The Transformational Impact of Tokenizing Assets: From Ripples to Waves
The tokenization of financial assets is moving from the experimental phase to large-scale deployment. Although its adoption is not yet widespread, financial institutions that venture into blockchain will have a strategic advantage.
Tokenization involves the process of creating tokenized assets on a blockchain network, and after years of development, it has become relatively mature. The benefits of tokenization include programmability, composability, and enhanced transparency, which can enable financial institutions to increase operational efficiency, boost liquidity, and create new revenue opportunities through innovative means. The benefits of tokenization have already been realized today, with the first applications of tokenization trading billions of dollars’ worth of assets on-chain every month. However, there are still some flaws in tokenization itself. To further integrate these technologies into traditional finance, cooperation from all relevant stakeholders is required, and it must be done in a robust, secure, and compliant manner. As infrastructure participants shift from proof of concept to robust, large-scale solutions, the reimagining of the future of financial services will present many opportunities and challenges (see “What is tokenization?”).
If we were to design the future of financial services, we might envision features that include 24/7 availability, instant global liquidity, fair access, composability using a universal technology stack, and controlled transparency. Larry Fink, Chairman and CEO of BlackRock, expressed his belief in January 2024 that the next step will be the tokenization of financial assets, meaning that every stock and every bond will be recorded on a general ledger. More and more institutions are launching and expanding tokenized products, ranging from tokenized bonds and funds to private equity and cash.
As tokenization technology matures and demonstrates significant economic benefits, the digitalization of assets now seems increasingly inevitable. However, widespread adoption of tokenization is still a distant reality. The current infrastructure is not yet fully developed, especially in heavily regulated industries like financial services. Therefore, we expect the adoption of tokenization to occur in multiple stages: the first stage will be driven by companies or projects that can prove a return on investment and have a certain scale. Next will be companies or projects with smaller market sizes, less apparent returns, or more challenging technical hurdles.
According to our analysis, we expect the total market capitalization of the tokenized market to reach around $20 trillion by 2030 (excluding cryptocurrencies like Bitcoin and stablecoins like USDT), driven by adoption in mutual funds, bonds and exchange-traded notes (ETNs), loans and securitization, and alternative funds. In an optimistic scenario, this value could double to around $40 trillion.
In this article, we present our views on the adoption of tokenization. We describe the current state of tokenization applications (largely focused on a limited set of assets), as well as the broader benefits and feasibility of tokenization. We then explore use cases that are meaningful for market share and provide reasons for the growth of different asset classes. For the remaining major financial asset categories, we explore the “cold start” problem and propose possible steps for resolution. Finally, we consider the risks and rewards for pioneers and issue a “call to action” for future financial market infrastructure participants.
Staged Tokenization
The adoption speed and timing of tokenization in various asset classes will differ due to differences in expected returns, feasibility, time to impact, and market participant risk preferences. We expect these factors to determine when tokenization will achieve widespread adoption. Asset classes with large market values, high current value chain friction, less mature traditional infrastructure, or lower liquidity are more likely to yield unexpected returns from tokenization. We believe the feasibility of tokenizing asset classes with low technical complexity and regulatory considerations is highest.
Interest in tokenization investments may be inversely related to the richness of cost in current inefficient processes, depending on whether the function is handled internally or outsourced, and the degree of concentration of key participants and their costs. Outsourcing activities tend to achieve economies of scale, reducing the motivation for disruption. The speed of returns related to tokenization investments can enhance business cases, thereby increasing interest in pursuing tokenization.
Specific asset classes can lay the groundwork for the adoption of subsequent asset classes by introducing clearer regulation, more mature infrastructure, and investment. Adoption will also vary by geographic location and be influenced by evolving macro environments, including market conditions, regulatory frameworks, and buyer demand. Lastly, high-profile successes or failures may drive or restrict further adoption.
Asset Classes Most Likely to Adopt Tokenization
Tokenization is advancing gradually, and with the strengthening of network effects, the pace is expected to accelerate. Given their characteristics, certain asset classes adopting tokenization may become widespread within a decade, or even faster, with total future tokenization market sizes potentially exceeding $100 billion. We expect the most prominent categories to include cash and deposits, bonds and ETNs, mutual funds and exchange-traded funds (ETFs), and loans and securitization. For many of these asset classes, adoption rates are already high, benefiting from the efficiency and speed of value growth brought about by blockchain, as well as increased technical and regulatory feasibility.
We estimate that by 2030, the total market capitalization of tokenized assets could reach around $20 trillion (excluding cryptocurrencies and stablecoins), driven mainly by the assets listed in the graph below. We expect the total market capitalization of tokenized assets to be between $1 trillion and $4 trillion. Our estimate excludes stablecoins, such as tokenized deposits, wholesale stablecoins, and central bank digital currencies (CBDCs), to avoid double-counting, as these are typically used in settlement of transactions involving tokenized assets.
Mutual Funds
The tokenized mutual fund market already has an asset size of over $1 billion, indicating a demand for on-chain capital in a high-interest environment. Investors can choose from funds managed by well-known companies such as BlackRock, WisdomTree, and Franklin Templeton, or those managed by Web3-native companies like Ondo Finance, Superstate, and Maple Finance. In a high-interest environment, there may be sustained demand for tokenized mutual funds, which can also serve as on-chain value stores, offsetting the role of stablecoins. Other types of mutual funds and ETFs can provide diversified choices for traditional financial instruments for on-chain capital.
Shifting to on-chain funds can significantly enhance their utility, including the ability for instant 24-hour settlement and the use of tokenized funds as a means of payment. With the growth of tokenized fund sizes, more revenue related to products and operations will gradually manifest. For example, highly customized investment strategies can be achieved through the composability of hundreds of tokenized assets. Using shared ledger data can reduce errors associated with manual reconciliation and increase transparency, thereby reducing operational and technical costs. While the overall demand for tokenized mutual funds partly depends on the interest rate environment, it is currently gaining significant traction.
Loans and Securitization
Blockchain-supported lending is still in its early stages, but some institutions have already found success in this area: Figure Technologies is one of the largest non-bank home equity line of credit (HELOC) lenders in the United States, with an initial lending limit of several billion dollars. Web3-native companies like Centrifuge and Maple Finance, as well as other companies like Figure, have facilitated over $10 billion in blockchain-based loans.
We expect more adoption of tokenized loans, particularly in warehousing loans and on-chain loan securitization. Traditional loans often have complex processes and are highly centralized. Blockchain-supported loans offer an alternative with many benefits: real-time on-chain data stored in a unified ledger as the sole source of data, enhancing transparency and standardization throughout the loan lifecycle. Payment calculations supported by smart contracts and simplified reporting reduce costs and labor. Shortened settlement periods and access to a broader capital pool can accelerate trade flows and potentially reduce borrower costs. In the future, tokenizing borrowers’ financial metadata or monitoring their on-chain cash flows can achieve fully automated, fairer, and more accurate underwriting. With more loans shifting to private credit channels, these incremental cost savings and speed will be attractive to borrowers. As the overall adoption of digital assets grows, demand will also increase for Web3-native companies.
Bonds and Exchange-Traded Notes
Over the past decade, over $10 billion in tokenized bonds have been issued globally. Prominent issuers recently include Siemens, the City of Lugano, the World Bank, and other companies, government-related entities, and international organizations. Additionally, blockchain-based repurchase agreements (repos) have been adopted, resulting in monthly trading volumes in North America reaching several trillion dollars, creating operational and capital efficiency value from existing liquidity.
The issuance of digital bonds may continue as they offer significant potential returns once they reach a certain scale, with relatively low implementation complexity, partly driven by the desire of some regions to stimulate capital market development. For example, in Thailand and the Philippines, tokenized bond issuances have achieved investor inclusivity through small-scale investments. While returns have mainly been realized on the issuance side so far, end-to-end tokenized bond lifecycles can achieve at least a 40% improvement in operational efficiency through data clarity, automation, embedded compliance (such as transferability rules encoded at the token level), and streamlined processes (such as asset servicing). Additionally, cost reduction, faster issuance, or decentralization can be achieved through “timely” financing (i.e., optimizing borrowing costs by raising a specific amount at a specific time) and leveraging a global capital pool.
In conclusion, the tokenization of assets has the potential to revolutionize financial markets, offering unprecedented benefits such as increased liquidity, transparency, and operational efficiency. However, the road to widespread adoption is still long and will require cooperation among various stakeholders, as well as the resolution of technical and regulatory challenges. Nonetheless, the future of finance holds great promise with the transformative power of tokenized assets.Sure, here is the rewritten article with a creative re-expression while maintaining accuracy and fluency:
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Improving Financing for Small Issuers
Focus on Repo Agreements
Repo agreements, also known as “repos,” represent a tangible example of tokenization in action. Broadridge Financial Solutions, Goldman Sachs, and JPMorgan currently transact tens of trillions of dollars in repos monthly. Unlike some other tokenization use cases, repos achieve substantial benefits without requiring tokenization across the entire value chain.
Financial institutions enhance operational and capital efficiency through tokenized repos. Operationally, smart contracts automate routine operations management (e.g., collateral valuation and margin supplementation). This reduces errors and settlement failures, simplifies disclosures, and enhances capital efficiency through 24/7 instant settlement and on-chain data. Intraday liquidity from short-term borrowing and enhanced collateral usage further boosts efficiency.
Most repo terms extend for 24 hours or longer. Intraday liquidity reduces counterparty risks, lowers borrowing costs, facilitates short-term lending of idle cash, and minimizes liquidity buffers. Real-time, 24/7 cross-jurisdictional collateral liquidity provides access to higher yielding, high-quality liquid assets and optimizes their availability among market participants.
Next Steps
For many market participants, tokenized assets like alternative funds hold significant potential to drive asset management growth and streamline fund administration. Smart contracts and interoperable networks increase efficiency in managing large-scale autonomous investment portfolios through automated portfolio rebalancing. They may also offer new capital sources for private assets. Decentralization and secondary market liquidity could help private funds attract new capital from smaller retail and high-net-worth individuals. Enhanced operational efficiency through transparent data and automation on a unified ledger is being explored by established firms like Apollo and JPMorgan for blockchain-based portfolio management. However, full realization of tokenization benefits requires the underlying assets themselves to be tokenized.
For other asset classes, tokenization adoption may be slower due to feasibility issues such as meeting compliance obligations or lacking incentives for key market participants (see Fig. 2). These asset classes include publicly traded and unlisted stocks, real estate, and precious metals.
Overcoming Cold Start Issues
Cold start issues are common challenges in tokenization adoption. In the world of tokenized financial assets, issuance is relatively easy and replicable, but achieving scale depends on capturing user demand—whether through cost savings, liquidity improvements, compliance enhancements, or other factors.
While some progress has been made in proof-of-concept experiments and single fund issuances, issuers and investors still face cold start challenges: limited liquidity hinders issuance due to insufficient trading volume to establish a robust market. Concerns about losing market share may lead early adopters to incur additional costs by supporting parallel issuances with traditional technologies.
For example, tokenized bonds see new issuances almost weekly. Despite several billion dollars’ worth of outstanding tokenized bonds today, yields are modest compared to traditional bond issuances, and secondary trading volume remains low. Overcoming cold start issues requires building a use case where digital representations of collateral bring substantive benefits, including greater liquidity, faster settlements, and enhanced marketability among participants. Achieving sustainable long-term value requires coordination across multiple facets of the value chain and broad participation from new digital asset categories.
Given the complexity of upgrading operational platforms in the financial services industry, we advocate for Minimum Viable Value Chains (MVVCs) to support the scalability of tokenization solutions and overcome some of these challenges by asset class. To fully realize the benefits outlined in this article, financial institutions and partner organizations must collaborate on shared or interoperable blockchain networks. This interconnected infrastructure represents a new paradigm and raises concerns in regulation and feasibility (see Fig. 3).
Currently, multiple projects are striving to establish universal or interoperable blockchains for institutional financial services, including the Monetary Authority of Singapore’s “Guardian Program” and “Regulated Settlement Network.” In the first quarter of 2024, the Canton Network pilot project brought together 15 asset management firms, 13 banks, along with custodians, exchanges, and a financial infrastructure provider for simulated trading. This pilot validated that traditionally isolated financial systems can successfully connect and synchronize using public permissioned blockchains while maintaining privacy controls.
While there are successful examples on both public and private blockchains, it remains unclear which blockchain will handle the most transaction volume. Currently, in the United States, most federally regulated institutions are discouraged from using public blockchains for tokenization. Globally, however, many institutions choose the Ethereum network for its liquidity and composability. The debate between public and private networks continues as unified ledgers are constructed and tested.
Path Forward
Comparing the current state of tokenizing financial assets with the rise of other disruptive technologies, we are still in the early stages of adoption. Consumer technologies (e.g., the internet, smartphones, social media) and financial innovations (e.g., credit cards, ETFs) typically experience their fastest growth within the first five years of emergence (with annual growth rates exceeding 100%). Subsequently, growth rates slow to around 50%, eventually stabilizing at moderate compound annual growth rates of 10% to 15% over a decade. Although experiments began as early as 2017, widespread issuance of tokenized assets only emerged in recent years. We estimate an average compound annual growth rate of 75% across asset classes by 2030, led by the initial wave of tokenized assets.
While expecting tokenization to drive transformation in the financial industry is reasonable, early adopters who can “ride the wave” may see additional benefits. They can capture substantial market share (especially in markets benefiting from economies of scale), enhance efficiency, set agendas for formats and standards, and benefit from the reputation of embracing emerging innovations like tokenized cash settlements and on-chain repos.
However, many institutions are still in a “wait-and-see” mode, awaiting clearer market signals. We believe tokenization is at a tipping point, suggesting institutions still in a wait-and-see mode may find themselves lagging behind once key milestones, such as:
– Infrastructure: Blockchain technology capable of supporting trillions of dollars in transactions.
– Integration: Seamless interoperability between different blockchains.
– Supportive Factors: Wide availability of tokenized cash (e.g., CBDCs, stablecoins, tokenized deposits) for instant settlement of transactions.
– Demand: Buyer participants willing to invest significantly in on-chain capital products.
– Regulation: Action that provides certainty and supports more fair, transparent, and efficient cross-jurisdictional financial systems, with clear data access and security.
While not all these milestones have been met, we anticipate a surge in tokenization adoption soon. Adoption will be led by financial institutions and market infrastructure participants rallying together to take the lead. We refer to these collaborations as Minimum Viable Value Chains (MVVCs). Examples of MVVCs include Broadridge’s blockchain-based repo ecosystem and Onyx, a collaboration between JPMorgan, Goldman Sachs, and BNY Mellon.
In the coming years, we expect more MVVCs to emerge to capture value from other use cases, such as enabling instant B2B payments through tokenized cash, dynamically “smart” managing on-chain funds by asset managers, or efficiently managing the lifecycle of government and corporate bonds. These MVVCs may receive support from network platforms created by existing companies and financial technology disruptors.
For pioneers, there are risks and rewards: early investments and risks of investing in new technology can be significant. Pioneers not only attract attention but also need to develop infrastructure and run parallel processes on traditional platforms, which are both time-consuming and resource-intensive. Additionally, in many jurisdictions, there is insufficient regulatory and legal certainty for any form of digital asset interaction, and critical supportive factors such as widespread provision of wholesale tokenized cash and deposits for settlement remain unmet.
The history of blockchain applications is filled with such challenges leading to failures. This history may deter existing companies feeling secure in conventional business operations on traditional platforms. However, this strategy carries risks, including significant market share losses. Given the current high-interest rate environment, some tokenization products (such as repos) clearly demonstrate a use case, suggesting market conditions could quickly influence demand. As signs of tokenization adoption emerge, such as regulatory clarity or mature infrastructure, trillions of dollars’ worth of value could shift onto chains, creating a sizable value pool for pioneers and disruptors (see Fig. 4).
Immediate Action Pathways
In the short term, institutions including banks, asset management companies, and market infrastructure participants should assess their portfolios and identify which assets are most likely to benefit from transitioning to tokenized products. We suggest considering if tokenization can accelerate strategic priorities such as entering new markets, launching new products, and/or attracting new clients. Are there immediate-use cases for creating value? What internal capabilities or partnerships are needed to capitalize on market transformation opportunities?
By aligning pain points of both buyers and sellers with market conditions, stakeholders can assess where tokenization poses the greatest risks to their market share. However, realizing full benefits requires collaborative creation of a Minimum Viable Value Chain. Addressing these issues now can help existing participants avoid being caught off guard by surging demand.
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