Understand the systematic transformation of financial services from digitization to tokenization

The financial industry’s demand for exposure to digital and encrypted assets in all asset classes is increasing. This has led to interest, demand, and investment in institutional finance, from digital asset custody to digital asset trading desks, regulatory and compliance frameworks, and audit and risk models.

It can be said that digital assets have swept the financial services industry. Although traditional finance’s focus on and investment in decentralized finance (DeFi) is hailed as a step forward, financial services and institutions need to consider huge challenges and obstacles in order to make the adoption of digital assets mainstream.

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On the one hand, the industry is on the path of large-scale digitization to modernize the aging financial system that relies on ledger-based transaction systems. It must ensure that the road to digitalization is smooth and minimally disruptive, and that the financial system for transferring assets and payments keeps up with the pace of the digital age, and keeps up with the pace of digital commerce and digital service delivery.

These efforts have led to innovations in application programming interfaces (APIs) to support new business models. These strategic APIs not only appear in the form of digital products and services, but also in the form of co-creation tools, creating value for consumers and the financial service ecosystem. The industry has seen full lifecycle API management as a glue to protect business and expose services at the same time, which shifts the focus of IT from projects to strategic APIs.

Recently, this approach involves financial technology (or fintech) partnerships and/or modern technology. It focuses on user experience and APIs, and rarely pays attention to the system elements of the financial services industry, such as payment, funding, risk models, fraud, supervision, and compliance. Although the user experience approach has achieved some success, the shortcomings of the remaining design part of the tightly coupled design have surfaced. Use cases that represent financial applications will eventually catch up with the limitations of the financial system, with assets locked in a ledger and relying on batch relays to move assets.

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So, how do financial institutions manage these two very different models simultaneously with the industry? evolution In a complex transformation with destructive distortions? On the one hand, digital work focuses on the ledger-based model, which is mainly the existing infrastructure, while on the other hand, disruptive changes promote the token-based model, which challenges and denies the current digital work. How can financial institutions manage the delicate balance where two worlds can coexist and provide a seamless, single experience?

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Understand the disruption led by digitalization and fintech

The financial services industry is in a state of constant change, including recent fundamental changes. The industry has witnessed many previous eras of major changes, including the introduction of computing into the banking system, the use of ATMs for anytime, anywhere banking, and the Internet and mobile technology to transform the way of thinking into “anytime, anywhere”.

Today, the financial services industry is mainly focused on large-scale digital work, such as Open Bank, Payment Service Directive 2 (PSD 2), Strong customer identity verification (SCA) and ISO 20022 Payment coordination and modernization. Many of these digital tasks are industry-led, and some are driven by regulatory directives. They strive to remain competitive and meet customer demand for instant, real-time movement of assets and digital legal currency as settlement tools.

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The financial services industry faces enormous challenges, including the ever-changing regulatory environment, customer expectations for digital natives, real-time and 24/7 operations to meet customer needs, and exogenous factors in the ecosystem. Struggle to create interesting technology engines for financial institutions. The traditional infrastructure that represents both major investment and past modernization is now hindering the speed and scale required to release the digital value of products and services as well as the entire financial institution itself.

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With every major change, the financial services industry has been able to adapt and resist this destruction. The movement led by fintech is another major shift. It is based on completely different business models. These business models are composed of new innovative technologies, business structures, and digital services and participation in each part of the adjacent and consumer experience. Digital leadership. This shift—combined with increasing regulatory, compliance pressures, and the disruption of the financial technology ecosystem—is forcing the mature financial services industry to rethink innovation and business models. This is to maintain the competitiveness, innovation and plasticity of the system in order to cope with the disruptive changes that may occur in the future-such as DeFi driven by tokenization.

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Understand the meaning of asset tokenization

We have Established Digitization is the first step for many businesses and permissionless blockchain projects. Tokenization is the process of converting or declaring assets and rights as digital representations or tokens on the blockchain network. At this point, it may be prudent to distinguish (encrypted) assets or currencies from tokenized assets.

(Encrypted) asset or currency is a medium of exchange or protocol-driven exchange mechanism, which usually has the same characteristics as real-world currencies—such as durability, limited supply, and network recognition—and is supported by a common belief system , Such as legal tender. (Encrypted) assets or currency also represent a by-product of the trust system or consensus, as a tool to support the incentive economic model, reward and promote the network trust system, making it the trust currency of the network. On the other hand, tokens can be many things: a digital representation of a physical commodity, making it a digital twin, or a second-level agreement based on (encrypted) assets or currencies and representing units of value.

(Encrypted) The difference between asset or currency and tokenization assets It is important to understand exchange instruments, valuation models and interchangeability Pass through Various emerging value networks pose challenges to interoperability. The challenge is not only technical, but also commercial challenges surrounding fair swaps. The tokenization of assets can create a business model that promotes partial ownership or the ability to own large asset instances.The tokenization of assets promised on the blockchain-based business network is not only digitization or solving the problem of inefficient time and trust; it is also create The co-creation of new business models and synergy of network participants that did not exist before

Although the blockchain itself provides a technical structure that promotes exchange, ownership, and trust in the network, asset tokenization is essential in the digitization of value elements. In essence, digitization is a prerequisite for tokenization. In the field of financial services, the digitization of existing services and token-driven DeFi present two parallel business flows, which will converge as the industry aims to provide a unified user experience.

Tokenization means that account management and asset claims are driven by encryption keys, rather than account management and asset management by system operators called banks. Although tokenization is not only about account management and asset claims, it also achieves severability, fungibility, and non-intermediary business functions, such as asset transfer. It is the basic component and prerequisite of the “Internet of Value”.

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The answer How can financial institutions manage the delicate balance where two worlds can coexist and provide a seamless and unique experience? It’s a complicated one. It is necessary to fully consider the operational structure that includes the complexity of the existing structure, as well as the exponential growth (and complexity) of the digital asset ecosystem. This is not only a huge operational challenge, but also a huge opportunity pattern and a way to open up new business models.

As we all know, blockchain technology has laid the foundation for a credible digital transaction network. As a disintermediation platform, new digital interactions and value exchanges have generated new synergies and co-creation, thereby promoting the market and secondary The growth mechanism of the market.

Open Bank has led digital efforts through a large number of open APIs. These APIs can be extended to tokenized asset structures and transform the entire business process of various DeFi market structures into consumable units, where various asset classes, markets, and DeFi support services can be spliced ​​into a single experience that hides the complexity of transactions.

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