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The growth of tokenized financial products likely represents the tip of the iceberg, as the world’s biggest financial players continue to investigate the potential of blockchain technology.
This interest could lead to the proliferation of on-chain funds that might challenge the dominance of stablecoins, according to Colin Butler, Polygon Labs’ head of institutional capital.
Franklin Templeton launched its OnChain US Government Money Fund in 2021. It uses the Polygon and Stellar blockchains to process transactions and record share ownership.
BlackRock debuted its own tokenized offering — the USD Institutional Digital Liquidity Fund — on the Ethereum Network in March. The world’s largest asset manager then led a funding round by Securitize, a firm focused on bringing physical and traditional financial assets onto the blockchain.
The BlackRock and Franklin Templeton funds had amassed $375 million and $368 million in assets under management, respectively, as of April 30.
Their future asset growth will depend on how investors use them, Butler noted.
Franklin Templeton got regulatory approval to allow institutional investors to transfer shares of its on-chain fund to other shareholders.
“What you could do is have a venture capital firm on one side sending yield-bearing digital assets to one of their crypto-native portfolio companies that don’t have banking relationships,” he said. “That’s one idea; I don’t know what sort of adoption that receives.”
Read more: A stablecoin with yield? Tokenized fund perhaps just the start for fund giant
The stablecoin market is currently sized at about $160 billion. But unlike the Franklin Templeton fund, for example, stablecoins don’t offer users a yield.
“To the extent you can make them more permissionless and fit certain use cases, I can see these products chipping away at that existing [total addressable market], let alone the future TAM,” Butler said.
Keep reading for more excerpts from Blockworks’ interview with Butler.
Blockworks: What sorts of conversations are financial institutions having with blockchains as they mull their presence in the tokenization space?
Butler: Trust and credibility are the most important factors for any Wall Street transaction. The entity looking to collaborate really needs to understand that the chain doesn’t go down.
Virtually 100% reliability is what they’re looking for, because you can’t have a transaction just kind of disappear and fall through the cracks.
When you’re a big player thinking of coming on-chain, you also have to think about future-proofing your solution. Because if you spin something up that’s kind of a sandbox or walled garden, and there’s no future connectivity, then you have a product that’s limited in scope and you’re going to have to re-engineer everything at some point.
Read more from our opinion section: The future of tokenization? Permissioned blockchains
Blockworks: How might BlackRock’s entrance into the tokenized fund space affect how others move ahead here?
Butler: They are a thought leader, a technology leader and an innovation leader, and so when they make an action there tends to be a lot of replication.
You should just assume that almost everybody in the top 20 globally [in assets under management] has a plan for blockchain adoption. I can’t tell you when those plans will be realized, but there’s only — from my personal knowledge — one or two of the top 20 that aren’t really materially invested…without a team or a roadmap.
When BlackRock comes, it accelerates the plans for all of these other players because now they know they have air cover to do it.
And each one has a different angle on it. It’s not just BlackRock did this and now everybody replicates. Everybody’s looking to do something slightly different or build on what’s been done before, because nobody wants to be the third fund to do the exact same thing.
But broadly speaking, fund tokenization on blockchain is a huge conversation at most of the large players.
Blockworks: Private markets investment firm Hamilton Lane and hedge fund manager Brevan Howard have tokenized funds on Polygon. Do you expect more where that came from?
Butler: Longer term the vision is for everybody from banks to large RIAs, and everyone in between, to distribute these tokenized assets.
Why it’s interesting is that these assets are not available in any other format. So they’re going to go with both hands after that, because it enables a growth trajectory that they currently don’t have.
There’s deep financial incentives for the providers of financial products and the distributors, such as banks, to participate in this new ecosystem. That’s why people are so motivated to participate and come on-chain.
Blockworks: What do you make of the latest effort by Visa, Mastercard, JPMorgan, Citigroup and others aimed at using a shared ledger technology to settle tokenized assets?
Butler: Many of the players listed in that announcement have been working on this for so long. I would say mentally they’ve been very serious about it for the last two years, and to me, it takes about two years to get to the point of approval for production use cases at major financial institutions.
That’s why I think that while you may have seen announcements similar to this maybe two years ago, qualitatively it’s very different because of the stage that a lot of the global financial institutions are at internally.