Tokenization’s Broken Promise: Why a Swiss Firm Is Rethinking the Future of Digital Assets
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The initial vision of tokenization – streamlined compliance, reduced intermediaries, and global market access – has largely failed to materialize, giving way to a complex, costly, and increasingly risky landscape, according to a new report.
ten years ago, tokenization was heralded as a revolutionary force in finance. Today, the reality is far more fragmented. Off-chain rules, administrative “kill switches,” and proposals masquerading as industry standards have created a system that is proving tough to implement, expensive to operate, and potentially explosive for both investors and issuers.
The Complication of Off-Chain Bureaucracy
The core promise of blockchain technology is simplification.However, many tokenization projects have devolved into intricate “rule machines” requiring a multitude of supporting roles. “You have KYC providers for identity, databases for documents, interfaces for reporting, platform operators for trading authorization – all of this must constantly run synchronously,” a company release stated. A single point of failure in this complex web can bring the entire system to a halt.
What began as an effort to automate processes has often resulted in a return to cumbersome off-chain bureaucracy,leaving users navigating a labyrinth of dependencies. Developers debug, lawyers improvise, and the simplicity of blockchain is lost in a tangle of interconnected systems. The fundamental question remains: how many layers separate investors from their assets, and can anyone truly maintain oversight?
The Rising Costs of Tokenization
Issuers are facing significant hurdles, reporting setup times of six to nine months and costs ranging from €150,000 to €450,000 before the first token is held by an investor. Each additional layer of integration – contracts, service fees, compliance databases, DAO governance, and custom standards – adds to the financial burden.
“The promise of becoming cheaper through tokenization turns into the opposite,” the report notes. The integration of more standards and platforms leads to escalating costs, effectively recreating customary financial intermediaries in a digital form.
The Contradictions at the Heart of Tokenization
Tokenization rests on three core ideals: compliance and data protection, decentralization and control, and standardization and flexibility. However, these principles are inherently at odds. Off-chain compliance creates vulnerabilities,full decentralization can lead to legal ambiguity,and adherence to standards often results in navigating a complex web of compatibility issues.”The more you try to force a square peg into a round hole, the more the system is deliberately reduced, governance processes are made transparent, and control is decentralized.”
MiCA and the Regulatory Landscape
The impending Markets in Crypto-Assets Regulation (MiCA), effective December 30, 2024, and increasingly strict interpretations of GDPR by authorities like BaFin and FINMA, are poised to exacerbate the challenges facing existing tokenization frameworks. These developments will increase the cost of off-chain bureaucracy and expose vulnerabilities in existing systems.
A Choice: Complexity or Clarity?
The industry faces a critical juncture: continue down the path of complexity,expense,and risk,or embrace a more streamlined,verifiable,and controllable approach. SQARES advocates for the latter, employing a “scalpel” approach – a lean contract stack without approval patterns, agent authority, or off-chain dependencies.
“The question is not whether this approach works,” the report concludes. “The question is: why should you go another?”
SQARES AG is developing a modern capital market infrastructure for digital securities, with the Q-Token integrating regulatory requirements, offering 24/7 availability, interoperability, and acceptance by regulators.
For press inquiries,contact:
SQARES AG
Baarerstrasse 10
76300 Zug
Switzerland
+41 41 5131 607
https://sqares.finance
ruben Schäfer
[email protected]
