Token adoption grows as more real world asset tokenization move onto the blockchain

Although critics dismissed much of the initial excitement around the tokenized real-world asset (RWA) market, the sector has boomed in the past year. Indeed, by the end of the decade, the tokenization of global illiquid assets is expected to grow to be a $16 trillion industry, according to the Boston Consulting Group.

Various asset categories are being tokenized and attracted investments, with recent data suggesting that the total value of tokenized real-world assets reached an all-time high of $2.75 billion in August. And although the metric has declined since then, it still hovers around a respectable $2.49 billion as of September 30.

In a joint survey conducted by the American banking behemoth BNY Mellon and the research and advisory firm Celent, 91% of institutional investors expressed interest in placing their money in tokenized assets, and 97% of respondents believe that tokenization will transform the asset management industry.

Matthijs de Vries, co-founder of AllianceBlock, a company that is building a decentralized tokenized marketplace, told that these types of statistics offer insight into the impact institutional-grade investments are having on the industry.

The tokenized real-world asset market is predicted to grow rapidly as a result of this trend, particularly as more liquidity enters the market. This will lead to a more sustainable bull market with less capital outflow at its peak," he added.

Why the sudden surge of interest?

From the outside, tokenization of real-world assets appears to be gaining momentum due to greater regulatory clarity in specific jurisdictions (such as Switzerland) and successful pilot projects.

De Vries said that unsustainable returns in decentralized finance (DeFi), which led to the collapse of many major cryptocurrency projects in 2022, have led investors to seek sustainable real returns, such as those available with tokenized real-world assets.

"Tokenized real-world assets are gaining popularity among investors who are looking for clear explanations for the source of these returns because they have unique return sources and are becoming more well-known among traditional players."

The real estate market is an area where tokenization has had a significant impact. According to estimates, it is the largest asset class in the world, worth approximately $613 trillion in 2023.

Between the first and third quarters of 2023, the value of chain-listed real estate grew by 102%, or approximately $90 million.

The aggregate value of the tokenized assets, which in some cases represent fractional claims on real estate, amounts to $178 million as of September 30. RealT, an issuer of tokenized real estate, has the majority of the market. Tangible, another issuer of real-world assets focused on real estate, saw the most growth among its peers. The total value of Tangible tokens skyrocketed from just under $100,000 to an impressive $64 million during the first three quarters of 2023.

Bernard Lau, co-founder and CEO of Labs Group, a blockchain-based real estate investment company, The real estate tokenization is probably the best use of this technology today. Due to its stability and tangible asset value, Lau believes real estate stands out from others as a very sound investment.

"The entry barrier kept a lot of low-income investors out of the real estate market in the past, he said. And since a lot of people were left out of this calculation, they turned to bond and stock investing. However, now that people can invest in fractions of houses, buildings or even resorts, more people can participate, fueling growth that we see in the market.

Beyond real estate investments

Although real estate tokenization has certainly been a popular use case, de Vries believes that this space could face numerous challenges in the future, mainly due to different laws and registrations in different jurisdictions. In his view, tokenization translates most fluidly within asset classes such as exclusive collectibles, diamonds, luxury watches, classic cars, securities and even carbon credits.

Furthermore, the influence of tokenization is also actively felt in the realm of traditional finance, especially in relation to popular instruments such as bonds, stocks and exchange-traded funds (ETFs). Adam Levi, co-founder of Backed, a tokenized real-world asset platform, told that this transition is natural:

"The market needs stable returns. In a bear market, fixed income products provide this. All over the world, interest rates are rising and everyone wants to take advantage of these returns with almost no risk. We have not seen much interest in tokenized stocks "Right now even though the S&P 500 is up about 17% so far this year. However, we have seen increasing demand for non-USD denominated fixed income products."

Angle Protocol recently launched the first yield-generating euro stablecoin through bC3M, a euro-denominated tokenized ETF.Likewise, Backed has expanded its financial offering to include three new products denominated in euros. “We are exploring sterling and Brazilian real denominated ETFs next,” Levi added.

Tokenization of US Treasury bonds

In recent months, the valuation of US Treasuries, bonds and tokenized money markets has risen sharply to an impressive $685 million . The appeal of tokenized Treasuries has been growing among digital asset aficionados, especially as the yield on U.S. government bonds, widely perceived as a risk-free interest rate, has surpassed the yields offered by most DeFi offerings.

In 2023 alone, the market has seen the arrival of several new players, such as OpenEden, Ondo Finance, and Maple Finance, each introducing their own blockchain technology-focused Treasury products aimed at savvy investors, digital asset companies, and decentralized autonomous organizations. .

Due to these rapidly emerging trends, researchers at Bernstein Private Wealth Management believe that by 2028, around 2% of the global money supply, through stablecoins and central bank digital currencies, could be tokenized, driving the valuation of the sector to $5 billion.

The companies UBS and JPMorgan in the tokenization of assets

This month, banking giants UBS and JPMorgan made big strides in asset tokenization, unveiling platforms to facilitate seamless interaction between traditional financial assets and blockchain technology. UBS, for example, announced the start of the live pilot of a tokenized open-ended company (VCC) fund under the name Project Guardian, led by Singapore's central bank.

This effort, part of a broad range of VCCs, aims to bring various real-world assets to the blockchain. UBS Asset Management, through its internal service UBS Tokenize, has already conducted a controlled pilot of the tokenized money market fund, engaging in activities such as redemptions and subscriptions to the fund.

According to Thomas Kaegi, head of UBS Asset Management in Singapore and Southeast Asia, the project is a crucial step in unraveling the complexities of fund tokenization, in hopes of boosting market liquidity and accessibility for clients.

JPMorgan launched its blockchain-based tokenization platform , the Tokenized Collateral Network (TCN), with asset management giant BlackRock among its initial customers. The platform, designed to transform traditional assets into digital equivalents, carried out its first operation by converting shares of a money market fund into digital tokens.

This pioneering transaction between JPMorgan and BlackRock saw assets transferred to Barclays Bank, which served as collateral for an over-the-counter derivatives exchange between the entities.

TCN, which passed its first internal test in May 2022, now has a growing customer and transaction portfolio, with the goal of accelerating traditional settlements on the blockchain. Tyrone Lobban, head of JPMorgan's Onyx Digital Assets, highlighted in a statement the platform's capacity to release funds for use as collateral in continuing transactions, thereby increasing efficiency.

More notable developments in space

Untangled Finance, a marketplace for tokenized real-world assets, recently launched on the Cello network after receiving a $13.5 million venture capital injection, led by London-based Fasanara Capital, to transfer tokenized private credits to the blockchain.

The platform, which is expected to expand into the Ethereum and Polygon ecosystem via Chainlink's Cross-Chain Interoperability Protocol, aims to raise the present value of $550 million of private credit on DeFi pathways toward the massive $1 trillion valuation of the traditional private credit market.

Additionally, at the end of 2022, asset manager WisdomTree launched nine tokenized digital funds , adding to the one that had already successfully started at the beginning of the year. The funds allow the transfer agent to maintain a secondary record of shares on the Stellar or Ethereum blockchains.

In February 2023, Hong Kong's central bank issued an inaugural $100 million tokenized green bond , earmarked for sustainable investments. The Swedish bank SEB and the French investment bank Crédit Agricole CIB decided to create a blockchain-based tokenized bond platform in April.

Finally, on September 8, the US Federal Reserve published a comprehensive working paper that delves into asset tokenization and risk-weighted assets. In summary, the document states that tokenization, like stablecoins, embodies five fundamental components: a blockchain, a reference asset, a valuation methodology, storage or custody, and redemption procedures.

Therefore, as more and more individuals, market entities and large investors continue to understand the immense technological and financial advantages that tokenized real-world assets possess, it will be interesting to see how this still nascent market evolves and grows.