By Colin Butler, Global Head of Institutional Capital at Polygon Labs
From TradFi leaders to the crypto maxis, everyone predicts that real-world asset tokenization will eventually become a multi-trillion dollar market in the foreseeable future. But while we’ve already seen some compelling use cases, these are a drop in the ocean compared to the flood of digitized assets that could move on-chain in the next few years. When will today’s trickle of tokenization turn into a torrent and what is holding it back?
This October, Forbes published a deep dive into the issue under the provocative headline “Why Tokenization is Failing.” The author provides a troubling litany of failed or underwhelming digitization projects and concludes that the issue hindering the adoption isn’t technology but trust. I beg to differ.
The Calm Before the Storm
While a major paradigm shift toward tokenization might not be immediately evident today, the financial industry as a whole is already gearing up to embrace digitized assets, a trend set to continue into the New Year. Inevitably, we will soon see even more structured instruments like assets built from new revenue sources such as private credit — the logical next step for financial products that are inherently digital and relatively easy to migrate on-chain.
This pivot is unsurprising, especially considering countless benefits that real-world asset tokenization can bring to the table as a utility infrastructure to reduce costs, increase revenue and reduce risk with shorter settlement times. The sweet spot is probably between 30% and 50% in savings overall. By going fully on-chain, these TradFi firms will also be able to offer their funds to a much broader cross-section of investors, with the increase in capital efficiency removing the requirement for conventional mandatory minimums.
Furthermore, a decentralized infrastructure can help enterprises significantly de-risk their platforms. For example, electronics giant Siemens, which issued its first digital bond on blockchain in February, was able to shorten the settlement period from seven to to just one day by leveraging asset tokenization, and therefore massively de-risked its issuance process. This also allowed the company to reduce the number of required providers to around one or two, making the whole process more streamlined and frictionless.
Today, the primary reason why the tokenization market isn’t in full flood yet is its technical bottlenecks and some limitations of the current infrastructure and interoperability, which is an inevitable growing pain of a young, nascent space. Consequently, a major challenge standing in the way of tokenized asset adoption is the limited exposure and availability for the general public.
As a completely novel product, asset tokenization still lacks the necessary spread and reach that would allow people to buy things on-chain en masse. Even somewhat experienced investors who already have TD Ameritrade or Fidelity accounts, for example, can’t just go and buy the Hamilton Lane fund today because this functionality is simply not there.
Apart from still being somewhat obscure, the tokenization infrastructure is also not yet at the scale it needs to be in order to see mass adoption. Furthermore, there are still only a handful of major fintech players working on decentralized initiatives, so there is a very limited amount of market-ready products available. Combined, these issues result in an overall lack of demand for tokenized assets, which is only exacerbated by small supply.
However, while it’s easy to showcase the projects that didn’t deliver, the true story of tokenization in 2023 is about the incredible groundwork being laid that will enable the next wave of tangible on-chain results, driven by the might of major financial players entering the market.
Private Equity Funds And Credit Are Leading the Charge
Speak to anyone intimately acquainted with the tokenization ecosystem, and they’ll tell you that 2024 is full of promise. For starters, we see intense interest from private equity funds looking to develop new tokenization vehicles for their investors, putting these ideas into production with haste.
However, these instruments are just the start. The next generation of tokenized assets will include offerings like bonds and equities. In time, real-world assets from art and automobiles to commodities and fine wines will be traded on-chain. In fact, it’s already happening, with use cases including fractional ownership of classic artworks and real estate.
Notably, a report by HSBC and Northern Trust already predicted earlier this year that roughly 5-10% of all assets will be tokenized by 2030 — and that figure could amount to approximately $19.5 trillion by today’s estimates.
Tokenized real estate, in particular, could be a significant boon for the market, which has traditionally been complex and slow-moving. Now, not only will these markets become digitally native but they could also benefit from things like fractional ownership and near-instant settlements.
This stands to make investing more accessible and bring new liquidity into static and sclerotic markets. Entirely new generations of investors will begin tapping into the possibilities of tokenization and breathe new life into legacy markets. With new institutions and assets will come new payment rails as well as the requirement for industry-wide standards that make all of these products and markets interoperable.
Not only will this demonstrate the power and utility of tokenization, but it will also foster the trust that Forbes correctly identifies as the key driver of demand. In 2024, we can have every confidence that the flow of new tokenization will turn from a drip-drip into a deluge, marking the most profound revolution in financial affairs in centuries.
About the Author
Colin Butler is the Global Head of Institutional Capital at Polygon Labs, driving education and awareness within the institutional investment community. Prior to Polygon, he spent 18 years in financial markets. He has worked as Head of Business Development at a global L/S equity hedge fund, the Global Revenue Officer in a company that used AI to quantify human decision-making, and a variety of other leadership roles that spanned institutional equity sales and trading, private wealth management, and alternatives marketing. Colin has the ability to describe both the novel technology and institutional opportunity of Web3, to connect with institutions across industries. He is eager to educate investors about Web3 in general and Polygon in particular, a new technology that promises to disrupt many facets of traditional industry, from brokers and banks to global logistics and supply chains. He lives in New York City.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.