(Bloomberg) — Bitcoin's breakthrough rally is rekindling hope that the digital ledger technology that underpins cryptocurrencies will revolutionize everything from recording home ownership to bonds.
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Tokenization, or the process of creating digital representations of real-world assets on blockchain, has become one of this year's buzzwords in conventional and crypto finance circles. The excitement is reminiscent of the hype a few years ago surrounding the use of blockchains for everything from tracking lettuce at Walmart Inc. to digitize stocks which proved to be premature.
For years now, the tokenization of assets beyond stables that serve as a proxy for real currencies in crypto trading has drawn attention. Only some 67,530 parties – mostly institutions – hold tokenized assets that are not stablecoins, according to data tracker rwa.xyz. Only 0.003% of the world's total asset value has been tokenized, and many companies behind the projects are on the verge of bankruptcy, says researcher Opimas.
The United States' unfavorable regulatory regime was largely to blame. For years, regulators encouraged banks to avoid crypto and related risks. Although tokenized securities run on blockchains and adhere to the same rules as traditional securities, regulators often lumped them together with crypto as deserving of greater scrutiny. So many financial service providers chose to stay away, and instead invest in areas like AI.
That is starting to change, as President-elect Donald Trump plans for a more favorable regulatory regime for crypto, and with the world's largest asset manager, BlackRock Inc., launching a tokenized money market fund this year. That pushes others to follow.
“Now they felt like they could do something and really sped up their timeline, but before they were just watching,” said Charlie You, co-founder of rwa.xyz. “They make things happen.”
Preparing for more traction, in October, the card network introduced Visa Inc. a platform that allows banks to issue fiat-based tokens. In November, stablecoin issuer Tether launched a tokenization platform. In the same month, Mastercard announced that it had linked its token network with JPMorgan Chase to settle cross-border business-to-business transactions on the bank's blockchain-based platform Kinexys, and sees an opportunity to introduce payment schemes from the kind to more financial institutions.
“That is a clear trend that will continue to evolve and unlock many new business models. That trend is here to stay,” said Raj Dhamodharan, executive vice president of blockchain and digital assets at Mastercard. Kinexys already supports about $2 billion in transactions per day, according to JPMorgan.
A series of money market funds – many investing in US Treasuries – plans to debut. Boston Consulting Group predicts that token fund assets under management could reach more than $600 billion by 2030, up from about $2 billion today. In order to make such tokens more useful, the Commodity Futures Trading Commission is considering new guidelines on how to use tokenized assets as collateral.
Tokenization is also mentioned as increasing the liquidity of an asset, making it accessible to more investors, while cutting costs and transaction time.
“By tokenizing those assets, it enables natural efficiency,” said Rob Krugman, chief digital officer of Broadridge, which has issued trillions of dollars worth of repos. “Maybe it's even bigger than the internet. It's a fundamental rethinking of the way the markets work.”
Still, some industry participants worry that the stampede could lead to tokenization of assets that shouldn't be tokenized, and expose investors to new risks, such as some hacks. Investors may also unknowingly pay more fees for tokenized products versus traditional products. Or with assets that are difficult to sell.
“You end up with a lot of low-priced assets being sold to investors who are not as sophisticated,” said Nathan Allman, CEO of Ondo Finance. “Outside of Treasuries, I think there is almost no value in token public securities. In fact, no one has done public guarantees well. Unfortunately, the majority of projects in this area seek to distribute low-quality, low-priced assets.”
Carlos Domingo, CEO of the tokenization platform Securitize, says that it is not sold on real estate sale tokens. Noelle Acheson, author of the Crypto is Macro Now newsletter, believes that private equity tokenization “feels a little more to me like a solution looking for a problem.” After all, many private companies provide equity to select partners—and don't want them to sell it to others. Buying a piece of tokenized Picasso leaves the buyer without the pleasure of enjoying the real art.
On the other hand, tokenization can also reduce some risks. More automation that comes with adding programmability to blockchain-based tokens can reduce some counterparty risk, as assets can be placed in escrow, for example, to be released upon delivery of goods, for example, You Said.
Capco analysts saw the need to renew the electronic payment systems invented decades ago, and using blockchain to make money more programmable can improve efficiency in the payments workflow, but it will take time.
“There are a lot of opportunities, we don't disagree with that, but there is still a lot of work to be done,” said Ervinas Janavicius, Capco's managing director.
