In order to understand how a technology is developing, it is important to get to know the view of the big players. Bank of America is one of the largest banks in the USA. In the latest report, they have presented their view on the topic of asset tokenization market.
The findings are mind-blowing! The topic now has an Market maturity and will create a 15-trillion dollar market. Welcome to the Token economy!
Bank of America published a detailed report on the status of tokenization in June 2023. This article summarizes the key points.
Here are the key takeaways:
- Traditional asset tokenization may reach $16 Trillion+, transforming infrastructure and markets over the next 5-15 years
- Tokenization enables efficiencies (faster, cheaper, simpler) and catalyzes a new generation of SaaS companies
- DLT/BCT (Distributed Ledger Technology/Blockchain Technology) is more than just crypto trading; institutional and corporate use cases are in production
Tokenization – an infrastructure evolution
We are on the verge of an infrastructure evolution that may reshape how value is transferred, settled and stored across every industry. Tokenization is just one DLT/BCT application, but this one application may transform financial and non-financial infrastructure and public and private financial markets over the next 5-15 years.* Disruptive innovations like the radio, television and email took 30 years to reach mainstream adoption. We expect a far shorter road for digital assets.
Efficiencies and reduced cost for every industry
FIs are increasingly leveraging DLT/BCT, smart contracts and tokenization to enable 24/7 real-time or customizable settlement; reduce credit risk; lower settlement, financing and operational costs; increase liquidity for previously illiquid assets; and allocate capital more efficiently. Corporates are leveraging the same technology to generate incremental revenues, automate manual processes, optimize supply chains, increase customer loyalty, offset contributions to climate change and combat counterfeiting. We expect DLT/BCT implementation to accelerate among FIs and corporates as the opportunity cost of uncaptured efficiencies increases.
TradFi and corporate adoption accelerates rapidly
FI and corporate tokenization use cases are diverse and expanding. Citi issued a tokenized LC to decrease processing time to 3 hours from 5-10 days. The EIB issued a tokenized €100mn bond with T+0 settlement. KKR and Hamilton Lane tokenized private equity funds to reduce minimum investments to $10k-$100k from $5mn.
Broadridge’s DLT platform settles $1.4tn a month of tokenized repos. Nike generated $93mn+ in secondary NFT sales by tokenizing royalty streams. Pharma companies are tokenizing supply chains to combat drug counterfeiting that results in a million deaths a year. The California DMV tokenized vehicle titles to reduce issuance to minutes from weeks.
Tokenized traditional assets aren’t “crypto”
Blockchains are a type of distributed ledger that allow open access to network data (public) and the network (permissionless). Memecoins receive outsized attention, but blockchains require tokens to reward network participants for processing transactions and to secure the network by ensuring participants have “skin in the game.” In contrast, distributed ledgers facilitate regulated FI and corporate use cases by restricting access to network data (private) and the network (permissioned). Distributed ledgers do not require tokens to reward network participants for processing transactions or to secure the network because participants already have “skin in the game” – their reputations.**
Welcome to the token economy
In the not-too-distant future, you may open an iPhone app to check the market value of portfolio holdings, which include tokenized dollars, Apple (AAPL) stock, corporate bonds, interest in a private equity fund, carbon credits, royalty rights to Rihanna and Diplo songs, interest in a diversified blue-chip art fund and tokens that power blockchain operating systems. You may sell 47.62765% of your private equity interest at 5:15pm to 20 different buyers through a liquid secondary market. We expect tokenized assets to become so ubiquitous that “token portfolios” will simply be referred to as “portfolios.”
Executive Summary – Tokenization Market
Tokenization – the transformation of global markets
Tokenization refers to the process of creating digital programmable representations of traditional financial and non-financial assets that can be exchanged and tracked on distributed ledgers or blockchains. We expect the tokenization of traditional assets to transform financial and non-financial infrastructure and public and private financial markets over the next 5-15 years. As we wrote in our Primer (see our 10/4 report), we are only in the first innings of a major change in infrastructure and applications that may reshape how value is transferred, settled and stored.
Our view is that the tokenization of traditional assets and issuance of assets in tokenized form have the potential to increase efficiencies and reduce costs across an asset’s lifecycle, improve the efficient allocation of capital, optimize global supply chains, catalyze a new generation of software-as-a-service (SaaS) companies and ultimately drive mainstream adoption. Disruptive innovations like the radio, television and email took 30 years to reach mainstream adoption, but we expect a far shorter road for digital assets.
“I actually believe this technology is going to be very important…I believe the next generation for markets, the next generation for securities, will be tokenization of securities.”
Larry Fink, BlackRock chairman & CEO, Nov 30, 2022
DLT and tokenized traditional assets aren’t “crypto”
Although some blockchains support the exchange and transfer of tokenized traditional assets, our view is that decentralization and lack of customization, data privacy and permissioned access to the network limit current financial institution and corporate use cases that require expanded scalability and regulatory compliance.
Blockchains are public, permissionless and require tokens
Blockchains are a type of distributed ledger that remove the need for some intermediaries, support trustless transactions, record network activity and token ownership data transparently (public) and allow open access to join the network (permissionless). Blockchains record ownership of the 26k+ tokens that exist within the digital asset ecosystem, but we expect 99% of those in existence today to essentially disappear over the next 10 years.
Memecoins like Shiba Inu (SHIB) and Pepe (PEPE) receive outsized attention, despite having no utility or intrinsic value, but other tokens are different. Public permissionless blockchains like Bitcoin, Ethereum (see our 4/6 report) and third-generation blockchains (see our 3/21 report) are decentralized and require tokens to reward network participants for processing transactions, but also to secure the network by requiring participants to have “skin in the game” that disincentivizes malicious behavior.
Distributed ledger customization expands FI and corporate use cases
In contrast, distributed ledgers provide customizable infrastructure for financial institution and corporate use ases that ensure regulatory compliance by restricting access to network activity and token ownership data (private) and preventing unknown entities from joining the network (permissioned).
Distributed ledgers still remove the need for some intermediaries, but also the need for tokens to reward network participants and secure the network. Network participants, which may be a consortium of financial institutions or corporates, are centralized and don’t require tokens to align incentives because they already have “skin in the game” – their reputations.
Disruption potential should not be ignored
Just as there was an explosion of simple to complex websites in the 1990s that altered how we shop and interact, in the coming years, we could see the tokenization and decentralization of many aspects of the economy. Distributed ledgers and blockchains provide back-end infrastructure, but some investors may underappreciate how this disruptive technology is powering an infrastructure evolution that may touch every industry.
We believe the lack of user-friendly front-end interfaces and a disproportionate focus on bitcoin, memecoins, regulatory headwinds and illicit activity are overshadowing the rapid development of real-world use cases that are in active production today.
“I was initially a crypto skeptic, but…I think crypto is here to stay and with proper oversight and regulation, it has the potential to greatly benefit society and grow the global economy.”
-Bill Ackman, Pershing Square Capital Management founder & CEO, Nov 20, 2022
We expect the tokenization of assets and funds within markets that are the least efficient and most intermediated to be tokenized first, and assets and funds within markets where the reverse is true to be tokenized last. Consultants expect the value of tokenized assets to reach 10% of global GDP ($16.1tn) by 2030.1 However, our view is that forecasting the value of tokenized assets over the next 10 years may signal tokenization’s disruption potential, but ultimately distracts from the largest transformation of infrastructure and markets in over 50 years, efficiencies that DLT/BCT enables and new products and applications that become economically viable.
“The unified ledger thus opens the way for entirely new types of economic arrangements that are impossible today due to incentive and informational frictions. The eventual transformation of the financial system will be limited only by the imagination and ingenuity of developers that build on the system, much as the ecosystem of smartphone apps has far exceeded the expectations of the platform builders themselves.”
BIS, Blueprint for the future monetary systems, Jun 20, 2023
Efficiencies and reduced costs drive accelerating adoption
Institutional investors and banks are increasingly leveraging DLT/BCT, smart (self-executing) contracts, tokenization and fractionalization to enable customizable settlement times; reduce credit risk; lower settlement, financing and operational costs; increase liquidity for previously illiquid assets; and more efficiently reallocate funds previously held as collateral to yield-bearing assets or rebalance portfolios with illiquid assets. DLT/BCT may also facilitate increased retail accessibility to alternative assets, as well as the creation of improved financial assets and applications, some of which were not economically viable previously (Exhibit 1).
Our view is that corporate DLT/BCT and tokenization use cases are potentially more diverse and expansive than financial institution use cases. In fact, over half of Fortune 100 companies have launched projects leveraging DLT/BCT since the beginning of 2020.2 Corporates across every industry are increasingly leveraging the same underlying technology as financial institutions to generate incremental revenues, lower costs by automating manual processes, optimize supply chains, broaden potential customer pools, increase customer loyalty, offset contributions to climate change, combat counterfeiting and appeal to Enviromental, Social and Governance (ESG)-focused customers and investors. Many companies with the greatest risk of disruption, or that fear a loss of market share, are proactively exploring how to enter the digital asset ecosystem and leverage its many use cases.
Welcome to the token economy
Tokenization is just one of many DLT/BCT applications, but we expect this one application to lead to new and more efficient primary and secondary markets for financial and non-financial products. In the not-too-distant future, institutional and retail investors may open an iPhone app to check the real-time market value of their portfolio holdings, which include tokenized dollars, Apple (AAPL) stock, corporate bonds and interests in a private equity fund and commercial building that’s located on a different continent. Portfolio holdings may also include carbon credits, rights to royalties generated from Rihanna and Diplo songs, interest in a diversified blue-chip art fund, bitcoin (BTC) and other tokens that provide holders with a call on cash flows and power smart contract-enabled blockchain operating systems.
Ownership of these (tokenized) assets will be immutably recorded on one of the 5-15 distributed ledgers or blockchains that survive consolidation, some of which are public (full data transparency for transactions since inception) and permissionless (anyone can join the network) and some of which are private and permissioned. Within the same app, you may fractionalize and sell 47.62765% of your interest in a private equity fund at 5:15pm EST to 20 different institutional or retail buyers (with whom you’ve never interacted) in a liquid secondary market with 24/7 real-time settlement and smart contracts performing anti-money laundering/know your client (AML/KYC) requirements. It’s difficult to overstate how transformative DLT/BCT, tokenization and the thousands of decentralized apps that have yet to be created could be.
“I could see a day in the not-too-distant future when a client’s portfolio is not 10% to 15% alternatives, but 50%.”
-Marc Rowan, Apollo CEO, May 5, 2022
The more things change, the more they stay the same
The digitization of financial assets began in 1971 when Nasdaq introduced infrastructure enabling the world’s first electronic stock exchange, but it wasn’t until 2001 that US stock markets fully transitioned to decimalization of asset prices, which drove smaller order sizes and heightened liquidity.3 However, 27% of settlement systems today still leverage legacy infrastructure that is over 20 years old.4 Today’s financial systems continue to be built on centralized (company-owned) and fragmented infrastructure that requires third-party intermediaries, which limits efficiencies, interoperability, innovation and functionality; increases time to settlement and costs; and prevents the efficient allocation of capital.
Why now for tokenization? Pilots reach maturity
Despite last year’s digital asset market correction (see our 12/2 report), financial institution, central bank and corporate interest remained, and industry development accelerated for private permissioned distributed ledgers and blockchains. Our view is that customizable distributed ledgers, blockchain subnetworks (subnets) and smart contracts have reached maturity and production after years of development.
In contrast to public permissionless blockchains, private permissioned distributed ledgers and blockchain subnets integrate separate systems into one and enable the efficiencies provided by distributed (shared) ledgers, but with enhanced functionality and reduced regulatory and reputational risk. We expect DLT/BCT implementation to accelerate as the opportunity costs of uncaptured efficiencies and reduced costs increase.
The next evolution of software has only just begun
Bitcoin’s blockchain launched 14 years ago, Ethereum’s launched eight years ago and the first decentralized applications launched seven years ago, but many of the newest blockchains and applications are less than three years old and remain early in their development roadmaps. However, distributed ledgers and blockchain subnets intended for institutional and corporate use cases are even more nascent than the newest blockchains and require time to mature, despite numerous use cases already executed and ongoing.