Despite the legal, regulatory and technical challenges, the shift to a tokenized financial system is inevitable, according to most in the U.S. financial industry, Moody’s Ratings reports.
In a report published Tuesday, the rating agency said there’s an emerging consensus among major U.S. financial firms that there will likely be a shift to a more digitized financial future, including expanded use of tokenization and digital money.
“Given the benefits of tokenization of financial assets, most, but not all, view the shift as inevitable,” the report said.
For banks, tokenized deposits are a “logical extension of the existing deposit model,” the report said, whereas banks view the prospect of stablecoins as a threat that could allow them to be replaced by tech firms, or other non-banks, within the banking system.
“The strategy of most banks is to prioritize their own bank-issued tokenized deposits within the regulated banking sphere, while staying ready for stablecoins, if needed,” Moody’s said.
So far, there is little demand for tokenized payments, the report said, noting that some consumers and companies have been slow to shift from paper-based payments to digital payment systems, so there is little pressure to upgrade payment technology.
“True uptake is expected only if digital money can be used to settle tokenized versions of mainstream financial assets or to enable agentic commerce,” it said.
As it stands, the current use of tokenized assets remains limited, with instruments such as stablecoins and tokenized money-market funds being used in crypto trading, cross-border payments and for other limited uses. But it’s expected that demand will grow, “if tokenized financial assets or agentic commerce take off, requiring on-chain settlement to enable instant, programmable transactions,” the report said.
However, there remain significant obstacles to widespread tokenization of traditional financial assets that “will require a major restructuring of market infrastructure,” the report acknowledged.
While the existing components of market infrastructure — such as transfer agents, central securities depositories, custodians, clearing houses and exchanges — are expected to remain central components of the financial ecosystem in order to maintain market integrity and confidence, “their roles could gradually shift toward risk management, exception management and compliance,” it said.
“Adoption should rise gradually as legal and regulatory clarity, technological maturity and investor confidence build to a tipping point toward rapid uptake that fundamentally transforms financial markets operations,” the report further noted.
Moody’s said it’s expected that markets will evolve with a “slow, then fast” shift toward continuous digital operation.
“Firms will initially run hybrid models, blending traditional and tokenized processes, extending trading hours and shortening settlement cycles without yet achieving fully real-time markets or completely tokenized asset life cycles,” it said.
That hybrid approach could last for a decade or more, before the shift to continuous, fully-digitized markets takes hold, the report said.