Tokenization’s Success Hinges on Proper Controls and Governance

Tokenization — the method of assigning digital tokens traded on blockchains to real-world assets — has been touted as a gateway to trillions of dollars of new value for businesses. At its core, blockchain technology is about optimizing processes and making assets of all kinds more accessible and valuable.

Tokenization is one viable and important vehicle within this ecosystem. To drive meaningful and sustained success, organizations must understand general best practices, top issues to watch for in tokenization projects, and how to mitigate them at every stage.

The potential benefits to tokenization include new financial products and services, greater access to trading opportunities and new markets, automation of financial transactions and processes using smart contracts, and infrastructure improvements.

Leveraging these benefits, though, requires attention to technology infrastructure, data access, privacy, security, regulatory compliance, governance, and operational challenges.

In the race to innovate ahead of competition, many organizations have pushed their transformation teams forward at a rapid pace, prioritizing speed to market over careful and strategic planning. Often, this has resulted in costly project delays or failure to ultimately deliver on millions of dollars in proof of concept investments.

To avoid these negative outcomes, it’s important for project teams to evaluate success factors and pitfalls at the outset and every phase along the way. This will help remediate problems before they escalate, build resilience against risk, and strengthen performance as projects move forward.

Aligning stakeholders through consensus and cross-functional understanding is one essential success factor. This step helps ensure continued support for project funding and responsible management of innovation investments.

Asking the right questions can guide ongoing stakeholder alignment discussions as the project evolves. Taking time for thorough evaluation is particularly important when moving from pilot to production-ready testing. Robust assessment can help ensure the platform will perform under real-world stressors, versus only in a protected proof of concept environment.

Questions to support assessments include:

• What are we doing?
• Why are we doing this?
• How are we tracking the goals?
• What are the desired outcomes?
• What are possible alternative outcomes?
• What are our milestones? When do we need to reach them?
• Who still needs to be convinced? What are their concerns?
• What is our collective risk tolerance?

Defining the primary business drivers behind tokenization projects, and clearly understanding how end goals will be measured, will further support successful deployment of tokenization products and services. Goals often include:

• Acting as a first mover
• Strategic competitive positioning, wherein organizations aren’t concerned with being a first mover, but also want to avoid being seen as a laggard
• New revenue
• Replacing outdated technology and achieving efficiencies
• Driving innovation and incubating ideas for business growth
• Introducing new products

There should also be metrics available for internal discussions with stakeholders. Most organizations either don’t know who to engage or what information to extract to measure success.

The key is to define how to articulate progress, then how to continue building the project roadmap in alignment. This can be a moving target, as innovation teams need to balance project support with concerns over regulatory uncertainty.

In the US and most traditional finance applications, tokenization isn’t cryptocurrency. Rather, it’s a framework for assigning digital tokens traded on blockchains to real-world assets and linking the value of those assets to the value of the correlated tokens.

Because these digital assets aren’t cryptocurrencies, they aren’t bound by the same laws and regulations that apply to crypto in most jurisdictions. The global landscape is varied on this point.

For example, in the US, tokens don’t qualify as cryptocurrency. Meanwhile, the Central Bank of the UAE has clear regulations around stablecoins and central bank digital currency, for use as payment tokens.

These gaps in regulatory frameworks leave no clear roadmap for what requirements tokenization projects ultimately may be expected to meet. Tokens within financial services firms eventually may be defined as securities, commodities, property or a new category of asset, which will affect the legality of various tokenization offerings, and the controls financial institutions will need to implement to uphold compliance.

Fatigue is another common challenge, particularly as many financial institutions expected more regulatory clarity around tokenization by now. There’s a mix of concerns over how long the wait for guidance will be, or whether it will come at all.

This requires a nimble approach to measure the maturity and continuation of a project while justifying ongoing funding through a strong business case and clear return on investment.

Many tokenization projects are currently struggling to meet expectations or deliver return on investment. Deficiencies in scalability, integration, performance, and regulatory guidance continue to stand in the way of implementation.

For financial institutions to overcome these barriers and see their pilot projects through to success, they need to make sure the right controls and technical frameworks are in place at each step along the way.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Steven McNew is senior managing director and global leader of blockchain and digital assets at FTI Consulting.

Sam Davies is managing director in the blockchain and digital assets practice of FTI Consulting.

Serkan Ersanli is senior director, blockchain and digital assets, at FTI Consulting.

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