbemorecostlyorimpossible.Moreover,transactionsinthetokenizedassetcansettlemorequicklythantransactionsintheirrespectivereal-worldreferenceassets,aswellas

23OSTKwasconvertedintocommonstocksin2022.See

Keely

(2022)

.

24

/view/tokenized-stock/.

25ForinformationontheunderlyingassetsoftokensissuedbyOndoFinance,see

https://ondo.finan

ce/ousg.

26Formoredetailsonliquiditysavingmechanismssee

MartinandMcAndrews

(2008)

.

7

transactionsinfinancialreferenceassets.Traditionalsecuritiessettlementsystems,suchasFedwireSecuritiesServicesandtheDepositoryTrustandClearingCorporation(DTCC),settletradesonagrossornetbasisthroughoutthesettlementcycle,whichistypicallyabusinessdayfollowingthetrade

.27

TheexistingempiricalevidenceonETFs,whicharetheclosestfinancialinstrumenttotokenizationintermsofrepresentingotherassets,mightsuggestamechanismbywhichtokenizationsmayalsoimprovetheliquidityofthemarketsforthereferenceassets.TheacademicliteratureonETFsdocumentsastrongpositivecorrelationbetweentheliquidityoftheETFandtheunderlyingsecuritiesandfindsthatadditionaltradingactivityforETFs

resultsinhigherinformationefficiencyfortheunderlyingsecuritiesintheETF.28

Fortokens,asimilardynamicwouldimplythatgreaterliquidityfortokensincryptomarketsmightbeassociatedwithmoreaccuratepricesinthemarketsforthetoken’sreferenceassets.

4.FinancialStabilityImplicationsofTokenizations

Theoverallvaluefortokenizedmarketsinthelowsingle-digitbillionsremainssmallrelativetobothcrypto-assetmarketsandthetraditionalfinancialsystem,anddoesnotrepresentamaterialfinancialstabilityconcern.However,iftokenizationscontinuetogrowinnumberandscale,theymayintroducefragilitiestocryptoassetmarkets,andintroducefinancialstabilityvulnerabilitiestothetraditionalfinancialsystem.

Theprimarylonger-termfinancialstabilityimplicationsoftokenizationrelatetotheinterconnectionsthattokenizationcreatebetweenthedigitalassetecosystemandthetradi-tionalfinancialsystemviatokenizationredemptionsmechanisms.Forexample,atsufficientscaleafire-saleoftokenizedassetsmightreverberatethroughtraditionalfinancialmarkets,aspricedislocationsincryptomarketsprovideincentivesformarketparticipantstobuythetoken,redeemitforitsreferenceasset,andsellthelatter.Therefore,tokenizationsmayprovideameansforashocktobetransmittedfromcryptomarketstothemarketforthereferenceassetsofcryptotokens.

Astresstransmissionvulnerabilitymightbeamoreprominentconcernfortokenizationswhosereferenceassetsaren’tliquid.Examplesmightincluderealestate,orotherlessliquidreferenceassets.AsimilarconcernisdiscussedintheacademicliteratureonETFs,wherethere’sastrongcorrelationbetweenliquidity,pricediscoveryandvolatilityofETFsand

27Today,securitiessuchasequitiesandbondsaremaintainedinelectronicbook-entryaccountsatcen-tralizedsecuritiesdepositories(CSDs),typicallyviaanindirectholdingsystemwhereintermediaries(e.g.custodians,brokers)holdsecuritiesonbehalfoftheirclientswiththeCSDs.

28See

MadhavanandSobczyk

(2016),

Ben-David,I.,Franzoni,F.andMoussawi,R.

(2016),and

Liebi

(2020)

.

8

thoseoftheunderlyingassets.29

LikeETFs,itisconceivablethatgreaterliquidityincrypto

assetmarketsmightimproveliquidityinthemarketsfortheunderlyingreferenceassets,butalsotransmitvolatilityfromcryptomarketstothemarketsfortheunderlyingreferenceassets.

Anotherfinancialstabilityconcernisrunsontheissueroftokenizedassets.Tokenizedassetswitharedemptionoptionmightsufferfromsimilarissuesasthosearisingforcollater-alizedstablecoins,suchasTether.Anyuncertaintysurroundingthetokens’collateralizationlevels,especiallyifaccompaniedbyalackofdisclosuresandaccurateinformationabouttheissuers,mightraiseinvestors’incentivestoredeemthereferenceassets,thustriggeringafiresaleoftokenizedreferenceassets.

Transmissionofvolatilitycanalsobeexacerbatedbynuancesapplicabletovenueswherecryptoassetstradebutnottovenueswherereferenceassetstrade(orviceversa).Cryptoexchangesallowcontinuous,24/7tradingofcryptoassets,whilemostreferenceassetmar-ketsareonlyopenduringbusinesshours.Thetimingmismatchintradinghoursmighthaveunpredictableimplicationsforinvestorsorinstitutionsinastressevent.Forexample,anissuerofatokenizedassetwitharedemptionoptionmayfaceafire-saleontheweekend.Becausethereferenceassetisheldoff-chain,redeemersareunabletoquicklyprocurerefer-enceassetsastraditionalmarketswouldbeclosed.Theinabilitytomeetredemptionsmayperpetuatethefire-sale,decreasingthevalueoftheassettothepointthatitmaythreatenthesolvencyofanyinstitutionholdingasizeableshareofthetokenizedassetonitsbalancesheet.Furthermore,ifsuchaninstitutionwouldbenefitfrominjectionsofliquidityfromtraditionalmoneymarkets,theywouldbeunabletoobtainfundingonaweekend.Hence,asizeablefiresale,couldquicklyreducethemarketvalueofaffectedinstitutions’andtheissuer’sassets,underminingtheirabilitiestoborrowand,thus,theirsolvency.Anotherex-amplemightrelatetoautomatedmargincallsmechanismsinDeFiexchanges,thattriggeraneedtoliquidateorredeemcryptotokens,whichcouldhaveunpredictableimplicationsforthemarketsforreferenceassets(especiallyinastressevent).

Astokenizationtechniquesandthemarketsfortokenizedassetsdevelop,itispossiblethattokenizedassetscouldbecomereferenceassetsthemselvesforcertaintradesincryptoandtraditionalfinancialmarkets.Totheextentthatcryptoassetpricesaremorevolatilethantheirreal-worldcounterparts,suchtokenizationsmaytransmitvolatilitytotraditionalfinancialmarkets.

Astokenizationsgrowinsizeandscale,traditionalfinancialinstitutionsmaybecomemoreexposedtocryptoassetmarketseitherbydirectownershipoftokenizedassetsorby

29Forexample,see

Ben-Davidetal.

(2018)

.

9

usingtokensascollateralforotherfinancialinstruments.30

ExamplesofthismightincludetokenizedgrainusedtocollateralizeloanstofarmersbythebankSantander,aswedescribeabove,andongoinginitiativestotokenizevariousmoneymarketinstruments,suchasthetokenizationofU.S.governmentmoneymarketfundsbyOndoFinance.

Inaddition,despitebeingsimilarinspirittoJ.P.Morgan’sfirstuseoftokenizedownershipinterestsinMoneyMarketFund(MMF)sharesascollateralforrepoandsecuritieslendingtransactions,theimpactofOndoFinance’sinitiativeontraditionalfinancialmarketscouldbeinvolvedinawiderrangeofusesandcreatemoreinterconnections.OndoFinance’stokensaredeployedonthepublicblockchainEthereumratherthanonaninstitution’spermissionedblockchain,implyingthatOndoFinancehasnocontroloverhowusersandDeFiprotocols

choosetodeploysuchtokens.31

AsofMay2023,OndoFinance’stokenizedETFsmakeup32%ofthemarketvalueofassetsissuedbydecentralizedprotocolsrelatedtorealworldassets,thelargestprojectinthiscategory,accordingtoDeFiLlama,andOUSGcanbeusedascollateralforthepubliclyaccessibleand19thlargestlendingprotocolFluxFinance

.32

Finally,similartotheroleofsecuritizationduringtheGFC,tokenizationcanpotentiallydisguiseriskierorilliquidreferenceassetsassafeandeasilytradeable,possiblyencouraginghigherleverageandrisk-taking.Asuddenreversalofthesepositionscouldthentriggersystemicevents.

5.Conclusion

Thisnoteaimstoprovideabackgroundontokenization,andtodiscussitspotentialbenefitsaswellasfinancialstabilityrisks.Currentlythescaleoftokenizationisquitesmall,bothwhentakentogetherorwhenmeasuredrelativetothemarketsizeofeachtoken’sreferenceasset.However,manyprojectsinvolvingvariouscategoriesofreferenceassetsareindevelopment,suggestingthattokenizationmaybecomealargerpartofthedigitalassetecosystem.Amongthebenefitsoftokenization,loweringbarrierstoentryintootherwiseinaccessiblemarketsandimprovingtheliquidityofsuchmarketarethemostprominent.Thefinancialstabilityrisksoftokenizationmainlyrelatetotheinterconnectionsthattokenizationcreatesbetweenthedigitalassetecosystemandthetraditionalfinancialsystem,possiblytransmittingshocksorvolatilityfromonetotheotherorpossiblyraisingincentivestorun

30Whileinterconnectionsbetweenthedigitalandtraditionalfinancialsystemsremainlimitedatthemoment,financialnetworktheoryindicatesthattheinterconnectionsbetweentwomarketsneednotbelargeforashockinonemarkettospreadtotheother.See

ChangandChuan

(2023)

.

31See

J.P.Morgan

(2022)

.

32See

/protocol/ondo-finance

.ForanexampleofhowOUSGcanbeusedascollateral,see

/.

10

onissuersfailingtoprovideatransparentaccountofthemechanismlinkingthereferenceassettoitstokenizedcounterpart.

1