The concept of tokenization first caught the attention of companies back in 2017, according to Coinbase. Of particular interest to them was ownership of illiquid physical assets on the blockchain. In the current environment, companies are interested in introducing tokenization into government bonds, money market funds and repurchase agreements.
In 2017, tokenization fell short of initial expectations as the focus began to shift to decentralized finance (DeFi) at the time. However, there is now a resurgence of interest in tokenizing real assets. This is due to the downturn in the cryptocurrency market in 2022, which contributed to a reassessment of the fundamental value of blockchain. The recent banking crisis in the US also showed the need to increase profitability, which increased the attractiveness of tokenized products.
Key factors driving the adoption of asset tokenization among financial institutions have been instant settlements, automation of business processes, and increased transparency of audit records. These benefits are backed by 24/7 trading. Additionally, tokenization eliminates the need for intermediaries, making online payments and settlements easier and faster.
Coinbase analysts have identified the main problems on the path to asset tokenization. Many institutions still rely on private blockchains due to their reservations about open networks. Companies fear exploits in smart contracts, manipulation of oracles, and network failures. Preference for private blockchains could make interoperability difficult, leading to liquidity fragmentation, the report notes.
Regulatory complications may also hinder mass tokenization of assets. Many jurisdictions do not have a clear legal framework for tokenization. Platforms often have to process tokenized assets in different jurisdictions. This can delay the process as Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations may be followed differently by platforms and institutions.
According to analysts at the investment bank Citi, by 2030 the market for tokenized assets will grow 80-fold and will amount to between $4 trillion and $5 trillion. Boston Consulting Group and ADDX have made a bolder prediction: $16.1 trillion of illiquid assets will be tokenized by 2030.
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