Tokenization and Inclusive Finance

Technically speaking, tokenization is the process of issuing or representing real-world or financial assets as digital tokens—often on distributed ledger technology (DLT) such as blockchain—so they can be recorded, transferred, and accounted for more efficiently. By turning traditionally illiquid assets into programmable, trackable tokens, tokenization can enable faster movement of value, with improved transparency and traceability, supporting new ways to design and deliver financial products.

For financial services providers, tokenization has the potential to expand access to financial services for excluded and underserved customers. It can do this by reducing the frictions that disproportionately affect them – e.g., high transaction costs, limited documentation, and constrained liquidity. The most prominent current example of the impact of tokenization is the uptake in stablecoins in international remittances.

However, tokenization comes with important challenges that must be managed for responsible adoption. Issues around scalability and interoperability across networks, fraud and cybersecurity risks, data protection, and regulatory uncertainty all need to be resolved.

It is important to pursue a practical, evidence-based approach that is grounded in real use cases and compared against non-tokenized alternatives. CGAP’s work on tokenization aims to help identify where tokenization delivers measurable inclusion benefits and what enablers are needed to achieve safe adoption at scale.