The European Commission (EC) and the German Banking Association have come together to launch a new initiative called “Tokenise Europe 2025,” according to a recent article from Fintech Switzerland. The initiative was described in a report by the consultancy firm Roland Berger. The objective of the initiative is to leverage the potential of asset tokenization and distributed ledger technology (DLT) to increase competitiveness and build economic resilience in Europe. Over 20 banking trade groups and paytech firms from different countries and industries throughout Europe are supporting the initiative.
Tokenization is the process of creating digital tokens (such as cryptocurrencies) on a blockchain to represent assets, including financial instruments such as equities and bonds. The technology offers several benefits, including greater simplicity in the financial system, faster settlement, and a potential reduction in fraud.
Tokenization is crucial for Europe to remain competitive in the global technological arena. Europe currently has the chance to secure a leading position in tokenization. However, the Roland Berger report also warns of several challenges holding back further development of tokenization, including the perceived lack of relevance of tokenization in daily business and the conservative and risk-averse culture in Europe.
It’ll be important to understand how digital ledger technology and tokenization have the potential to drive innovation and efficiency in various kinds of financial transactions. These technologies can reduce the risk of fraud and counterfeiting, as well as increase speed, efficiency, and cost-effectiveness in real-time payments. This is true for cross-border payments as well.
“Most of the CBDC development efforts globally have been blockchain-based, says Steve Murphy, Director of Commercial and Enterprise Payments at Javelin Strategy and Research. “One example of collaborative efforts between central banks for better cross-border execution is Project mBridge in Asia. Another example, this one in the decentralized finance (DeFi) space, is Project Guardian, sponsored by the Monetary Authority of Singapore (MAS). Pursuing innovation in these new spaces is a growing trend.”
European regulators have a critical role to play in establishing a uniform legal and regulatory framework that legitimizes tokenization and blockchain systems necessary for payments innovation. As this framework comes into place, central banks and will have more confidence in introducing CBDCs, and the private sector will be able to develop scalable, profitable use cases for the technology.