3rd October 2023 – (New York) The rapidly evolving world of cryptocurrencies is witnessing a shift as a group of crypto investors place their bets on blockchain technology revitalising traditional assets. As crypto prices continue to fluctuate, the market for “tokenisation” is gaining momentum. Tokenisation involves issuing blockchain-based digital tokens that represent various assets, ranging from bonds and stocks to real estate.
Several major financial firms, including the London Stock Exchange Group, WisdomTree, and Mirae Asset Securities, have recently invested in token trading and investment platforms or are engaged in discussions to develop them. Additionally, prominent names such as Franklin Templeton, UBS Asset Management, and ABN Amro have introduced tokenised versions of assets, such as money market funds and green bonds.
According to surveys conducted by EY-Parthenon in May, over a third of institutional investors in the United States and nearly two-thirds of high-net-worth investors plan to invest in tokenised assets in the coming year. This growing interest can be attributed to potential savings on transaction costs, a factor that has caught the attention of major investment players.
Colin Butler, global head of institutional capital at blockchain firm Polygon Labs, highlighted the cost-reduction appeal of tokenisation, stating, “It’s a knife fight right now for market share and profits, so these cost-reduction ideas are very powerful.” Institutions have devoted several years to researching tokenization and are now more comfortable launching projects.
Proponents of tokenisation argue that it offers the traditional finance industry benefits such as transparent trading, increased liquidity, lower costs, and faster settlement times. This is achieved through the automation of processes using smart contracts, which are blockchain-based agreements that settle automatically.
However, critics point out significant challenges, including gaps in trading infrastructure, a lack of cohesive global regulations, and limited traction with investors. Presently, the issuance and value of tokenized traditional assets remain relatively small compared to the wider cryptocurrency market. According to data from Dune Analytics, the market cap of tokenised public securities stands at $345 million, a fraction of the $1 trillion cryptocurrency market. Over the past 30 days, these tokens have experienced 2.3% growth, lagging behind Bitcoin’s rise of approximately 10% during the same period.
Nonetheless, some industry experts envision a more substantial future for tokenization. A joint report by Northern Trust and HSBC earlier this year estimated that digital assets could account for 5% to 10% of all assets by 2030.
While tokenisation has been discussed since the early days of Bitcoin, the current market is seeing greater potential with increased buy-in from senior-level executives at large firms. Morgan Krupetsky, head of institutions & capital markets at Ava Labs, expressed optimism, stating, “I do think this time is different, largely because now you’re seeing senior-level buy-in from large firms.”
Although hurdles remain, market participants believe that larger trading pools and wider adoption of common platforms among firms will lead to improved network effects and increased tradeability of assets.
As the market for tokenisation continues to grow and traditional assets undergo digital transformation, the financial landscape is poised for significant change.