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What cryptocurrency investors should know as tokenization affects all assets
Tokenization is rapidly arriving for all financial assets
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In addition to the innovation and wealth creation that blockchain and cryptoassets have created and spread across the world and financial markets, these technologies and assets have also spurred renewed debate about how markets and payments will evolve in the future. In the United States, in particular, there appears to have been a renewed vigor in these conversations as the presidential election approaches, but this misses the larger point. The benefits of blockchain and tokenized payments – faster, instantaneous and cheaper transactions and recordkeeping – are evident to both individuals and institutions. What comes next in these conversations, the tokenization and digitization of all assets, represents a significant step forward for blockchain, cryptoassets, and tokenization opportunities in general.
It’s also worth noting the estimated size of this opportunity; despite all the promise and reality of cryptoassets, that market remains much smaller than TradFi assets and markets. Tokenization of such assets has the potential to change this; Blackrock estimates – and invests – the programs to be implemented $10 trillion of value in the tokenization of real-world assets (RWA). Even with such investment and appetite, however, there needs to be some sort of regulation or barriers that will help these efforts succeed as advertised.
This is why the recent hearings of tokenization of RWAs they are so important to cryptocurrency investors and supporters in general and have several implications for the future of the space.
Tokenization has arrived in DC
With the Financial Services Committee that just took place hearings on this topic, it is worth understanding 1) what the significance of these hearings is and 2) what these hearings indicate for political interest and interest in tokenized assets in general. A substantial portion of the hearing will be discussion of the “Tokenization Report Act of 2024” (H.R. 8464). This act requires the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the National Credit Union Administration Board to jointly submit a comprehensive report focused on asset tokenization.
It remains to be seen how far these hearings, the proposed actions, or any future such efforts will go, but the fact that these hearings are taking place should be cause for optimism. Considering the recent congressional action on SAB 121, the passage of FIT21 in the House, and the general shift towards more pro-innovation and pro-cryptocurrency sentiment, it seems clear that cryptocurrencies have firmly entered the mainstream of political debates.
Financial advisors will put the tokenized assets to work
Starting with ETF trading in the United States, there is an ongoing dialogue about how soon or how quickly financial advisors and other investment professionals will begin recommending or allocating funds towards cryptoassets. While still grappling with the volatility and regulatory ambiguity that continues to exist and drive debate in the tokenized asset space, there are facts that continue to make bitcoin and other cryptoassets attractive to investment advisors.
Search from Coindesk reveals that 1) Bitcoin has outperformed large- and small-cap stocks, Treasuries, investment grade bonds, as well as gold and REITs in nine of the last twelve years. Furthermore, bitcoin’s correlation with all other major asset classes has been less than 25%, with a 1% allocation improving returns by 0.67% over the past 11 years. Important in this context is that investors (and advisors) should not assume that bitcoin and cryptoassets will generate overly optimistic returns, but can actually invest in cryptoassets even as a neutral investor.
Tokenization will change financial markets
The trend towards tokenization is taking on an air of when versus if, and this transformation will change the way financial markets work and how investors interact with financial products and services. The biggest change that will come from the tokenization of financial assets in general will be the speed with which transactions and negotiations are settled and finalized. Accelerating the speed of transactions will benefit institutions by reducing costs and freeing up capital for other ventures, while individuals will benefit from the instant nature of tokenized transactions. Entrepreneurs of all sizes, but especially small and medium-sized businesses, will see lower transaction processing costs and faster access to customer payments.
Wider conversations around tokenization will also help accelerate and adopt cryptoassets more broadly. An ongoing problem and barrier to wider, mainstream adoption – as well as a somewhat inaccurate perception of volatility – revolves around the terminology used by proponents and the lack of understanding of quantitative benefits. Regardless of what form tokenization ultimately takes, the fact is that tokenization and the greater integration of blockchain into financial markets increasingly looks like the future of financial markets and transactions.
Tokenization is becoming mainstream and all market participants should take note.