What is tokenization and how are banks tapping into its design principles?

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Tokenization is the process of converting something with tangible or intangible value into digital tokens. Tangible assets like real estate, stocks or art can be tokenized. In a similar vein, intangible assets like voting rights and loyalty points can be tokenized, too. We see Avios as an example of tokenized loyalty points by the traditional credit card industry.

However, when tokens are created on a blockchain, they add a level of transparency that previous iterations of tokens couldn’t achieve. There are several banks that are experimenting with tokenization. But, before diving into the use cases in banking, it would be useful to understand the qualitative advantages that tokenization brings to financial services.

1. Institutions open a deposit account with JPMorgan (NYSE:JPM) and deposit USD in it. They receive an equivalent amount of JPM Coins.
2. Institutions can transfer JPM coins globally to other institutions that are JPMorgan clients. This can be just a currency transaction or a security transaction paid in JPM Coins.
3. The recipient institution can redeem JPM Coins for USD.

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