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Tokenization empowers investors and shocks Wall Street
Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of the crypto.news editorial.
“The Times They Are-A Changin”: This classic opening line from one of Bob Dylan’s catchiest songs has become the most appropriate statement when talking about contemporary patterns of asset holding.
A detailed market study conducted by one of the big four accounting firms, Ernst&Young (E&Y), last year highlighted a significant increase in allocation to digital assets and interest in tokenization. The report revealed that institutional investors are becoming increasingly confident in the long-term value of blockchain and digital assets. According to the E&Y survey, 57% of institutional investors expressed interest in investing in tokenized assets, with 93% of respondents believing in the long-term value of blockchain or digital technology and digital assets.
Interestingly, not only were they eager to tokenize assets, but most had a clear strategy on how to proceed. For example, 71% of institutional asset managers surveyed intended to tokenize their assets through partnerships with digital native or tokenization companies. Meanwhile, 21% planned to build infrastructure in-house and 5% were looking forward to acquiring a tokenization startup.
What benefits do these experienced fund managers see that compel them to plan tokenization so meticulously?
The empowering potential of tokenization
In one of them explainers, McKinsey & Company defines tokenization as the “process of issuing a digital, unique, anonymous representation of a real thing.” On a practical level, tokenization requires a blockchain on which to carry out the process. Institutional investors show a marked preference for publicly licensed blockchains for tokenizing their assets, followed by private chains (40%) and public chains (22%).
One of the most appealing aspects of tokenization is its inclusiveness, allowing a wide range of assets to be tokenized. These include real estate, art, bonds and stocks, intellectual property, and even identities and data.
There are numerous examples of real-world assets being tokenized and becoming available to an expanded base of new customers and investors. Consider gold, for example, which has long been one of the most reliable assets throughout human history. Last year, the combined market capitalization of tokenized gold assets passed $1 billion.
Tokenized gold involves physical gold bars whose ownership rights are stored as digital tokens on a blockchain. While physical gold remains in safe custody off-chain, protected by financial institutions, those offering tokenized gold mint digital tokens on a blockchain to indicate ownership rights to physical gold bars or coins. Equivalence, such as an on-chain token representing one gram of physical gold stored off-chain, is determined by the issuing company.
Many companies now offer tokenized gold coins. For example, New York-based fintech firm Paxos Trust Company offers Pax gold coins (PAXG), while well-known blockchain entity Tether offers Tether gold coins (XAUT).
Like gold, art is another asset class that has enthusiastically embraced tokenization. For example, in April 2023, a soon-to-launch blockchain platform, Freeport, declared that it had completed its SEC review and was ready to launch its tokenized art platform featuring four iconic Warhol collectors, including the legendary Baby Jane Holzer. While the platform didn’t resist, it made a helpful observation in its press release; It She said:
“Blockchain technology has opened access to unique investment opportunities that were once out of reach of the average retail investor, especially today’s younger generations. However, in the case of fine art, the entry threshold remains too high for everyday retail investors, preventing them from participating in an investment class that has outperformed the S&P 500 Index for the past 25 years and is often insulated from broader market conditions.”
Freeport was right on target. The world has already witnessed Sygnum Bank’s tokenization of Pablo Picasso’s 1964 masterpiece, Fillette au Beret, which allowed 50 investors to collectively own the artwork through 4,000 tokens. Further exemplifying this shift, renowned artists such as Damien Hirst and celebrated digital artist Beeple have done so participated the growing chorus of successful painters to embrace tokenization.
As this trend accelerates, tokenization of real-world assets is transforming several other asset classes. Second According to the Boston Consulting Group, the total size of tokenized assets, including those considered less liquid, such as real estate and natural resources, could exceed $16 trillion by 2030.
Tokenization of global illiquid assets by 2030 | Source: Boston Consulting Group
But what is behind this massive surge in value? How is it becoming possible that such a new technology as blockchain can unlock trillions in untapped liquidity? Several factors are driving the growth of this market.
The factors that make asset tokenization successful
One of the main factors that make asset tokenization an immediate winner is its potential to make asset holding more democratic, fair and inclusive. These are the intrinsic properties of the blockchain, which imagines a world free from prohibitive and burdensome intermediaries. This vision extends perfectly to the field of tokenization of real-world assets.
Take, for example, artistic precious metals or high-value real estate, which are generally out of reach of the average retail investor. Thanks to fractional ownership through digital tokens, investing in such assets has become more accessible. Imagine 50 investors collectively purchasing a Picasso masterpiece or shares in a luxury property. Tokenization democratizes the process, allowing buyers to own a slice of something extraordinary.
This innovative approach operates through automated smart contracts within the systematic framework of blockchain protocols, powered by cryptographically secure tokens. It effectively dismantles the monopoly of brokers, from local real estate agents to the top investment figures who sit and dictate the market from their swanky offices on Wall Street. Now, retail investors no longer need their services. They can invest comfortably from home, equipped only with a digital wallet and an internet connection.
Tokenized assets and the potential for democratic ownership also lead to improved price discovery and reduced costs. In return, the market can reach a whole new group of investors who were hesitant to invest in asset classes like art or luxury real estate. As a result, liquidity increases manifold.
Asset holding, particularly in categories such as real estate, has often been plagued by fraud. Statistically speaking, one in ten Americans have done so state a target of real estate fraud, with half of these victims even suffering financial losses. Such a scale of real estate fraud is alarming. After all, this translates into annual financial losses worth $446 million, with average consumer losses due to real estate fraud reaching $70,000 per incident.
Asset tokenization brings greater transparency and much tighter security to the system. The confluence of blockchain, smart contracts and decentralized oracle networks reduces reliance on intermediaries. It becomes much easier to verify the authenticity of tokenized property as it comes with immutable ownership records stored on a blockchain ledger. These logs make provenance tracking possible and come with verifiable data trails.
Investing in tokenized assets is also more efficient. Programmable smart contracts help simplify the backend and make the process free from potential administrative errors. Therefore, it is no wonder that tokenization is on the rise. Who wouldn’t want a more democratic, efficient, inclusive and cost-effective investment environment?
The future of tokenization: innovation and ingenuity
As the market is expected to grow to billions of dollars in the coming years, it will attract innovation and creative solutions. Interoperability plays a crucial role, bringing isolated systems together under a single operational paradigm, improving scalability, transparency and efficiency with enterprise-grade infrastructure and programmable logic.
Tokenization is spreading rapidly in several areas, including the financial services sector, where cash tokenization is gaining momentum. McKinsey & Company estimates that $120 billion of tokenized cash is in circulation in the form of fully reserved stablecoins. In a world grappling with climate change and global warming, carbon credit tokenization offers an innovative solution. These tokens contain all the information and functionality of the credits within them.
Carbon credits can now be issued natively on-chain, making their attributes public. This transparency encourages greater acceptability and adoption, and these credits are transferable onto the blockchain via carbon bridges. These bridges can eventually be connected to traditional registries such as Verra and Gold Standard.
The potential of tokenization goes beyond empowerment. Anyone with a digital wallet can participate, regardless of their financial situation. Tokenization has democratized access to high-value assets that were once just ambitions, such as a lucrative real estate or an art masterpiece.
Previously, such assets could only be admired from afar by most investors. Now, through tokenization, investors can own a portion of these assets, even if only partially, and exploit their exceptional growth potential.
This means that an empowered, intermediary-free class of investors can now optimize their returns and explore their opportunities as broadly as possible, depending on the asset classes they are interested in.
Cloris Chen
Cloris Chen is the CEO of Cogito Finance, a defi platform that offers institutional-grade investment products by tokenizing fixed income assets and equities. Cloris combines a banking background with practical experience in the financial sector. He spent six years at HSBC and served as treasury director for a unicorn startup. This diverse CEO experience helps Cogito address defi challenges such as unsustainable yield farming, credit risk and regulatory uncertainty through tokenization. As a partner of SingularityNET, Cogito leverages Ben Goertzel’s expertise in artificial intelligence for business processes, including portfolio management.