Next Generation Infrastructure: How Tokenization of Real-World Assets Will... (EventID=117392)

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On Wednesday, June 5, 2024, at 9:00 a.m. (ET) Subcommittee on Digital Assets, Financial Technology and Inclusion Chair Congressman Hill and Ranking Member Congressman Lynch will hold a hearing entitled, “Next Generation Infrastructure: How Tokenization of Real-World Assets Will Facilitate Efficient Markets."
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Witnesses for this one-panel hearing will be:
• Carlos Domingo, Co-founder and CEO, Securitize
• Nadine Chakar, Global Head of DTCC Digital Assets, Depository Trust and Clearing Corporation
• Robert Morgan, Chief Executive Officer, USDF Consortium
• Lilya Tessler, Partner, Sidley Austin LLP
• Hilary Allen, Professor of Law, American University Washington College of Law
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Background
Tokenization is the process by which an entity creates a unique, digital representation of an asset that can be transacted and stored with blockchain technology. Blockchains are digital ledgers that record information as blocks of code on a transparent network. Each computer on the network confirms the block of data and records the information so that no one source can delete or modify the block without consensus from the network. The blockchain is considered decentralized because there is no single, third-party entity to confirm the transaction.
Over the past several years, crypto-assets associated with newer blockchain networks have dominated the conversation surrounding blockchain technology. However, traditional financial institutions are exploring the benefits blockchain technology bring to existing markets, beyond crypto-assets. Entities can reduce reliance on, or even eliminate, intermediaries by using tokenization to represent assets and facilitate transactions. Specifically, tokenizing a specific asset can help increase liquidity, enhance price discovery, increase transparency, increase access, enable fractional ownership, among other things.
Depending on the nature of a specific asset, however, existing laws or regulations may create uncertainty regarding a person’s interest or property rights associated with a tokenized asset. Some regulators and commentators emphasize the need to regulate assets according to their specific risk characteristics and not necessarily their underlying technology.
Use Cases
The most promising use cases of tokenization involve smart contracts to conduct transactions. Smart contracts are contracts on a blockchain that self-execute when specific conditions are triggered. The instructions or terms of the contract are tokenized by embedding the code into a block that is then placed on a blockchain. The contract’s terms are memorialized by the other computers and when the contract’s conditions are met, it is universally recorded. The transparent and unambiguous conditions of smart contracts allow for the seamless and automated execution of transactions. This aspect of blockchain technology has been used to effectuate the transferring of ownership of a variety of real-world assets.
Tokenization in Payments and Deposits
Unlike the current U.S. payment infrastructure, blockchain networks operate 24/7/365. This allows for payments to be executed outside the hours of our traditional payment rails and be effectuated instantaneously. There have been various projects looking to explore blockchain technology and tokenization for both international and domestic payments.
For example, in August 2023, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) announced its infrastructure could facilitate the transfer of tokenized value across multiple public and private blockchains. In this project, SWIFT found, “[t]he experiments successfully demonstrated that SWIFT connectivity and messaging standards - in combination with an interoperability protocol… - can be used to achieve interoperability between traditional financial systems and emerging blockchain networks.” Additionally, there have been other initiatives focused on facilitating seamless cross-border transactions in a similar manner.
Domestically, there have been efforts to increase payment efficiency through the tokenization of bank deposits. Banks traditionally use internal ledgers to keep records of customer deposits at their institution. Originally, these were recorded physically on paper ledgers but have since migrated to electronic ledgers. While these ledgers are digital, they are siloed and held individually by each financial institution. There are numerous efforts underway to tokenize bank deposits which could lead to instant....
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