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Source: The Economist Compiled by: Liam In the eyes of conservatives on Wall Street, the "use case" of cryptocurrencies is often discussed in a mocking tone. Veterans have already seen all this. Digital assets come and go, often with endless sights, exciting investors who are passionate about memecoins and NFTs. In addition to being used as a tool for speculation and financial crime, their use in other aspects has also been repeatedly found to be flawed and inadequate. However, the latest wave of craze is different. On July 18, President Donald Trump signed the GENIUS Act, providing stablecoins, crypto tokens backed by traditional assets, typically the U.S. dollar, with the regulatory certainty that industry insiders have long craved. The industry is booming; Wall Street people are now scrambling to get involved. "Tokenization" is also on the rise: on-chain asset trading volumes are growing rapidly, including stocks, money market funds, and even private equity and debt. As with any revolution, revolutionaries rejoiced, while conservatives were worried. Vlad Tenev, CEO of digital asset broker Robinhood, said the new technology could "lay the foundation for cryptocurrencies to become the backbone of the global financial system." ECB President Christine Lagarde has a slightly different view. She worries that the emergence of stablecoins is tantamount to "currency privatization". Both sides are aware of the scale of the change at hand. Currently, the mainstream market may face more disruptive changes than earlier crypto speculation. Bitcoin and other cryptocurrencies promise to be digital gold, while tokens are just wrappers, or carriers that represent other assets. It may not sound spectacular, but some of the most transformative innovations in modern finance have really changed the way assets are packaged, split, and restructured – exchange-traded funds (ETFs), Eurodollars, and securitized debt are prime use cases. Currently, the value of stablecoins in circulation stands at $263 billion, an increase of about 60% from a year ago. Standard Chartered expects the market value to reach $2 trillion in three years. Last month, JPMorgan Chase, the largest bank in the United States, announced plans to launch a stablecoin-class product called JPMorgan Deposit Token (JPMD), despite the company's CEO Jamie Dimon who has long been skeptical of cryptocurrencies. The market value of tokenized assets is only $25 billion, but it has more than doubled in 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 of regular trading hours. Stablecoins make transactions cheap and fast and convenient because ownership is instantly registered on a digital ledger, eliminating the need for intermediaries operating traditional payment channels. This is particularly valuable for cross-border transactions, which are currently costly and slow. Although stablecoins currently account for less than 1% of global financial transactions, the GENIUS Act will give it a boost. The bill confirms that stablecoins are not securities and requires them to be fully backed by secure, liquid assets. Retail giants, including Amazon and Walmart, are reportedly considering launching their own stablecoins. For consumers, these stablecoins may resemble gift cards, offering balances to spend at retailers and potentially at a lower price. This will kill companies like Mastercard and Visa, which have a profit margin of about 2% on sales in the US. A tokenized asset is a digital copy of another asset, whether it's a fund, company stock, or a basket of goods. Like stablecoins, they can make financial transactions faster and easier, especially involving illiquid assets. Some products are just gimmicks. Why tokenize stocks? This may allow for 24-hour trading, as the exchanges where the stock is listed do not need to operate, but the advantages of this are questionable. Moreover, for many retail investors, the marginal transaction cost is already low or even zero. Efforts to tokenize However, many products are not so fancy. Take money market funds, for example, which invest in Treasury bills. The tokenized version can double as a payment method. These tokens, like stablecoins, are backed by secure assets and can be seamlessly exchanged on the blockchain. They are also an investment that outperforms bank rates. The average interest rate on savings accounts in the United States is less than 0.6%; Many money market funds offer yields of up to 4%. BlackRock's largest tokenized money market fund is currently worth more than $2 billion. "I anticipate that one day, tokenized foundations will be as familiar to investors as ETFs," the company's CEO, Larry Fink, wrote in a recent letter to investors. This will have a disruptive impact on existing financial institutions. Banks may be trying to dip their toes into new digital packaging spaces, but they are doing so in part because they realize that tokens pose a threat. The combination of stablecoins and tokenized money market funds may ultimately make bank deposits less attractive. The American Bankers Association notes that if a bank loses about 10% of its $19 trillion in retail deposits, the cheapest way to finance, its average financing cost will rise from 2.03% to 2.27%. While total deposits, including business accounts, will not decrease, bank profit margins will be squeezed. These new assets could also have disruptive implications for the broader financial system. For example, holders of Robinhood's new stock tokens do not actually own the underlying shares. Technically, they own a derivative that tracks the value of an asset, including any dividends paid by the company, rather than the stock itself. As a result, they do not have access to the voting rights typically conferred by stock ownership. If the token issuer goes bankrupt, holders will be in trouble and will need to compete with other creditors of the failing company for ownership of the underlying assets. A similar situation has been encountered by Linqto, a fintech startup that filed for bankruptcy earlier this month. The company has issued shares of private companies through special purpose vehicles. Buyers are now unclear whether they own the assets they think they own. This is one of the biggest opportunities for tokenization, but it also creates the greatest difficulties for regulators. Pairing illiquid private assets with easily tradable tokens opens up a closed market for millions of retail investors with trillions of dollars to allocate. They can buy shares in the most exciting private companies that are currently out of reach. This raises questions. Agencies like the U.S. Securities and Exchange Commission (SEC) have far more influence over public companies than private companies, which is why the former is suitable for retail investors. Tokens representing private shares turn what was once private equity into an asset that can be easily traded like an ETF. However, the issuer of the ETF promises to provide intraday liquidity by trading the underlying asset, which the token's provider does not. On a large enough scale, the token would actually turn a private company into a public company without any of the disclosure requirements that would normally be required. Even pro-crypto regulators want to draw a line. U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce has been dubbed the "crypto mom" for her friendly approach to digital currencies. In a statement on July 9, she emphasized that the token should not be used to circumvent securities laws. "Tokenized securities are still securities," she wrote. Therefore, regardless of whether the securities are wrapped in new cryptocurrencies, the company issuing the securities must comply with the rules of disclosure. While this makes sense in theory, the large number of new assets with new structures means that regulators will be in an endless catch-up state in practice. Therefore, there is a paradox. If stablecoins are really useful, they will also be truly disruptive. The more attractive tokenized assets are to brokers, clients, investors, merchants, and other financial companies, the more they can transform finance, a change that is both welcome and worrying. Regardless of the balance between the two, one thing is clear: the idea that cryptocurrencies have not yet produced any innovations worth paying attention to is long a thing of the past.