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Tokenization’s Unstoppable Surge: Bridging Assets and Innovation

Tokenization, the process of digitizing asset ownership on a blockchain, stands poised to revolutionize finance on a grand scale. Industry experts from traditional finance leaders to cryptocurrency enthusiasts predict a potential market running into the tens of trillions. While existing use cases demonstrate its promise, the full-scale adoption of tokenization faces hurdles, primarily technical bottlenecks and limitations in current infrastructure and interoperability. However, 2023 marks a pivotal juncture. Strides made in addressing these challenges pave the way for a surge in tangible on-chain assets, with major financial players entering the fray. This momentum could catalyze a significant shift in how assets are managed and traded.

Tokenization is fundamentally reshaping wealth distribution by quantifying values in unexplored territories such as the metaverse and enabling liquidity for assets. It presents an opportunity for global impact by offering investments at fractional levels, even as low as mere cents, thus democratizing access to investment opportunities. However, the realization of tokenization’s full potential hinges on regulatory adaptations and technological advancements in decentralized finance (DeFi) for widespread adoption.

Notable Figures and Institutional Interest

Key figures like Jenny Johnson, CEO of Franklin Templeton, advocate for tokenization’s value, referring to tokenization as “securitization on steroids”. At the Fortune Global Forum in Abu Dhabi, Johnson highlighted blockchain’s potential to democratize the financial market by fractionalizing asset ownership, expediting transactions, and reducing costs.

Major players such as London Stock Exchange Group (LSEG.L), WisdomTree, Mirae Asset Securities, Franklin Templeton, UBS Asset Management, and ABN Amro (ABNd.AS) are actively investing in token trading platforms or launching tokenized versions of assets like money market funds and green bonds. Moreover, two surveys, conducted by EY-Parthenon in May, reveal that over a third of institutional investors in the U.S. and nearly two-thirds of high-net-worth investors plan to invest in tokenized assets within the next year or so.

Recently, Apex Group has strategically invested in Tokeny, a leading enterprise tokenization solutions provider. Tokeny, having tokenized €28 billion in assets and established the ERC3643 market standard for tokenization, stands at the forefront of standardizing the market. By harnessing Tokeny’s expertise, Apex aims to offer a comprehensive tokenization solution, positioning itself to drive digital transformation in financial services. This partnership is poised to accelerate tokenization’s widespread adoption in the financial market.

Global Developments and Initiatives

Globally, institutions and regulators are exploring the tokenization’s market potential. The UK’s Financial Conduct Authority (FCA) have welcomed a blueprint for implementing fund tokenization on November 24. Earlier, Banque de France Governor François Villeroy de Galhau has proposed a regional approach to tokenization using distributed ledger technology (DLT). Moreover, regulators in Singapore, Japan, and Switzerland announced plans to test tokenization for fixed income, foreign exchange, and asset management products. Notably, Hong Kong was the first government to issue a tokenized green bond using Goldman Sachs digital assets platform. On February 16, the Hong Kong Monetary Authority (HKMA) confirmed its first $102 million tokenized green bond issuance. The one-year bond, priced at 4.05%, was distributed by Bank of China (HK), HSBC, Credit Agricole CIB, and Goldman Sachs.

Banks and financial institutions are increasingly embracing crypto technologies like programmable ledgers and smart contracts for tokenizing money and real-world assets (RWA). The Bank of England emphasized this positivity in its biannual report published on December 6, highlighting the movement of various RWAs onto blockchains, both private ledgers and public networks.

HSBC, a major global bank, unveiled plans on November 8 for a digital-assets custody service for institutional clients, focusing on tokenized securities in collaboration with Swiss crypto safekeeping specialist Metaco. Societe Generale also successfully sold 10 million euros of tokenized green bonds on Ethereum earlier in November. Moreover, Germany’s KfW, a state-owned development bank, announced plans to issue a tokenized bond in 2024, aligning with the shift towards decentralized digital depositories supported by legislation.

Innovative financial products like the Franklin OnChain U.S. Government Money Fund, utilizing Stellar’s blockchain for transaction processing and share ownership recording, demonstrate the fusion of finance and blockchain technology. This U.S.-registered fund, represented by BENJI tokens, boasts nearly $296 million in on-chain assets, offering accessibility through the Benji Investments app.

The Avalanche Foundation announced the allocation $50 million to acquire tokenized assets minted on the Avalanche blockchain under the initiative “Avalanche Vista“, on July 25. This initiative considers a wide range of assets, including equity, credit, real estate, commodities, and blockchain-native assets

On September 11, Northern Trust announced a distributed ledger technology project, spearheading the tokenization of carbon credits. This pioneering initiative aims to facilitate the seamless digitization of carbon credits, enabling direct access for institutional buyers to participate in tokenized transactions with leading project developers.

Additionally, JPMorgan and Apollo announced collaboration with blockchain firms in November, showcasing how asset managers can tokenize funds on preferred blockchains, advancing solutions for managing portfolios and automating asset management.

Coinbase and its asset management arm introduced Project Diamond, a platform for institutions to trade and create digital assets directly on-chain, on November 10. Project Diamond received “in-principle approval” from the FSRA of ADGM, enabling it to test out Developing Financial Technology Services within the sandbox. While limited to non-US institutions, it has shown success with the issuance and settlement of a USDC-denominated digital debt instrument on December 12, gearing up to enter the Abu Dhabi Global Market (“ADGM”) RegLab sandbox.

More recently, SIX Digital Exchange (SDX) has tokenized Aktionariat AG’s private shares on its regulated blockchain-based Central Securities Depository (CSD), with Berner Kantonalbank (BEKB) as the issuer agent and custodian. This demonstrates the transformation of Ethereum blockchain shares into regulated, bankable securities, enhancing custody and transferability for investors in private companies.

The financial landscape’s transformation, driven by these developments, underscores the growing momentum towards integrating tokenization across various asset classes and the concerted efforts to leverage blockchain technology for a more efficient and accessible financial ecosystem.

Blockchain-Enabled Tokenization and Institutional Savings

Several notable institutions have entered the realm of tokenization, showcasing its tangible benefits. Investors are increasingly turning to blockchain-powered systems in pursuit of enhanced efficiencies and reduced manual labor across various financial institutions. For instance, Goldman Sachs Digital Asset Platform (GS DAP) achieved a 15 basis points cost reduction on a €100M digital bond issuance, translating into a €150K return to Union Investment, the sole buyer involved.

In a similar vein, J.P. Morgan’s Onyx Digital Assets (ODA) anticipates a remarkable $20 million in savings from an anticipated $1 trillion volume in tokenized repo transactions by the year-end 2023. Additionally, Broadridge’s Distributed Ledger Repo (DLR) solution notably saved sell-side clients like Societe Generale $1 million for every 100,000 tokenized repo transactions processed.

The impact of blockchain extends further: Equilend’s 1Source, a distributed ledger-based securities lending solution, aims to deliver an estimated $100 million in industry-wide cost savings, all through tokenization’s power. Intain’s adoption of Hyperledger and Avalanche blockchain solutions significantly reduced SME loan lifecycle fees from 150 basis points to 50, resulting in an impressive 100 basis points in savings.

Vanguard’s integration of R3’s Corda, a permissioned tokenization platform, through Grow Inc. streamlined operations, saving a remarkable 100 hours of labor each week. Furthermore, Liquid Mortgage’s groundbreaking feat drastically reduced Mortgage-Backed Securities (MBS) reporting from a lengthy 55 days down to a mere 30 minutes, harnessing the tokenization’s innovative potential via the Stellar blockchain.

These instances illustrate the diverse applications of blockchain technology across various financial processes, showcasing substantial efficiency gains and cost reductions ensuing from tokenization.

Envisioning Tokenization’s Market Potential

The landscape of asset tokenization continues to evolve at a rapid pace. Recent developments outlined previously underscore this trajectory, showcasing both the burgeoning potential and early wins in this transformative space. Interestingly, the value of tokenized US treasury assets on public blockchains has experienced a remarkable surge, catapulting from $100 million in January 2023 to over $650 million by August of the same year.

While these milestones mark notable strides, they stand as notional wins when juxtaposed with the projected enormity of tokenization’s potential market. Forecasts from esteemed entities such as the Boston Consulting Group envision a colossal market valuation reaching around $16.1 trillion by 2030 — made up largely of financial assets (such as insurance policies, pensions, and alternative investments), home equity, and other tokenizable assets, such as infrastructure projects, car fleets and patents. Roland Burger’s meticulous analysis, which projected a monumental fortyfold increase to surpass a valuation of $10 trillion, aligns with this trajectory. Their approach, considering diverse asset categories and applying conservative growth rates, highlights the prominence of assets like real estate and financial instruments in driving this expansion.

The vision for asset tokenization transcends these early successes, encompassing a broad spectrum of assets—from traditional equities, bonds, and real estate to novel ventures in private credit and beyond. The evolving nature of this landscape underscores the necessity for standardized industry practices, essential to support and nurture the proliferation of these innovative financial instruments.

Charting the Course Ahead

Tokenization, poised to revolutionize asset ownership and investment, holds the promise of transforming traditional investment frameworks by significantly reducing transaction costs, enhancing transparency, and introducing unprecedented liquidity.

Yet, the Bank of England’s recent cautionary note on financial stability risks stemming from unbacked crypto and stablecoins casts a shadow. Vigilance and global cooperation are imperative to navigate these potential risks as tokenization propels towards a reshaped financial reality.

Tokenization stands on the cusp of a paradigm shift, a transformation poised to redefine finance fundamentally. With ongoing advancements, regulatory adaptations, and the embrace of institutions, the journey towards a tokenized economy holds the promise of a more accessible, liquid, and inclusive financial future.

Salma Naueihed

Salma has dedicated the last 10 years of her career to academic research since she got her MBA degree in Finance and Economics from Notre Dame University - Louaize. With a strong background in research and data analysis, she has made valuable contributions to research at Olayan School of Business at AUB. She also works as a freelance researcher, providing expert research services on various business topics. Her expertise spans across research fields, including economics, finance, financial and managerial accounting, corporate governance, and corporate social responsibility. She also has keen interest in emerging trends in cryptocurrency and blockchain technology. She has a proven track record of providing high-quality research support, managing research projects, and contributing to publications.

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