Tokenization: Cost Savings Today Over Hype Tomorrow

Tokenization, for all its potential, stands at a critical juncture. In theory, tokenizing assets could revolutionize finance by delivering real-time settlement, capital efficiency, and transparency. Yet for global banks, clearinghouses, exchanges, and custodians, the real breakthrough may lie in a less visible realm: reducing the back- and middle-office costs associated with cross-border settlements, risk management, and compliance.

The process begins with assets being minted on the blockchain, a step that places them directly under the control of the investor or asset manager. Yet, once tokenized, these assets rely on custodians to navigate the complexities of storage, management, and compliance.

Custodians, positioned at the edges of financial transaction cycle, hold substantial leverage over the adoption of tokenization. They control asset custody, so the practical benefits of tokenization ultimately depend on their involvement and the environments they create for end users.

This raises essential questions: Can asset holders achieve better outcomes because their assets are tokenized, or does the efficiency come from reduced operational costs in asset management? Both stand to gain.

Custodians have strong incentives to adopt open, multi-blockchain frameworks that enable access to diverse digital assets without locking market participants into single-vendor platforms. This neutrality positions them as “altruistic” facilitators in an evolving landscape, catalyzing innovation across asset types.

In contrast, proprietary blockchains from private institutions, such as investment banks or even private blockchains purveyors, prompt hesitation: Why should one institution rely on another’s closed network when open, interoperable frameworks and neutral custodial networks promise broader reach and flexibility?

Tokenization does face notable challenges. Distributed Ledger Technology (DLT) and blockchain systems still have limitations in handling the scale and liquidity demands of global financial markets. The issue isn’t with blockchain engineering itself but with adapting blockchain architecture to handle large-scale, cross-border transactions.

Interestingly, the cryptocurrency industry has demonstrated that scalable solutions are possible even with assets remaining idle in custody rather than continuously moving—an approach that seems counterintuitive given blockchain’s ability to move assets rapidly.

This shift implies that asset movement should occur primarily when driven by risk, rather than routine activity, reinforcing an efficiency-focused model that prioritizes strategic movement over continuous flow. Traditionally, this approach resembles multilateral netting, but in the blockchain realm, it relies on custodians to clear and settle the associated risks (See Off-Exchange Settlement).

Many domestic technological rails for finance are extremely efficient already. Where blockchain shows most promise is the cross-border realm.

In practical terms, tokenization could enable near-instant settlement across time zones, asset types, and regulatory environments. Such a system could reduce the capital that institutions must hold as collateral, freeing up billions of dollars for more productive uses.

For large financial players, even a slight reduction in collateral requirements would yield considerable capital efficiency. If collateral requirements for daily transaction volumes could be reduced, tokenization would allow institutions to release significant capital tied up in these reserves. This could unlock millions in assets, reducing the cost of holding collateral and enhancing liquidity for institutional players, ultimately allowing capital to be allocated more productively.

But tokenization also presents near-term benefits that can be had today by enhancing efficiency in compliance, reconciliation, and risk management. Institutions bear significant costs in manually ensuring compliance across jurisdictions, with cross-border settlements often requiring days and extensive reconciliations across fragmented systems.

Cryptocurrency operations have shown that digital assets can be processed with remarkable efficiency by lean teams. Where traditional finance may need a large call center just to support transaction volumes, a digital asset business can handle billions with fewer employees than a single bank branch. The contrast is striking: while finance giants invest heavily in staffing, digital assets reveal a model where minimal manpower and high-volume processing co-exist, leaving the industry both impressed and perhaps a bit envious of digital assets’ awe-inspiring operational efficiency.

A tokenized asset ledger could automate much of these processes, reducing compliance costs and error rates. By enabling near-real-time risk assessments, tokenization by way of their custodians offers the opportunity to cut back-office costs, streamline reporting, and manage asset flows more effectively. Integrating DLT with legacy systems can bridge gaps in scalability and interoperability, fostering a smooth, institution-friendly transition over a disruptive overhaul.