Asset Tokenization is Gathering Steam

Institutions are shrugging off the bear market in cryptocurrencies and forging ahead in testing asset tokenization—effectively, the securitization of assets on a blockchain. Here is a summary of how it works, current activities, and the outlook for this evolving capability.

What is tokenization?

Asset tokenization uses blockchain, a shared digital ledger for transactions. The asset issuer creates digital tokens that represent units of an asset, such as shares of a company or real estate. Digital ledger technologies enable the asset owner to execute and record a transaction with a buyer.

Interest is growing because companies and individuals can exchange an asset (and record the transaction) directly and immediately with one another without the intermediaries and time requirements of traditional methods.

Tokenization also lowers the bar on the size and type of assets that can be made liquid—and pledgeable as collateral—on commercially viable terms. This opens a wider range of investible assets for investors and new pools of previously inaccessible capital. In addition, tokenization may offer:

• 24/7/365 liquidity, with real-time settlement and lower transaction costs

• Fractional ownership of expensive assets traditionally limited to wealthy investors

• More access to illiquid assets such as private equity and real estate

• Cybercrime protections

How does it overlap with cryptocurrencies?

In some ways, tokenization does not overlap. A large volume of tokenized assets will live on private blockchains, such as JP Morgan’s Onyx Digital Assets blockchain that reached $350 billion in trading volume as of June 2022.

In other ways, tokenization overlaps substantially with cryptocurrencies. Many of the most prominent tokenization companies—such as Securitize (partnering with KKR & Co. Inc., Morgan Stanley, and ARCA) and Securrency (with partners State Street and U.S. Bancorp)—utilize Ethereum and other public blockchains; ether is the cryptocurrency of the Ethereum blockchain.

What’s the outlook for tokenization?

In its report, “Relevance of on-chain asset tokenization in ‘crypto winter,’” Boston Consulting Group projects the tokenized asset market will grow to $16 trillion, or 10% of global GDP, by 2030. They contend this is a conservative estimate, with multiples of that figure within the realm of possibility.

Source: Boston Consulting Group. Used with permission.

In our view, given the commercial real estate market is $20 trillion in the U.S. alone and the private equity market is $6 trillion in assets under management (and raising another $1 trillion or so each year), the BCG forecast may be reasonable.

Who might benefit?

Tokenization has the potential to drive incremental expansion in each of the above markets, and many others. For example:

• Institutional investors could gain improved liquidity and settlement speed

• The range of investible assets available to wealth managers and retail investors could significantly expand

• Structured finance teams could have a much broader palette to work with

• In ESG, it could enable more liquid carbon markets and provide better data from other sources such as complex supply chains.

• The real estate market and entire mortgage complex could be likely to move on-chain in coming years

What to watch?

There has been a flurry of noteworthy transactions and announcements in the fourth quarter of 2022. Two highlights include:

• JP Morgan Chase executed a live trade involving tokenized Japanese Yen and Singapore Dollar deposits on public blockchain Polygon (MATIC) as part of a Monetary Authority of Singapore Project Guardian pilot project.

• Hamilton Lane announced plans to tokenize three more of its funds, building on the tokenization earlier this year of its Global Private Assets Fund.

As blockchain technology evolves, legal and regulatory clarity is needed for financial institutions. And an entire parallel financial ecosystem must be built—the underlying trading systems and custody, for example—and integrated with the existing system so tokenized assets can sit side-by-side with traditional financial assets in portfolios.

This will take time, but the ability to tokenize assets shows real promise for financial firms and retail investors.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.