Economist: Cryptocurrency Blast Will Completely Change Finance

Source: The Economist  

Compiled by: Liam  

In the eyes of Wall Street traditionalists, the "use cases" of cryptocurrencies are often discussed with a tone of derision. Veterans have seen it all before. Digital assets come and go, often with great fanfare, exciting investors热衷于 memecoins and NFTs. Beyond their use as tools for speculation and financial crime, their utility in other areas has repeatedly been found flawed or inadequate.  

However, the latest wave of enthusiasm is different. On July 18, President Donald Trump signed the *Stablecoin Act* (GENIUS Act), providing the long-coveted regulatory certainty for stablecoins—crypto tokens backed by traditional assets (usually the U.S. dollar). The industry is booming; Wall Street players are now scrambling to get involved. "Tokenization" is also on the rise: on-chain trading of assets, including stocks, money market funds, and even private equity and debt, is growing rapidly.  

As with any revolution, the revolutionaries are elated, while traditionalists are wary. Vlad Tenev, CEO of digital asset broker Robinhood, says the new technology could "lay the groundwork for cryptocurrencies to become a pillar of the global financial system." Christine Lagarde, President of the European Central Bank, sees it somewhat differently. She worries that the rise of stablecoins amounts to the "privatization of money."  

Both sides recognize the scale of the transformation underway. Mainstream markets now face potentially more disruptive changes than the early crypto speculation. Bitcoin and other cryptocurrencies promised to be digital gold, while tokens are merely wrappers—or carriers—that represent other assets. This may sound unremarkable, but some of the most transformative innovations in modern finance have indeed changed how assets are packaged, divided, and recombined—exchange-traded funds (ETFs), Eurodollars, and securitized debt are prime examples.  

Stablecoins in circulation currently value $263 billion, up about 60% from a year ago. Standard Chartered Bank predicts the market will reach $2 trillion in 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 long-standing skepticism of cryptocurrencies. The market value of tokenized assets is only $25 billion but 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 normal trading hours.  

Stablecoins make transactions cheap, fast, and convenient because ownership is instantly recorded on digital ledgers, eliminating intermediaries that operate traditional payment channels. This is especially valuable for cross-border transactions, which are currently costly and slow. While stablecoins account for less than 1% of global financial transactions, the GENIUS Act will boost their adoption. The Act confirms that 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 to spend at retailers—potentially at lower costs. This would undercut companies like Mastercard and Visa, which earn margins of about 2% on U.S. sales they facilitate.  

Tokenized assets are digital replicas of other assets, whether funds, company shares, or baskets of commodities. Like stablecoins, they can make financial transactions faster and easier—especially for less liquid assets. Some products are mere gimmicks. Why tokenize stocks? It might enable 24-hour trading, as exchanges hosting the stocks wouldn’t need to be open, but the benefits are questionable. Moreover, marginal trading costs are already low—even zero—for many retail investors.  

### The Effort to Tokenize  

Yet many products are less flashy. Take money market funds, which invest in Treasury bills. Tokenized versions could double as payment methods. These tokens, like stablecoins, are backed by safe assets and can be seamlessly exchanged on blockchains. They also offer better returns than bank rates: the average U.S. savings account yields less than 0.6%, while many money market funds yield up to 4%. BlackRock’s largest tokenized money market fund is now worth over $2 billion. "I expect tokenized funds will one day be as familiar to investors as ETFs," Larry Fink, the firm’s CEO, wrote in a recent letter to investors.  

This will disrupt existing financial institutions. Banks may be trying to enter the new digital packaging space, but in part because they recognize tokens as a threat. The combination of stablecoins and tokenized money market funds could eventually reduce the appeal of bank deposits. The American Bankers Association notes that if banks lost about 10% of their $19 trillion in retail deposits—their cheapest funding source—their average funding costs would rise from 2.03% to 2.27%. While total deposits, including business 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 own a derivative that tracks the asset’s value—including any dividends paid by the company—rather than the stock itself. Thus, they cannot exercise voting rights typically granted by stock ownership. If the token issuer goes bankrupt, holders would be left scrambling to claim ownership of the underlying assets alongside the failed firm’s other creditors. A similar situation befell Linqto, a fintech startup that filed for bankruptcy earlier this month. The company had issued shares of private firms through special-purpose vehicles; buyers now face uncertainty over whether they own what they thought they did.  

This is among tokenization’s greatest opportunities—and its biggest regulatory headache. Pairing illiquid private assets with easily tradable tokens opens a closed market to millions of retail investors, who control trillions of dollars in capital. They could buy shares in the most exciting private companies, currently out of reach. This raises questions. Regulators like the SEC wield far more influence over public firms than private ones, which is why the former are suitable for retail investors. Tokens representing private shares would turn once-private equity into assets tradable as easily as ETFs. But unlike ETF issuers, who commit to providing intraday 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 nicknamed "Crypto Mom" for her favorable stance on digital currencies, emphasized in a July 9 statement that tokens should not be used to evade securities laws. "Tokenized securities are still securities," she wrote. Thus, companies issuing securities must comply with disclosure rules, whether those securities are wrapped in new crypto packaging or not. While logical in theory, the flood of new assets with novel structures means regulators will perpetually play catch-up in practice.  

Hence a paradox: if stablecoins are truly useful, they will also be truly disruptive. The more appealing tokenized assets become to brokers, clients, investors, merchants, and other financial firms, the more they will transform finance—for better and for worse. Whatever the balance, one thing is clear: the idea that cryptocurrencies have produced no innovations worth taking seriously is a thing of the past.  

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