By Alexander Jones, International Banker
It has been a decidedly mixed 15 years for blockchain since bitcoin was created. While advances in innovation and crucial use cases are undoubtedly being pursued, the technology has faced storied challenges, particularly regarding its potential limitations when operating at scale. That said, there is now unadulterated excitement over the potential of asset tokenisation to transform global real-world and financial markets to such an extent that it has prompted Citigroup to call it blockchain’s “killer use-case”.
Asset tokenisation allows financial assets such as stocks, bonds and funds as well as real-world assets (RWAs) such as commodities, art, patents and real estate to be represented by digital tokens on a blockchain. These digital tokens confer ownership of and legal rights to an asset on the token holder. And because the blockchain itself is a public, immutable ledger, the technology ensures token holders that their ownership of underlying assets cannot be erased or compromised in any way.
Two broad categories of tokenised assets are widely traded at present. Firstly, fungible tokenised assets represent a wide range of assets, such as gold, fiat and commodities, that are both divisible and interchangeable, such that each token unit has the same value and market properties and can be divided into as many sub-divisions as desired when issued. The second type of tokenised asset is the nonfungible token (NFT), which is non-interchangeable and, therefore, unique, such that each one has its own value and market properties and thus cannot be replaced by other tokens. For example, collectibles, artwork and housing property could all be represented by NFTs on the blockchain.
Such features give rise to a multitude of benefits that can be exploited by trading tokenised assets. Arguably, the most desirable advantage for investors is the opportunity to obtain fractional ownership of an RWA asset, with each share of the asset represented by a digital token on the blockchain. For example, a commercial property worth $1 million can be divided and represented by one million digital tokens, each worth $1.00.
Having recently received approval from the U.S. Securities and Exchange Commission (SEC), the blockchain platform Freeport now allows investors to purchase fractionalised shares of fine art—including prints from famous pop artist Andy Warhol—in the form of security tokens on the Ethereum blockchain. “We are beyond thrilled to launch the Freeport platform and start opening access to the once-exclusive world of fine-art investing,” said Colin Johnson, chief executive officer and co-founder of Freeport. “As more and more value moves on-chain, fractionalized art is increasingly sought after by a younger, yet less financially flexible, class of investors. Our platform goes far beyond just fractionalizing shares of fine art into security tokens—we’ve built a fully-immersive and interactive platform hosting an art-centric community and redefining the ownership experience surrounding fractionalized art.”
Indeed, the opportunity to massively improve the liquidity of previously illiquid assets via asset tokenisation cannot be underestimated. And by broadening the pool of participating investors to include those who could not afford the assets in their previously complete, indivisible forms, asset tokenisation also boosts financial inclusion, further promoting asset liquidity. “There is a limit to the level of fractionalization possible with real-world assets. Selling 1/20 of an apartment or a fraction of a company share is not currently practicable,” a report from Bank of New York Mellon (BNY Mellon) acknowledged. “However, if that asset is tokenized, this limitation is removed, and it becomes possible to buy or sell tokens representing fractions of ownership, allowing a far broader investor base to participate.”
Another clear benefit is the sheer directness that arises from the digital trading of assets on a blockchain. With the technology removing the need for intermediaries and middlemen to settle and confirm transactions, the degrees of security, efficiency, accuracy and transparency of digital-asset trading can be elevated well above what physical trading of RWAs can achieve. Costs and time are also minimised by the remote nature of asset tokenisation—for example, an investor can securely purchase an artwork located in another part of the world without ever having to visit that location.
“It creates a faster, more efficient way for companies to issue assets, individuals to own them, and everyone to transfer value,” John Wu, president of Ava Labs, the firm behind the popular blockchain Avalanche (AVAX), told TechCrunch on July 25. Wu also confirmed that the Avalanche Foundation would purchase up to $50 million of tokenised assets created on its layer-1 (L1) blockchain under an initiative called Avalanche Vista to demonstrate the benefits of tokenisation in different sectors, such as equity, credit, real estate and commodities. “Our mission is to tokenize the world’s assets,” Wu added. “Vista is our next show of commitment to do that. It’s not just dollars involved, but commitment to help web2 players work with us and explain tokenization.”
The sheer range of benefits offered by asset tokenisation, therefore, is generating palpable excitement, not only over its ability to transform financial markets for the better but also due to the potential financial opportunities this new infrastructure could present. Indeed, a report published in May by Boston Consulting Group (BCG) and investment firm ADDX estimated that the value of asset tokenisation would reach $16 trillion by 2030—equivalent to a whopping 10 percent of global gross domestic product (GDP). That’s comfortably ahead of the $9.6 trillion of total assets under management (AUM) of global exchange-traded funds (ETFs) recorded at the end of 2022, while it dwarfs the current value of security tokens, which the report recorded at $310 billion.
And although Citi is not quite as bullish as BCG and ADDX, estimates from the US bank still demonstrate the sheer magnitude of the opportunities that could be unleashed by asset tokenisation. “Almost anything of value can be tokenized, and tokenization of financial and real-world assets could be the ‘killer use-case’ blockchain needs to drive a breakthrough,” Citi explained in its “Money, Tokens and Games: Blockchain’s Next Billion Users and Trillions in Value” report published in March. “We forecast $4 trillion to $5 trillion of tokenized digital securities and $1 trillion of distributed ledger technology (DLT)-based trade finance volumes by 2030.” According to Citi, this would still represent a whopping 80-fold increase from the current value of real-world assets locked on blockchains. And of the up to $5 trillion that will be tokenised, the bank sees $1.9 trillion coming in the form of debt, $1.5 trillion from real estate, $0.7 trillion from private equity and venture capital, and $0.5-1 trillion from securities.
“Traditional financial assets are not broken, but sub-optimal as they are limited by traditional systems and processes,” Citi noted, adding that blockchain tokenisation is superior to traditional financial infrastructure as it provides more investment opportunities in private markets. Indeed, several private-equity firms, including KKR (Kohlberg Kravis Roberts & Co), Apollo Global Management and Hamilton Lane, have already created tokenised versions of their funds on blockchain platforms. “Certain financial assets—such as fixed income, private equity, and other alternatives—have been relatively constrained, while other markets—such as public equities—are more efficient,” according to Citi.
As such, the bank expects blockchain tokenisation to eliminate the need for time-consuming, costly processes, such as reconciliation, as well as prevent settlement failures and improve trade efficiencies. “What DLT and tokenization offer is an entirely new tech stack that lets all stakeholders do all activities on the same shared infrastructure as one golden source of data—no more expensive reconciliation, settlement failures, waiting for the faxed documents or ‘originals to follow’ by post, or investment choices being restricted by operational difficulty in access.”
Similarly, Ava Labs’ Wu acknowledged that his prime focus regarding asset tokenisation is to improve operational efficiency, in addition to widening accessibility for new users and boosting liquidity. “People are seeing that this concept of instant settlement doesn’t really exist in the real world,” Wu said during his TechCrunch interview, adding that blockchain settlements can be completed instantly, and investors can see their assets being stored on-chain because of its transparency. “Clearing in a traditional system takes a couple of days, and that’s trillions and billions locked up for a period of time. That can be done in a more efficient manner [on the blockchain] instantly.”
But Citi also confirmed that the lack of legal and regulatory frameworks, challenges with building the infrastructure and obtaining a widely followed set of interoperability standards are all pertinent issues faced by the asset-tokenisation ecosystem.