Asset Tokenization – A Trillion Dollar Market Opportunity

The most recent crypto market surge attracted billions of dollars, funding the development of a ubiquitous, resilient global decentralized network. Startup investors poured a staggering $94 billion into emerging web3 ecosystem companies. However, the industry became engulfed in excessive hype and speculative fervor, leading to several market failures and bankruptcies, casting doubts about the industry’s future prospects. Regardless, transformative technological and financial innovations such as blockchains, tokens, smart contracts, wallets, etc., have facilitated peer-to-peer transactions, trading, transparency, and instant atomic settlement, providing substantial benefits across the global economy. The gamut of financial innovation has unlocked new opportunities previously unattainable using traditional platforms.

Indeed, major US financial institutions overseeing a staggering $27 trillion in assets are striving to offer clients exposure to Bitcoin
BTC
and crypto. Institutions are proactively exploring Web3 use case applications to enhance customer engagement, improve transaction experience, optimize processes, streamline operations, create efficiencies, and unlock other benefits. The market for asset tokenization is swiftly evolving into a promising opportunity worth trillions of dollars. It helps secure ownership rights, enables asset fractionalization, boosts liquidity, and makes financial transactions more convenient and transparent. Proxying and recording an asset as a programmable token on a blockchain enhances asset ownership (whole or fractional) mobility, empowers instant and atomic settlement, provides real-time on-chain visibility of the asset lifecycle, and enables process automation. Leading banks and financial institutions are embracing asset tokenization as a game-changing blockchain technology innovation, driving its integration into the financial market infrastructure. Significant cost savings can be achieved by enhancing the back-office, middle-office infrastructure, transaction settlement processes, data management systems, and other areas of the operational value chain. Boston Consulting Group reports that asset tokenization can generate annual savings of $20 billion in just the global clearing and settlement costs. By 2030, it could unlock a $16 trillion global market for tokenized illiquid assets, which would account for less than two percent of the total notional value of public and private assets.

Non-Blockchain Tokenization is used to safeguard data. It substitutes sensitive data with random tokens that hold no inherent meaning or exploitable value. These tokens act as references or identifiers, facilitating the mapping back to the original sensitive data using a tokenization system. The method is widely used to secure diverse types of sensitive data, including financial transactions, health records, criminal histories, vehicle driver details, loan documents, stock trading, voter registration, and more.

Blockchain Tokenization, on the other hand, converts assets into digital token securities, which act as a proxy for whole or fractional ownership of the underlying asset. Blockchain, smart contracts, and token securities are pivotal in enabling illiquid asset fractionalization by programmatically enforcing the required rules and restrictions, allowing for enhanced mobility of asset ownership, efficient payments and distributions, and a range of financial benefits across the lifecycle of the transactions. Tokenized assets can be securely transported within the ubiquitous cross-border decentralized blockchain network, establishing the foundation for open marketplaces; connecting global markets, investors, and asset owners. Furthermore, they empower asset owners to participate in decentralized finance (DeFi) systems, utilize associated infrastructure, and access services such as decentralized lending, collateralization, cross-border trading, and capital optimization.

Asset tokenization is anticipated to benefit all asset classes, such as private capital markets, asset-backed securities, money market funds, ETFs, intellectual property, and fixed income. This suggests a nearly limitless Total Available Market (TAM) for tokenization. Private capital markets comprising private company equity, debt, and real estate face challenges such as illiquidity, outdated asset pricing information, and multiple intermediaries controlling price discovery and updates. These obstacles make this sector particularly ripe for financial innovations. Additionally, in the last twenty years, private assets have achieved a compound growth rate that is approximately four times higher than that of publicly traded assets, showcasing a rapidly growing pie. Bain Capital estimates the notional value of private assets outside the financial system at around $540 trillion. However, the current tokenized assets amount to only $77 billion, representing a market penetration of merely 0.01%. This highlights the substantial market potential for investors as these assets become more accessible through tokenization.

Kyle Sonlin, CEO of Security Token Market, states, “Global banks have begun recognizing the benefits of digital assets’ transparency and efficiency. Asset tokenization has the potential to strengthen global financial systems and improve liquidity across diverse asset classes, particularly during critical and high-stress periods.”

Financial institutions are actively implementing institutional tokenization.

JP Morgan’s (JPM) tokenization initiatives focus on traditional assets such as U.S. Treasuries and money market fund shares. Its Onyx division is developing digital asset infrastructure and networks. JPM Coin, a digital representation of the U.S. Dollar, is used for internal blockchain-based transactions. The Onyx platform also hosts the Liink network designed to make cross-border transfers more efficient.

The JPM Blockchain-based Repo Network enables the trading of repos with any third-party entities that join the syndicate and has esteemed clients such as Goldman Sachs, BNP Paribas, and DBS
DBS
Bank. Global financial institutions frequently employ intraday credit facilities and overnight repo agreements to handle intraday cashflows as part of their liquidity management and regulatory compliance. However, these traditional intraday financing options can be expensive and susceptible to operational challenges. The Onyx platform offers a digital financing solution that allows global financial institutions to access faster, more cost-effective, and more secure intraday funding without relying on balance sheets. Financial institutions can enjoy a remarkable 56% reduction in borrowing rates compared to traditional intraday credit funding solutions. Moreover, the platform ensures near-instantaneous delivery-vs-payment settlement and requires minimal operational involvement, resulting in near-zero touch settlement for operations. The average daily repo volume in the United States is $3 trillion.

Digital Asset: Their primary product, Daml, is a private blockchain language that serves as the foundation for various institutional tokenization platforms. Additionally, Digital Asset has introduced the Canton Network, an interoperable platform aimed at competing with public-permissioned blockchains in the institutional sector.

Goldman Sachs introduced its Digital Asset Platform (GS DAPTM) in January 2023, leveraging the Daml language. The primary objective of GS DAPTM is to simplify the complexities associated with asset lifecycles within a unified environment. Initially focus of the platform is digital bonds, which have gained traction among investment banks. However, it is expected that GS DAPTM will expand to encompass other institutional products, such as commercial real estate opportunities, private equity funds, and structured finance.

Broadridge technology platforms use the Daml for its Distributed Ledger Repo (DLR) and power $9 trillion worth of transactions per day. According to a Forbes interview, the DLR delivers savings of $1 million for every 100,000 transactions compared to previous repo technology solutions.

KKR
KKR
, the private equity behemoth with $471 billion in assets, launched its first tokenized private equity feeder fund on the Avalanche
AVAX
(AVAX) blockchain. The security tokens represent economic interests in the feeder fund, granting investors the right to potential returns from the primary fund. Tokenizing the feeder fund significantly lowers the minimum investment threshold, reducing it from the typical $5 million required by traditional funds to just $100,000 for the tokenized feeder fund. This lower investment threshold increases the investor base, facilitated by blockchain technology, which excels at efficiently managing ownership records, distributions, reporting, and secondary trading.

Hamilton Lane, a colossal investment-management firm overseeing $824 billion in assets, has introduced a “tokenized” fund on the Polygon
MATIC
Blockchain. The tokenized version of the feeder fund drastically decreases the minimum investment requirement from the conventional $5 million to a mere $20,000 for the tokenized feeder fund. The expanded accessibility opens up opportunities in private markets for a more diverse range of investors.

Figure Technologies Inc., a leader in transforming financial services through blockchain technology, completed HELOC (home equity line of credit) securitization underwritten by Jefferies, Goldman Sachs, and J.P. Morgan. These initiatives enable Figure to source additional liquidity in capital markets, offering homeowners flexible and affordable access to their home equity.

Franklin Templeton, a prominent asset manager with $1.5 trillion in assets, has unveiled a mutual fund that utilizes a public blockchain for transaction processing and recording share ownership on a decentralized cloud-based ledger rather than a spreadsheet. Without the need for daily human settlement, particularly during the redemption process, the fund opens up to 24/7/365 trading. The orders can settle in real-time or at a predetermined time daily that’s automated through the ledger.

Apollo, BlackRock
BLK
, Blackstone, BNY Mellon, Carlyle, KKR, Morgan Stanley
MS
, State Street, and UBS are all members of a blockchain consortium focused on Alternative investments. It is noteworthy that nearly all members already have significant blockchain-related initiatives.

The global asset market is undergoing a transformative shift through blockchain asset tokenization, creating unprecedented financial and investment opportunities. It unlocks access to illiquid assets, enables secured fractionalized asset ownership, enhances ownership mobility, improves transactional and operational efficiencies, and more. The staggering notional value of assets, amounting to hundreds of trillions of dollars outside the traditional financial system, coupled with the anticipated economic benefits, is enticing major institutions to blockchain experimentation. Moreover, this paradigm shift presents exciting opportunities for asset owners to attain superior overall returns.