Representative French Hill (AR-02) led the House Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion in a crucial meeting on June 5th, titled “Next Generation Infrastructure: How Tokenization of Real-World Assets Will Facilitate Efficient Markets.” As stated, this hearing was a significant step towards the integration of advanced technologies into the financial industry, with a particular focus on the concept of tokenization.
Chairman Hill opened the hearing by acknowledging committee progress. Just last month, they passed a historic bill to modernize the digital asset market. This legislative effort gained commendable bipartisan support, an indication of harmony and cohesion in the committee. Before this particular accomplishment, there was also another bipartisan effort that led to the nullification of Staff Accounting Bulletin 121. This allowed regulated financial institutions to store and protect the digital assets of their clients. Nevertheless, according to Hill, such achievements indicate that there is still a long way to go in terms of digital assets.
Hill stated that tokenization is a process based on blockchain technology, or DLT, and is considered a continuation of the discussion of digital assets. Nonetheless, he emphasized the importance of understanding tokenization as a separate topic and paying attention to it. Tokenization through blockchains offers the prospect of rejuvenating US markets as well as bringing traditional markets into the blockchain. Blockchain technology has the potential to address various issues in capital markets, such as high costs, low market liquidity, market segmentation problems, and the difficulty of new entrants.
The chairman also highlighted that there are challenges in the banking system, including delays in transferring funds and reconciliation of ledgers between different banks. Blockchain technology can automate these fundamental processes, thereby reducing settlement costs. Hill highlighted that reducing agency costs is vital to helping consumers in the financial services sector. Blockchain decentralization, non-comparability, and regulatory coding can provide tokenized asset owners with a more reliable and distinct record of ownership, reducing fraudulent or mistaken claims while fostering accountability and openness in transactions.
According to Hill, numerous markets stand to reap huge rewards from the adoption of tokenization. States that enacted new amendments to the Uniform Commercial Code, which define modern rules for carrying out commercial transactions related to digital assets, have noted some progress. Regulation still has restrictions, and guidance can sometimes stymie innovation. Banking institutions, for example, need to get no objection from federal regulators to conduct pilot programs that employ blockchain technology, such as the tokenizing of deposits.
Hill reasoned that the private sector does not require approval from regulators, allowing it to experiment with new technologies to cut costs and enhance products. He argued that regulators must embrace innovation in an effort to improve the growth of markets. Witnesses at today’s hearing demonstrated awareness and active engagement in tokenization to advance and optimize the capital markets and banking industry.
Hill excitedly said the witnesses are helping define the future of the US financial services industry. He wanted the hearing to show where tokenization can be applied and what regulatory and legal reforms are needed. Hill expressed concern about the possibility of evaluating tokenization activities in the United States against those in other comparable international financial centers.
In his final address, Hill thanked the witnesses for their efforts and the experience they brought to the table. The hearing will focus on how tokenization brings positive change to the financial markets in terms of processing, cost reduction, transparency, and confidence in monetary transactions. Self-sovereign identity can significantly transform the future of financial services to deliver a more innovative and efficient market environment.