Tokenization in financial systems requires CBDCs and Digital IDs

What is tokenization? And how it relates to digital identities
Aspects of economic change due to the tokenization process
General risks of the global economy tokenization process.

One of the key issues in understanding the interest of the momentum of the digital agenda is the relationship between CBDCs, digital identities, and the need to impose biometric verification systems with the most absurd excuses.

It is the process of tokenization that is currently underway within the world economic system, that simply explaining it, a "token" within a digital system, pretends to be a unique identification that can reference anything: a person, material goods, national resources, etc.

For this reason they are expanding biometric systems, as they are considered "legitimate" "authentication" data. Making use of them can create a "token" of them, turning people into an economic and digital "good."

Tokenization of identity

Identity tokenization refers to the creation of secure digital representations of the identities of individuals or entities on programmable platforms. For example, the Aadhaar system introduced by India as its national biometric identity document exemplifies this concept.

This innovation has revolutionized financial inclusion by providing accessible banking services to millions of citizens around the world. However, a digital system already has a number of drawbacks from the outset, even in the economic environment:

Liquidity mismatch - Tokenized funds can promise instant repayments while maintaining illiquid assets, leading to panic risks.
Systemic risks: liquidity problems, leverage amplification through smart contracts, operational fragility and dependence on unregulated "oracles" pose significant risks to financial systems.
Interconnection: global tokenized markets could accelerate contagion during crises.

Siddharth Tiwari, former Chief Representative for Asia and the Pacific at BPI (Bank for International Settlements), has commented on tokenization, stating that once digital token becomes common, it will be efficient and expressed "I have no doubt that you and I will be tokenized."

This highlights a central theme in modern financial innovation: the digital representation of value and identity. It is becoming increasingly clear that tokenization is not just an economic tool, but a potential change factor that transforms the way we interact with money and value, leading to a system of strong control and oppression

Privacy Issues

All of this raises concerns about privacy and surveillance, especially in the context of central bank systems that can use these tokens to monitor transactions.

Combining digital IDs with Central Bank (CBDC) digital currencies will allow unprecedented government surveillance.

Many argue that tokenization will create a dystopian future where each transaction is traceable, potentially leading to financial censorship, such as freezing accounts for political dissent or non-compliance with mandates.

Tokenization of assets

Turning real-world or financial assets into digital tokens into a blockchain or distributed accounting system is promoted by having the potential to revolutionize finance by increasing efficiency, liquidity, and access.

This process can streamline settlement processes by integrating messaging, reconciliation, and settlement into a single transaction, dramatically reducing the time spent on intermediaries.

BIS vision: BIS advocates a "distributed accounting system" that combines tokenized reserves, money and bonds. This vision aims to create an efficient, transparent and resilient financial ecosystem.
Role of the Central Bank's digital currencies (CBDC): CBDCs are seen as the ideal settlement asset, providing a liquid and reliable digital currency that overcomes volatility and reserve transparency issues associated with private stablecoins.
Future potential: Projections suggest that the tokenized asset market could reach trillions of dollars by 2027-2030, enabling new business models such as fractional ownership of large assets and automated compliance through smart contracts.

Convergence: A new financial paradigm

The convergence between identity tokenization and assets through CBDCs presents a completely different new financial system, referred to by the BPI as the "Finternet" (Financial-Internet), which has a number of characteristics:

Identity tokenization: Once digital identities are universally accessible, they will become efficient representations of the verifiable status of individuals or entities on programmable platforms.
Tokenization of assets: These tokens can be used as a form of "digital currency," allowing real-time transactions without intermediaries such as banks.
Convergence: The integration of these two technologies through a centralized system of trust could create a new financial ecosystem where tokenized identities and assets converge seamlessly.

Criticism

Digital censorship: Such a broad digital system has the pontential where civil liberties are restricted through financial control. Privacy issues: Data is centralized and also vulnerable to abuse or over-scrutiny.

Critics argue that combining digital IDs with CBDCs could allow government surveillance, which could freeze accounts for political dissent or non-compliance. This raises concerns about data collection and control.
Regulatory risks
Financial stability institutions highlight systemic risks such as liquidity mismatches, leverage amplification through smart contracts, operational fragility and dependence on unregulated "oracles." These risks are considered significant threats to financial systems.
Privacy and surveillance issues

Practical drawbacks

While advocates such as Larry Fink of BlackRock advocate widespread tokenization, critics warn that benefits can be limited by practical challenges:

Fragmented infrastructure: The current infrastructure is normally fragmented, making it difficult to integrate different tokenized systems.
Lack of interoperability - Platforms lack compatibility, complicating transactions across multiple systems.
High implementation costs: Smaller institutions face high costs in the development and integration of new tokenized systems.
Regulatory frameworks: There is still a gap between regulatory requirements and system design, leaving little room for innovation.

Government application through digital IDs

These systems have the potential that governments could implement draconian measures by linking digital IDs using oppressive power through CBDC control.

This approach would allow authorities to monitor all transactions in real time, potentially imposing sanctions or freezing behaviour-based accounts, such as exceeding personal carbon rights or participating in political activities.