Why Asset Tokenization Is Inevitable

The process of converting real-world assets into digital tokens is no longer a new development; it marks the beginning of a revolutionary period in asset management.

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The distinction between crypto-native tokens and tokenized RWAs is crucial. Crypto-native tokens, such as bitcoin and ether, are purely digital and serve as both a speculative investment, store of value, and a utility within their own ecosystems. Tokenized RWAs, on the other hand, bridge the digital and traditional financial worlds, effectively bringing liquidity and fractionalization to improve the accessibility of assets that were previously “less liquid.”

In March 2023, BlackRock introduced its inaugural tokenized fund, BUIDL, a short-term treasury fund for private investors. This event represented a major advancement in the realm of tokenization. Within its first month, BUIDL amassed nearly $300 million in assets. Moreover, with BlackRock being the world’s largest asset manager, their entry into tokenized funds indicates a strong belief that this technology will shape the future of financial markets. The category for tokenized government securities currently stands at around $1.2 billion, as evidenced by offerings such as BENJI from Franklin Templeton, BlackRock’s BUIDL, and USDY from Ondo Finance. Since the beginning of last year, this sector has experienced a remarkable growth rate of approximately tenfold.

At present, the market for on-chain Representable Assets (RWAs) amounts to $7.5 billion. Though this may appear insignificant compared to the vast pool of assets valued in the tens of trillions of dollars managed conventionally, the rapid expansion and broadening scope of tokenized assets — encompassing treasuries, commodities, private equity, real estate, private credit, and more — indicate a turning point. A BCG report published in 2022 projected that the market for tokenized assets could surge to $16 trillion by 2030. Consequently, Decentralized Finance (DeFi) platforms focusing on these assets will have the opportunity to build innovative financial ecosystems in sectors such as lending, liquidity pools, futures and derivatives, and others.

A vast amount of new wealth, equivalent to trillions of dollars, has been generated through online transactions. This group of investors, who are accustomed to the crypto world, desire seamless access to financial instruments and services directly from their digital wallets. These investors, often referred to as “crypto-natives,” have profited from a continually operating ecosystem that boasts lower entry thresholds than traditional financial institutions, which may be guarded by gatekeepers, exclusive memberships, and limited business hours. In some instances, these crypto-native investors can even outmaneuver traditional markets before they make their moves.

On the escalating geopolitical conflict between Iran and Israel on April 13, 2024, PAXG, a type of gold token, experienced a significant increase in value. The price of PAXG surged by 20% compared to its closing price the previous day, reaching this peak during the weekend’s end on Sunday, April 14. This price hike occurred simultaneously with gold’s market opening at 5pm ET, demonstrating that the basic tenets of risk management, crucial in conventional markets, are relevant to digital assets as well.

With blockchain technology comes the idea of “Bring Your Own Wallet” (BYOW), which signifies the freedom and control given back to individual investors. By eliminating the need for intermediaries in asset custody, investors can directly manage and swiftly access their assets, free from the limitations and delays typically associated with traditional financial institutions.

With an increase in assets being transferred onto the blockchain, asset managers may adopt new approaches to access fresh pools of liquidity and capitalize on price differences between on-chain and offline markets. This development makes it possible for asset managers to bring traditional investment methods onto the blockchain, enabling them to construct portfolios using established principles and manage their strategies in a digital currency environment. These innovations offer novel avenues for distribution to crypto investors.

Moving forward, the process of dividing assets into smaller units (tokenization) and applying crypto investment strategies will likely become common practice in asset management. This transition isn’t just coming; it’s already happening. Forward-thinking asset managers and investors who adapt to this change will create next-generation firms that cater to a new type of investor – one who brings their own digital wallet for storing and managing assets.