An increasing number of crypto investors are placing their bets on blockchain technology’s potential to revolutionise traditional assets. As the crypto market experiences its characteristic volatility, the tokenization trend is approaching a pivotal turning point.
Tokenization refers to the process of converting real-world assets, such as real estate, art, or stocks, into digital tokens on a blockchain. These tokens represent ownership or a stake in the underlying asset and are stored securely using cryptographic techniques. By tokenizing assets, their value and ownership can be divided, enabling fractional ownership and making high-value assets more accessible to a broader range of investors. This innovation not only enhances liquidity but also allows for seamless and transparent transactions on a decentralised network. Blockchain technology ensures the integrity and security of these digital tokens, making them tamper-proof and traceable. Tokenization has the potential to revolutionise various industries by simplifying the transfer of ownership, reducing transaction costs, and democratising investment opportunities globally.
According to a Reuters report this week, notable financial institutions like the London Stock Exchange Group, WisdomTree, and Mirae Asset Securities have either invested in token trading and investment platforms or are in discussions to develop them. Other players such as Franklin Templeton, UBS Asset Management, and ABN Amro have already launched tokenized versions of assets, including money market funds and green bonds. Meanwhile, surveys conducted by EY-Parthenon reveal that more than a third of institutional investors in the U.S. and nearly two-thirds of high-net-worth investors intend to invest in tokenized assets within the next year.
The tokenization trend popularity in the current crypto climate is driven by the potential for significant savings on transaction costs, attracting major players in the investment world. Colin Butler, the global head of institutional capital at blockchain firm Polygon Labs, describes the competition for market share and profits as “a knife fight,” emphasising the allure of cost-reduction strategies. Institutions have spent years researching tokenization and are now increasingly comfortable launching projects in this space. Supporters of tokenisation argue that it offers traditional finance more transparent trading, increased liquidity, and reduced costs and settlement times, all achieved through the automation of processes via smart contracts – blockchain-based covenants that settle automatically.
While there is growing enthusiasm for the tokenization trend, it faces certain challenges. Critics highlight significant gaps in trading infrastructure, a lack of unified global regulation, and limited traction with investors. The actual issuance and value of tokenized traditional assets remain relatively insignificant compared to the broader cryptocurrency market. Tokenized public securities currently account for a market cap of $345 million, as per Dune Analytics data, representing a fraction of the trillion-dollar cryptocurrency market. Over the last 30 days, these tokens have experienced a 2.3% growth rate, lagging behind Bitcoin’s 10% rise during the same period. Nevertheless, some foresee a more substantial future for tokenization. A joint report by Northern Trust and HSBC estimated that 5% to 10% of all assets could be digital by 2030, indicating the potential for significant growth.
Although the concept of tokenization has been around for almost as long as Bitcoin, the nascent market is now beginning to realise much of its early promise. Senior-level buy-in from large firms is a significant indicator of this shift, according to Morgan Krupetsky, head of institutions & capital markets at Ava Labs. While there are still hurdles to overcome, such as the need for larger trading pools, optimism persists. Some industry participants believe that the future will bring about a more robust network effect, where more firms adopt similar platforms, making assets more tradeable. Doug Schwenk, CEO of Digital Asset Research, sums up this perspective by stating, “In the future, people are hoping for a better network effect where more firms are adopting the same platforms so assets become more tradeable.”
Stay informed with our Bi-Weekly Pulse for the latest crypto and blockchain news.
Get access to the week’s most interesting reads, stats and find out about the most recent trends in the cryptocurrency market.
