Tokenization is the tool emerging economies need to leapfrog

How tokenization can become a gateway to financial inclusion and investment opportunities in emerging economies.

The concept of “leapfrogging” is considered an effective means for developing countries to bypass traditional stages of development and jump directly to the latest version of technology or an emerging technology substitute. The typical example given is the smartphone.

While traditional Western countries have gone through stages of telecommunications development from landline connections to basic mobile phones and finally to the adoption of smartphones, latecomers have jumped to the end to avoid building expensive and inefficient legacy systems. This raises the question of what other technologies are ripe for similar sports. Can tokenization be a means of leveling the global financial playing field?

Driven by the emergence of blockchain technology, tokenization refers to the process of issuing blockchain-based tokens that represent real-world assets. This conversion process will disrupt the traditional financial world, and the tokenization market is expected to grow from US$2.3 billion in 2021 to US$5.6 billion in 2025, with an average annual growth rate of 19%.

Given the manifold difficulties in building a stable economic infrastructure, as well as the inefficiencies closely associated with the traditional banking system, tokenization offers a new and effective means of delivering results for growing economies.

New solutions to old challenges

According to the International Monetary Fund (IMF), emerging market and developing economies have a population of 6.77 billion, far exceeding the population of advanced economies. Volatility caused by political and economic instability and lack of market access remain key challenges in these regions.

Perhaps not surprisingly, emerging markets dominate grassroots adoption of cryptocurrencies, with low-income countries such as Vietnam, Philippines, Ukraine, India, Pakistan and Nigeria all featuring prominently in Chainanalysis’ Global Cryptocurrency Adoption Index.

Cryptocurrencies have gained a foothold in these countries due to their applications such as remittances and preserving savings during periods of fiat currency volatility. This trend could be complemented by broader tokenization of real-world assets, including currency tokenization through stablecoins pegged to local currency values, revolutionizing on-chain deposits and payments.

Promote economic participation

The benefits of tokenization are many. It changes the way we invest, trade and manage traditionally illiquid real-world assets, enhancing flexibility, security, transparency, efficiency and convenience. Among all the benefits, it enables greater economic participation and creates new investment opportunities, which is a major boon for emerging regions.

Take real estate investment as an example. This is a typical exclusive market that requires a large amount of entry capital to participate. With tokenization, any asset (in this case, property) can be divided and sold in parts, meaning that low-income investors can purchase tokens to own a percentage of the property with other participants, and any profits can be monetized Proportional distribution.

Cases like this are emblematic of what tokenization can offer. Tokenization enhances market liquidity and participation, opening up new niche investment opportunities in everything from fine art to real estate, rapidly expanding investment opportunities within the economy that might otherwise take years to materialize. .

Additionally, tokenization enables embedded finance to segment and specialize. Cryptography enables it to create strong, secure and borderless communication systems to integrate multiple financial service providers, fostering innovation through proven building blocks.

Looking to the future

Tokenization is not a panacea. There are limits to leapfrog development. Just as the spread of new technologies often depends on the availability of older technologies, it is difficult to imagine a fully tokenized economy taking root within it. On top of that, there are serious regulatory hurdles that need to be overcome before a framework can be established to accommodate this new form of tokenized assets. Still, considering the numbers of cryptocurrency adoption in developing countries, it stands to reason that these countries are likely to be early pioneers in tokenization.

Furthermore, blockchain technology and tokenization appear to be the perfect means for artificial intelligence to conduct transactions without human intervention. Therefore, the demand for such solutions is expected to continue to grow exponentially.

As new use cases and experiments emerge, legal and regulatory frameworks evolve, and rewards for early adopters increase, we may see tokenization take off in emerging economies. Those who embrace it will benefit from powerful economic catalysts capable of propelling them forward, creating new wealth opportunities, promoting financial inclusion and going some way to closing the global inequality gap.