Tokenize All the Things: Why Tokenization Will Eat the World
Ever since 2017, when an earlier version of the Ethereum blockchain approved and implemented the ERC-20 token standard, we’ve been hearing about how the ability to attach tokens to real-world activity would eventually change the world.
Close to a decade has passed since then, and the core technology has been used for everything from the crowdfunding of start-ups, the production of digitally verifiable art, reward tokens, tokenized real estate, stablecoins, and much more. These efforts have experienced varying degrees of success, but the fundamental overturning of existing practices that was initially promised has, as yet, failed to materialize.
Crypto’s scaling journey has often been highlighted as one of the culprits, but also the nature of crypto bull and bear markets. As these cycles shift, great interest and massive amounts of capital are periodically replaced with zero media coverage, the withdrawal of investment, and a mainstream view that “crypto is finished.” Add to this the widely publicized excesses and downfalls of crypto businesses like FTX, and you can see how the space has tended to leave a sour taste in the mouths of many investors when the tide goes out.
Despite this, development has continued unabated throughout crypto summers and winters, as the space has continued to adapt to new challenges. These include a general move away from resource-intensive proof-of-work consensus to proof-of-stake by most smart contract chains like Ethereum, and the implementation of Layer 2 solutions that enable these chains to offer their services at scale.
In the early days, even the most innovative blockchain projects were criticized as being solutions looking for problems. Today, though, the same firms that crypto purists initially wanted to disintermediate, and that initially scoffed at the technology, are perhaps its staunchest backers.
A technology made for markets
As we’ve seen, the cryptographic science that underpins all blockchain tech can be harnessed for a myriad of applications. However, it was the marriage of cryptography with digital money in Bitcoin that proved to be its first killer app.
Similarly, while the next generation of smart contract blockchains offered a great variety of potential use cases, such as decentralized ride-sharing, direct-to-artist streaming revenues, and verifiable supply chain management, it was decentralized exchange, and the ability to earn a yield on crypto assets via decentralized finance (DeFi), that became the space’s second greatest success in recent bull markets.
Today, with the feasibility of low-cost transactions at scale via Layer 2 solutions, use-case-specific second-layer networks are being built on top of Layer 1 protocols like Ethereum. This allows businesses to create their own infrastructures that leverage the underlying chain’s decentralization and security characteristics, without suffering from limited block space, protocol latency, and costly transaction fees. The fact that once again it’s finance that appears to be seeing the greatest value potential in the technology should, by now, come as no surprise to anyone.
If we’ve learnt anything about crypto in the last decade, it’s that it works best in the online world with fungible assets. While it can be coupled to unique real-world assets (RWAs), and there’s a great deal of innovation taking place in that space, crypto gets more complicated when it has to come into contact with the messiness of the physical world.
In contrast, the trading of money, securities, and even fungible commodities like oil and gold, has been digital for almost as long as we’ve had computers (albeit with the backing of a vast bureaucratic infrastructure).
What appears to be happening now is that the disintermediation of the clunky centralized bureaucracies that underpin global finance is occurring from within those industries, rather than at a grass-roots level by decentralized rivals.
Tokenization is opening up new horizons for firms, whether it’s by offering securities to extra-jurisdictional traders without middlemen, or making the world of private equity available to individual investors. Additionally, token funds can offer all the flexibility and transparency of an ETF, with a mutual fund structure that can leverage blockchain to offer 24/7/365 secondary transfers, lower barriers to entry, fractionalization, and even instant collateralization.
So, while the tokenization of less liquid, non-fungible assets such as property and fine art is sure to be part of the tokenization story, the greatest inroads are currently being made in the world of finance, with underlying assets that are already traded digitally.
Tokenization projections
According to McKinsey, the market capitalization of tokenized assets could reach anywhere between $2-4 trillion by 2030. This would be driven by the tokenization of mutual funds, loans, and the emergence of alternative funds structured around tokenized assets.
According to estimations by BCG, if all existing mutual funds were to be tokenized, investors would stand to benefit from an additional $100 billion in returns. The management consulting firm also estimates that sophisticated investors taking intra-day positions could potentially generate a further $400 billion. The firm predicts that by 2030, the value of illiquid tokenized assets will reach $16 trillion.
Standard Chartered is even more optimistic than McKinsey and BCG in its appraisal of the market. The bank, which estimated the current total value of tokenized assets, excluding stablecoins, at around $5 billion early in 2024, predicts that tokenized real-world assets could be worth over $30 trillion by 2034.
In its 2024 annual survey, the Tokenized Asset Coalition revealed that 86% of Fortune 500 executives understand the advantages of tokenization, and that 35% of them are already engaged in bringing tokenization projects to market.
Who’s tokenizing what?
Back in 2022, BlackRock CEO Larry Fink hailed tokenization as “the next generation for markets, the next generation for securities.” In January of 2024, he was unambiguous in his projections for the future of the technology when he said: “We believe the next step going forward will be the tokenization of financial assets, and that means every stock, every bond… will be on one general ledger.”
In March of 2024, BlackRock launched BUIDL, a tokenized money market fund, on the Ethereum blockchain. The fund, which is available to accredited investors, invests in cash, US Treasuries, and repo agreements. Each token is designed to hold a stable value of $1, earns its investors a monthly yield, and can be instantly transferred to other users 24/7/365.
By holding the token, investors are able to use it as collateral to back trading activities on Crypto.com and Deribit. Crypto.com currently serves 140 million global users, and Deribit, which is the world’s largest crypto options exchange, is in the process of being acquired by Coinbase, which could open up a plethora of uses for the token on Coinbase’s broader network.
In August of last year, US investment management firm Franklin Templeton made FOBXX, its Nasdaq-listed US Government Money Fund, available to institutional investors in a tokenized form on Ethereum’s Arbitrum Layer 2 network. FOBXX is the third-largest fund of its kind, and the firm has been experimenting with making it available on more than one blockchain.
Meanwhile, tokenization is also being adopted for retail use cases, both by crypto exchanges and brokers. Coinbase, Kraken, Robinhood, and Gemini are all moving to offer tokenized real-world assets and other financial instruments facilitated by tokenization.
At the broker’s recent “To Catch a Token” event in Cannes, Robinhood announced that it’s making stock and ETF trading available to EU customers via tokenized versions of the underlying assets on Ethereum’s Arbitrum Layer 2, with a view to eventually running its tokenized offering on its own purpose-built Layer 2 network.
Robinhood has stated that tokenization reduces the friction and higher costs associated with trading US equities outside of the US, and also allows private equity to attract liquidity from a far wider group of investors. At the Cannes event, the broker gave a combined $1.5 million in SpaceX and OpenAI tokens away to participants.
Kraken also launched its own tokenized stocks in April of this year. Dubbed xStocks, the crypto exchange now offers tokenized versions of popular US stocks and ETFs to US customers and plans a gradual rollout in which these tokenized securities will also be made available to UK, EU, and Australian traders in due course. Kraken has opted to use the Solana blockchain for tokenization, but has stated that it will also explore the issuance of tokenized stocks on other blockchains.
Coinbase, which operates its own Ethereum L2 called Base, also recently announced that it’s building an “everything exchange” that aims to bring all assets on-chain, including stocks and prediction markets.
Crypto exchange Gemini is yet another venue that has recently added tokenized stocks to its roster of products. It has opted for a staggered rollout, in which new underlying symbols are periodically announced. The offering is being initially debuted for EU traders.
Crypto-friendly regulation
In July, the US Securities and Exchange Commission announced an initiative aimed at modernizing securities regulations to be friendlier to the trading of crypto assets. Titled “Project Crypto,” the effort is being spearheaded by the SEC’s new chairman, Paul Atkins, in order to “update antiquated agency rules and regulations to unleash the potential of on-chain software systems in our securities markets.”
He went on to state that: “Federal securities laws have always assumed the involvement of intermediaries that require regulation, but this does not mean that we should interpose intermediaries for the sake of forcing intermediation where the markets can function without them.”
This is as clear a statement as any the SEC has produced regarding its intentions to make blockchain technology the backbone of existing financial markets. When, in December of last year, President Donald Trump appointed the pro-crypto Atkins as head of the SEC, it was expected that he would bring an end to the regulator’s historical hostility to crypto and usher in a new period of growth in the space.
Atkins has also been vocally in favor of “super apps,” mirroring Chinese examples such as Alipay and WeChat that unite a variety of different services in one interface. Apps such as these have found it almost impossible to gain regulatory approval in the US, but it appears that this may be about to change.
Atkins is also an advisor to Securitize, one of the premier tokenization specialist firms in the US, which has helped BlackRock in the creation of BUIDL, its tokenized money market fund mentioned above. His appointment is part of a broader “America First” strategy that aims to invite crypto market activity back to US shores, where previous administrations have forced it offshore, and to guarantee that the US is a leader in all things crypto and blockchain.
Final Thoughts
Tokenization has evolved from a technology on the fringes, touted by crypto evangelists as the future of finance, to a technology that’s rapidly being adopted by regulated markets and normalized for both retail and institutional investors.
Currently, no clear standard has emerged, and interested firms are experimenting with a variety of different blockchain deployments. It’s uncertain whether one protocol will win, or whether we’re entering the multi-chain reality that many thought leaders in the crypto space have previously predicted.
It seems as though crypto, and the tokenization that the core technology permits, is gradually finding its way into the incumbent system that has long relied on outmoded reconciliation, clearing, and settlement practices.
Aided by a US administration that appears to want to get as many of these changes through while still in office, things are moving rapidly towards a 24/7/365 trading reality where assets are much easier to invest in, transfer, and collateralize across jurisdictions and venues.
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