2021: The Year Institutions Turned to Crypto for Real World Assets

• The Future of Tokenization of Real World Assets
• Emergence of Tokenization
• Central Bank Digital Currencies (CBDCs) and Tokenization
• A New Era in Tokenization
• The Surge of Interest in Tokenization
• Benefits of Tokenization
• Market Development and Regulatory Challenges
• Smart Contract Law and Interoperability
• The Future of Tokenization

The Future of Tokenization of Real World Assets

The blockchain technology has been a promising avenue for the tokenization of real world assets (RWAs) for years, however, substantial institutional interest in RWAs has only started to emerge recently. The total value of tokenized assets across all public blockchains stands at $118.57 billion, with predictions suggesting it could surge to a staggering $10 trillion by 2030. This indicates the enormous potential for investing in RWAs. Factors such as recent macroeconomic shifts and advancements in technology for secure custody, trading and settlement, have added to the allure of investment in tokenized treasuries, private equity and debt.

Emergence of Tokenization

Regulatory clarity and property rights enforcement are touted as the key drivers that will make 2024 the breakout year for RWAs. The most familiar tokenization projects currently are Stablecoins. The most prevalent form is a direct claim on fiat currency held by a custodian. Currently, the global market cap for stablecoins is around $124 billion, but it is projected to grow to nearly $3 trillion within the next five years, thanks to private firms like PayPal starting to issue them.

Central Bank Digital Currencies (CBDCs) and Tokenization

Central bank digital currencies (CBDCs) represent another form of tokenization. As per the Atlantic Council data, 11 countries have already launched CBDCs, and 19 of the G20 countries are in the advanced stages of development. Interestingly, the tokenization of stocks, bonds and other traditional investment products has been gaining significant traction.

A New Era in Tokenization

In 2022, JPMorgan declared the first trade on its private Onyx network. By late 2023, this network has already processed almost a trillion dollars in notional collateral value. Moreover, JPMorgan announced recently that Onyx will conduct a proof-of-concept under the Singapore Monetary Authority to connect portfolios to tokenized assets offered by WisdomTree.

The Surge of Interest in Tokenization

Why has there been a surge in interest in tokenization? The answer lies in atomic settlement, the capability to settle even intricate transactions instantly, especially appealing in the current high-interest rate environment. Speed is crucial when trading assets worth hundreds of millions of dollars, as delays in settlement carry an opportunity cost that increases proportionately with the notional value involved.

Benefits of Tokenization

Near-instantaneous settlement by smart contracts eliminates the need for intermediaries and the accompanying fees while reducing the potential for human error. Additionally, banks have been witnessing margins for the private asset segment of their business steadily declining. Programmable smart contracts integrated into tokenized assets can automate several transactional functions over the life of the asset. This results in efficiency improvements that cut overhead and boost margins. The biggest beneficiaries, however, will be investors who will enjoy greater efficiency and reduced costs across the asset lifecycle.

Market Development and Regulatory Challenges

Despite the positive outlook, substantial work remains in building the market. Regulation is perhaps the most significant concern. The Hong Kong circular has broadly outlined four key areas that need to be addressed: tokenization arrangement, disclosures, intermediaries and staff competence. Global standards will have to be set for the tokenization of real-world assets to realize its full potential. In the U.S., tokenization will not be impeded by unresolved debates around whether digital assets are securities, who should regulate them, and how.

Smart Contract Law and Interoperability

Legal aspects concerning smart contracts are yet to be settled. Questions around ownership rights, liability and enforceability need to be addressed. Interoperability also poses a challenge. Currently, most tokenization activity is happening on private blockchains due to banks' compliance and control duties. However, public blockchains are becoming faster and innovating around interoperability. As a result, more institutions may eventually adopt public blockchains, following the lead of Franklin$0.0015 -3.24% Templeton, which became the first U.S. registered mutual fund to launch a money market fund on a public blockchain (Polygon$0.967 -3.65%) in April 2023.

The Future of Tokenization

The market infrastructure supporting tokenization will have to be developed. With many niche technologies and limited solution providers that can offer seamless process for creation and management, development is crucial. This gap is largely due to a lack of qualified custodians providing the necessary security to support these types of assets across the full lifecycle. The market cap for traditional financial assets far exceeds that of digital assets, making tokenization a highly compelling growth opportunity for the digital asset industry. The combination of high interest rates

Edited by Jonathan Stoker