Crypto for Advisors: Tokenization of Real World Assets

In Ask an Expert, Carlos Domingo, the CEO of Securitize, discusses the reasons why investors are attracted to these assets in the present financial market.

– Sarah Morton

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Why Over $40 Billion in Tokenized Securities Should Be Considered for Investment Portfolios

This year, I’ve noticed a significant surge in interest towards tokenized assets like equities, bonds, investment funds, real estate, and asset-backed securities – often referred to as “real-world assets” within the crypto sphere. Financial heavyweights such as BlackRock, Hamilton Lane, JP Morgan, DTCC, and Broadridge are actively investigating these assets due to their operational advantages and unique return profiles that are becoming increasingly apparent.

What is the meaning of tokenization? Using blockchain technology, RWA tokens serve as digital equivalents of financial instruments mentioned earlier. Unlike cryptocurrencies, these digital assets adhere to global securities regulations. They operate on regulated platforms while taking advantage of decentralized finance (DeFi) applications for improved functionality and performance.

Why incorporate established, high-value investment funds onto blockchain platforms? Financial advisors might be interested in diversifying their clients’ portfolios with assets that offer superior returns. However, these funds often require substantial initial investments, like $5 million. Imagine if your clients could invest with a smaller sum, such as $20,000. More people would gain access to attractive risk-adjusted returns, advisors could manage their clients’ portfolios more precisely, and issuers could handle their investors more efficiently thanks to the benefits of blockchain technology. This approach could be applied to a wide range of assets, enabling customized portfolio management in an era where wealth transfer reveals diverse asset allocation preferences and risk profiles. This would also cater to younger generations who are keen to engage with the cryptocurrency market.

How do RWAs fare against cryptocurrencies? Can they deliver extreme profits like crypto? Not exactly, but they can contribute to portfolio stability for digital assets, provide access to niche asset classes that were difficult to access before, and add functionality to them, ultimately shaping a dynamic financial landscape.

According to STM’s RWA Securities Market Update – August 2024 report, a theoretical collection of all STM-monitored RWAs as security tokens outperformed the CoinDesk 20 Index (CD20) this month, with a gain of 3.03% compared to the CD20’s loss of 14.45%. In terms of its historical performance, this security token bundle has generally seen lower single-digit positive returns, while the CD20 has experienced both months with similar performance and those with double-digit declines. This pattern suggests the inherent volatility of the cryptocurrency market.

In the August 2024 analysis I conducted earlier, conventional markets kicked off with a downturn, fueled by the Nikkei’s plunge, rising unemployment rates, and concerns about an impending US recession, among other factors. This downward trend was mirrored in the crypto market initially, but it attempted to rebound throughout the month, only to dip again in the end. Interestingly, while some security tokens followed this pattern of loss, others demonstrated substantial growth, contributing positively to the overall performance of our investment basket. For a deeper dive into Risk Weighted Assets (RWAs), I encourage you to check out our most recent research report.

– Herwig Konings, CEO and founder, Security Token Market

Ask an Expert

What’s your prediction for the future development of the treasury market, which currently has over $2 billion in total value locked (TVL)?

The rapid expansion of the market is expected to persist due to the untapped opportunities in digital securitized government bonds, or tokenized treasuries. Unlike traditional finance where no one pledges dollars as security, there are twice as many treasuries as dollars, with a staggering $150 billion in stablecoins compared to just $2 billion in treasuries. This discrepancy is poised to change eventually. Leading crypto entities will likely start depositing a stable value fund, essentially a short-term tokenized government bond that generates income for the institution, instead of stablecoins where the profits go to the issuer. These digital securities are already being employed in treasury management by major crypto players. This trend is set to unlock new capabilities, boost adoption, and fuel the growth of both the fund and the market for tokenized treasuries.

Question: How might the demand for tokenizing various types of assets change if the Federal Reserve raises interest rates this month as anticipated?

When interest rates climb, investors tend to prefer keeping their funds in treasury bonds. After all, who wouldn’t choose an investment offering a 5% return with minimal risk over one with potential returns but significantly increased risk and liquidity concerns?

We expect interest rates to decrease over the next 12 to 18 months.

It’s important to remember that Interest rates are high and inflation is high too, so investors aren’t really earning the yield they think they’re earning because their dollars are being depreciated. When both rates and inflation come down, treasuries will still be valuable because it’s risk-free. Meanwhile, there will be demand for other fixed-income assets that are adjacent to treasuries on the risk curve. They offer higher yield and are still liquid, thus compensating for the drop in risk-free yields. Those types of asset classes, like private credit for example, will become the next trend in this tokenization wave.

– Carlos Domingo, CEO and co-founder, Securitize

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