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On top of 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 a renewed conversation around how markets and payments will evolve moving forward. In the United States, especially, there has seemingly been a renewed vigor to these conversations as the Presidential election looms closer, but that misses the broader point. The benefits of blockchain and tokenized payments – faster, instantaneous, and cheaper transactions and record keeping – are evident to both individuals and institutions alike. What comes next in these conversations, the tokenization and digitization of all assets, represents a significant step forward for blockchain, cryptoassets, and the opportunities of tokenization in general.
Also worth noting is the estimated size of this opportunity; for all of the promise and reality of cryptoassets that marketplace remains much smaller when compared to TradFi assets and marketplaces. Tokenization of said assets has the potential to change that; Blackrock estimates – and is investing in – programs to realize up to $10 trillion of value in real world assets (RWA) tokenization. Even with such investment and appetite, however, there is a need for some sort of regulation or guardrails to help these efforts succeed as advertised.
This is why the recent hearings on the tokenization of RWA are so important for crypto investors and advocates at large, and hold several implications for the space going forward.
Tokenization Has Come To D.C.
With the Financial Services Committee just having recently held hearings on this topic, it is worthwhile understanding 1) what the significance of these hearings are, and 2) what these hearings indicate for the political interest and appetite for tokenized assets at large. One substantial component of the hearing will be a discussion of the “Tokenization Report Act of 2024” (HR 8464). This act mandates that the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the National Credit Union Administration Board jointly submit a comprehensive report focusing on asset tokenization.
It remains to be seen how far any of these hearings, proposed acts, or any future such endeavors ultimately go, but the fact that these hearings are happening should be cause for optimism. Given recent Congressional action on SAB 121, the passing of FIT21 in the House, and the general pivot toward a more pro-innovation and pro-crypto sentiment it seems apparent that crypto has moved decidedly to the mainstream of policy debates.
Financial Advisors Will On-Ramp Tokenized Assets
Starting with the trading of ETFs in the United States there has been an ongoing dialogue regarding how soon or how rapidly financial advisors and other investment professionals would start to recommend or allocate funds toward cryptoassets. While still dealing with the volatility and regulatory ambiguity that continues to exist and drive discourse in the tokenized asset space there are facts that continue to make bitcoin and other cryptoassets attractive to investment advisors.
Research from Coindesk reveals that 1) bitcoin has outperformed large-cap and small-cap equities, treasury bonds, investment grade bonds, as well as gold and REITs in nine out of the last twelve years. Additionally, the correlation of bitcoin with all other major asset classes was than lower than 25%, with a 1% allocation improving returns by 0.67% over the last 11 years. Important in this context is that investors (and advisors) need not assume that bitcoin and cryptoassets will generate overly optimistic returns, but can actually allocate to cryptoassets as even a neutral investor.
Tokenization Will Change Financial Markets
The trend toward tokenization is taking on an air of when versus if, and this transformation will change how financial markets function as well as how investors interact with financial products and services. The largest single change that will occur from the tokenization of financial assets at large will be the speed with which transactions and trades are settled and finalized. Accelerating the speed of transactions will benefit institutions by lowering costs and freeing up capital to deploy to other initiatives, with individuals benefitting from the instantaneous nature of tokenized transactions. Business owners of all sizes, but especially small to mid-size businesses will see lower costs for processing transactions and faster access to customer payments.
Wider conversations around tokenization will also help the acceleration and adoption of cryptoassets more broadly. An ongoing issue and obstacle to wider and more mainstream adoption – in addition to somewhat inaccurate perceptions of volatility – center around the terminology used by advocates and a lack of understanding of quantitative benefits. Regardless of what form tokenization ultimately assumes the fact is that tokenization and increased integration of blockchain into financial markets increasingly look like the future of financial markets and transactions.
Tokenization is hitting the mainstream, and all market participants should take note.