The era of asset tokenization is upon us, and it’s high time traditional finance woke up to this game-changing reality. Tokenization — the process of digitizing assets onto a blockchain — is not just an innovation; it is an imperative. Traditional financial markets are staring disruption in the face, threatened by obsolescence if they don’t embrace this transformative technology.
The disruption is on our doorstep, powered by blockchain technology. Global equity markets, worth over US$100 trillion, are on the brink of a powerful structural shift spurred by tokenization that promises to reshape the inefficient legacy systems that much of the world relies upon.
Case for tokenization: efficiency, automation, disruption
Many view blockchain as a technology surrounded by undue hype and speculation. Critics often question the necessity of blockchain when standard databases serve the purpose. But such views overlook a key fact — blockchain technology and its application in asset tokenization offer an unparalleled opportunity: transitioning traditional financial infrastructure on-chain.
According to data from DeFiLlama, the top five decentralized protocols dealing with real-world assets (RWAs) account for approximately US$688 million in current total value locked within their smart contracts. Comparatively, the top five projects on Ethereum command a combined total value locked of US$32 billion. With global equity markets towering over US$100 trillion, the value of RWAs on-chain has exponential room for growth.
Tokenization presents traditional financial markets with the chance to automate and streamline back-office operations, which could save institutions billions annually. The opportunity is ripe, and low-hanging fruit lies within tokenizing equities, debt and funds.
Low-hanging fruit: equities, debts and funds
While gold is an asset that is becoming increasingly tokenized along with many others such as real estate and fine arts, the biggest opportunity lies within tokenizing equities, debt and funds.
Equity markets, despite their critical role in the global financial system, have seen minimal innovation over the years apart from the introduction of high-frequency trading, electronic trading platforms, and direct listings. Tokenization, however, can cause a radical disruption, replacing legacy systems with cost-efficient and instant settlements.
The tokenization of funds can drastically cut down existing operational layers — trading, clearing, settlement, custody and reporting — each currently handled by different intermediaries. It also offers an opportunity to transition from the traditional T+3 or T+5 fund settlement terms to instant settlements, replacing redundancies with a lean and efficient model that delivers immediate results. Moreover, the establishment of the world’s first comprehensive framework for crypto regulation in Europe, MiCA, alongside the more accommodating regulatory stance of financial hubs like Luxembourg and Ireland, paves the way for an easier adoption of tokenization within the financial infrastructure.
Now, this leap forward is not without its challenges and obstacles. As we gaze into the years ahead, we need to address and navigate them proactively, to fully realize the transformative potential of tokenization.
Incumbents’ dilemma
As with any new technology, it’s common that incumbents in positions of power may be reluctant to see progress made.
In the context of funds, certain parties have been reaping significant profits from existing inefficiencies. Consider pension funds, which can charge over 0.5% annually to administer services — services that could be vastly streamlined via blockchain technology. Given the size of these funds and the impact of compound interest, this equates to an enormous amount.
While these incumbents do not outright ban parties from leaving, they subtly hinder the shift by adding friction. For example, fund administrators may impose administrative burdens, such as extensive paperwork, to discourage any transfer.
A pertinent example lies in the asset management industry, where incumbents impose administrative burdens when transferring assets, especially those in tax-protected investment vehicles or “tax wrappers.” Traditional pension schemes often create obstacles for clients looking to transfer their assets to cost-effective solutions. An example of these practices was shared in Pension Bee, CEO’s open letter to Aegon.
This resistance, however, cannot and should not hinder progress. Be it an imminent recession prompting firms to vie on costs or clear regulatory advancements galvanizing the tokenization space, the momentum towards tokenization will increase. Big changes often occur gradually at first and then accelerate quickly.
Embrace disruption
That said, change doesn’t happen overnight and there will be hurdles. Tokenization is an emerging trend that will gradually take shape before eventually triggering seismic shifts in the financial landscape.
The question is not if, but when and how we choose to embark on this exciting journey. The time for observing from the sidelines is over. Traditional financial markets need to embrace tokenization or risk becoming a relic of a bygone era. The public must be aware of this emerging trend and push for advancements that benefit society at large.
The future of finance is tokenized — it’s time we all get on board.