The cryptocurrency explosion will completely transform finance

Source: The Economist

Compiled by: Liam

In the eyes of Wall Street's more conservative players, cryptocurrency "use cases" are often discussed with derision. Veterans have seen it all before. Digital assets come and go, often in flashes of hype that excite investors obsessed with memecoins and NFTs. Beyond speculation and financial crime, their utility elsewhere has repeatedly proven flawed or inadequate.

Yet this latest wave is different. On July 18, President Donald Trump signed the Stablecoin Bill (GENIUS Act), providing long-sought regulatory clarity for stablecoins—cryptographic tokens backed by traditional assets, usually dollars. The industry is booming; Wall Street is now rushing to get involved. "Tokenization" is also on the rise: trading volumes of on-chain assets—including stocks, money market funds, even private equity and debt—are growing rapidly.

As with any revolution, revolutionaries are ecstatic while conservatives worry. Vlad Tenev, CEO of digital asset broker Robinhood, says the new technology could "lay the foundation for crypto to become a backbone of the global financial system." European Central Bank President Christine Lagarde sees things differently. She fears the rise of stablecoins amounts to "the privatization of money."

Both sides recognize the scale of change at hand. Mainstream finance may now face a transformation more disruptive than early crypto speculation. While Bitcoin and other cryptocurrencies promised to be digital gold, tokens are merely wrappers—or carriers—for other assets. This may not sound exciting, but some of modern finance’s most transformative innovations have indeed been about how assets are packaged, divided, and restructured—exchange-traded funds (ETFs), Eurodollars, and securitized debt being prime examples.

Stablecoins currently in circulation are worth $263 billion, up around 60% from a year ago. Standard Chartered forecasts the market will reach $2 trillion within three years. Last month, JPMorgan Chase, America’s largest bank, announced plans to launch a stablecoin-like product called JPMorgan Deposit Token (JPMD), despite CEO Jamie Dimon’s longstanding skepticism toward crypto. The tokenized asset market is worth just $25 billion today, but has more than doubled over the past year. On June 30, Robinhood launched over 200 new tokens for European investors, allowing them to trade U.S. stocks and ETFs outside regular trading hours.

Stablecoins make transactions cheap, fast, and convenient because ownership is instantly recorded on a digital ledger, eliminating intermediaries that operate traditional payment channels. This is especially valuable for cross-border payments, which are currently costly and slow. Although stablecoins account for less than 1% of global financial transactions today, the GENIUS Act will give them a boost. The law confirms stablecoins are not securities and requires them to be fully backed by safe, liquid assets. Retail giants including Amazon and Walmart are reportedly considering launching their own stablecoins. For consumers, these could resemble gift cards offering balances for spending at retailers—and possibly at lower prices. This would threaten companies like Mastercard and Visa, which earn profit margins of about 2% on sales they facilitate in the U.S.

Tokenized assets are digital replicas of another asset—whether a fund, company stock, or basket of commodities. Like stablecoins, they can make financial transactions faster and easier, especially those involving less liquid assets. Some products are mere gimmicks. Why tokenize stocks? Perhaps to enable 24-hour trading, since exchanges where stocks are listed don’t need to be open—but the advantages are questionable. Moreover, for many retail investors, marginal trading costs are already low or zero.

The Push for Tokenization

Yet many products are far from flashy. Take money market funds, which invest in treasury bills. Their tokenized versions can double as payment methods. These tokens, backed by safe assets like stablecoins, can be seamlessly exchanged on blockchains. They also offer better returns than bank rates. The average interest rate on U.S. savings accounts is under 0.6%; many money market funds yield as high as 4%. BlackRock’s largest tokenized money market fund is now worth over $2 billion. “I expect the day will come when tokenized funds are as familiar to investors as ETFs,” wrote CEO Larry Fink in a recent letter to investors.

This would be highly disruptive to existing financial institutions. Banks may be trying to enter this new digital packaging space, but partly because they recognize tokens pose a threat. The combination of stablecoins and tokenized money market funds could ultimately reduce the appeal of bank deposits. The American Bankers Association notes that if banks lose about 10% of their $19 trillion in retail deposits—their cheapest funding source—average funding costs would rise from 2.03% to 2.27%. While total deposits, including commercial accounts, wouldn’t shrink, bank profit margins would be squeezed.

These new assets could also disrupt the broader financial system. For example, holders of Robinhood’s new stock tokens do not actually own the underlying shares. Technically, they hold a derivative that tracks the asset’s value—including any dividends paid by the company—not the stock itself. As such, they lack voting rights typically granted by stock ownership. If the token issuer goes bankrupt, holders could be left in limbo, competing with other creditors for claims on the underlying assets. A similar situation occurred earlier this month with Linqto, a fintech startup that filed for bankruptcy. It had issued shares of private companies through special-purpose vehicles. Buyers now aren’t sure whether they own the assets they thought they did.

This represents one of tokenization’s biggest opportunities—and regulators’ greatest challenges. Pairing illiquid private assets with easily tradable tokens opens a closed market to millions of retail investors sitting on trillions of dollars in capital. They could buy shares in the most exciting private companies currently out of reach. But this raises questions. Regulators like the SEC exert far more oversight over public companies than private ones—that’s why the former are considered suitable for retail investors. Tokens representing private shares would turn once-private equity into assets as easy to trade as ETFs. Yet unlike ETF issuers, who commit to intra-day liquidity by trading underlying assets, token providers do not. At sufficient scale, tokens could effectively turn private firms into public ones—without any of the usual disclosure requirements.

Even crypto-friendly regulators want to draw lines. Hester Peirce, an SEC commissioner known as "Crypto Mom" for her favorable stance on digital currencies, emphasized in a July 9 statement that tokens should not be used to circumvent securities laws. “Tokenized securities are still securities,” she wrote. Thus, companies issuing securities must comply with disclosure rules, regardless of whether those securities come wrapped in new crypto packaging. While this makes sense in theory, the sheer volume of new assets with novel structures means regulators will perpetually be playing catch-up in practice.

Thus, a paradox emerges. If stablecoins are truly useful, they will also be genuinely disruptive. The more appealing tokenized assets become to brokers, customers, investors, merchants, and other financial firms, the more they will transform finance—a transformation that is both exhilarating and alarming. Regardless of how this balance plays out, one thing is clear: the idea that crypto has yet to produce any noteworthy innovation is now firmly in the past.