The Development of Tokenization
In countries like Thailand and the Philippines, the issuance of tokenized bonds has allowed small-scale investors to participate through decentralization.
Although the current advantages of tokenization primarily lie in the issuance process, the end-to-end lifecycle of tokenized bonds can improve operational efficiency by at least 40% through data clarity, automation, embedded compliance (e.g., coding transferability rules into tokens), and streamlined processes (e.g., asset intermediation services). Additionally, cost reduction, faster issuance, or asset fractionalization can improve funding for small issuers by implementing “real-time” financing (i.e., optimizing borrowing costs by raising specific amounts at specific times) and utilizing a global pool of capital.
5.4 Repurchase Transactions
Repurchase agreements (Repo) are an example of tokenization adoption and its benefits. Broadridge Financial Solutions, Goldman Sachs, and JPMorgan currently engage in trillions of dollars’ worth of repo transactions each month. Unlike some tokenization use cases, repo transactions do not require tokenizing the entire value chain to achieve real-world benefits.
Tokenizing repos primarily enhances operational and capital efficiency for financial institutions. On the operational side, smart contract-supported executions enable automation of daily lifecycle management (e.g., collateral valuation and margin top-ups), reducing system errors and settlement failures while simplifying reporting. On the capital efficiency front, 24/7 real-time settlement and on-chain data analytics can meet intraday liquidity requirements through short-term borrowing, simultaneously enhancing collateral to improve capital efficiency.
Historically, most repo agreements had terms of 24 hours or longer. Intraday liquidity can reduce counterparty risk, lower borrowing costs, enable short-term incremental borrowing, and decrease liquidity buffers.
Real-time, round-the-clock, cross-jurisdictional collateral flow in tokenized form can provide channels for higher-yielding, high-quality liquid assets and optimize their availability among market participants.
Wave After the First Wave of Tokenization
The tokenization market is steadily progressing and is expected to accelerate with the strengthening network effects. Given its characteristics, certain asset classes may enter the phase of meaningful large-scale adoption faster, with tokenized asset values exceeding $100 billion by 2030.
McKinsey predicts that the first asset classes to be tokenized will include cash and deposits, bonds, mutual funds, ETFs, and private credit. Cash and deposits (stablecoin use cases) already have high adoption rates due to the efficiency and value proposition brought by blockchain technology, as well as higher technical and regulatory feasibility.
McKinsey estimates that by 2030, the tokenized market value of all asset classes may reach around $20 trillion, with pessimistic and optimistic scenarios ranging from approximately $10 trillion to $40 trillion, primarily driven by the following assets. This estimation does not include stablecoins, tokenized deposits, and central bank digital currencies (CBDC).
Citi previously projected in its report “Money, Tokens, and Games: The Next Billion Users and Trillion-Dollar Value of Blockchain” that, excluding tokenized cash, the tokenization market would reach $5 trillion by 2030.
The first wave of tokenization, as described earlier, has accomplished the daunting task of achieving widespread market adoption. The tokenization of other asset classes will only be possible after the foundation is laid by the previous wave of asset tokenization or with the emergence of clear catalysts.
For several other asset classes, adoption may be slower either because the expected returns are only incremental or due to feasibility issues, such as challenges in meeting compliance obligations or lack of incentives for key market participants. These asset classes include publicly traded and non-listed equities, real estate, and precious metals.
How Financial Institutions Should Respond
Regardless of whether tokenization is at a turning point, a natural question arises: How should financial institutions respond to this moment? The specific timeframe and ultimate adoption of tokenization are still unclear, but early experiments by institutions with certain asset classes and use cases (e.g., money market funds, repos, private funds, corporate bonds) suggest that tokenization has the potential to scale up within the next two to five years. Those who wish to secure a leading position in this ecosystem may consider the following steps.
7.1 Reexamine the underlying business case
Institutions should reevaluate the specific advantages and value propositions of tokenization, as well as implementation approaches and costs. Understanding the impact of higher interest rates and volatile public markets on specific assets or use cases is crucial for correctly assessing the potential benefits of tokenization. Similarly, continuously exploring the landscape of providers and understanding early applications of tokenization will help refine estimates of the technology’s costs and returns.
7.2 Build technology and risk capabilities
Regardless of where existing institutions stand in the value chain of tokenization, they will need to build up knowledge and capabilities to embrace the new wave. The first and most important step is to establish a fundamental understanding of tokenization technology and its associated risks, particularly regarding blockchain infrastructure and governance responsibilities (who can approve what and when), token design (restrictions on assets and enforcement of these restrictions), and system design (decisions regarding ledger and record keeping locations and their impact on the nature of asset holders). Understanding these foundational principles will also help maintain proactivity in subsequent communications with regulatory bodies and clients.
7.3 Build ecosystem resources
Given the currently fragmented nature of the digital world, institutional leaders must timely develop an ecosystem strategy to integrate it into other (traditional) systems and partners to maintain a competitive advantage.
7.4 Engage in standard-setting
Finally, institutions aspiring to take a leading position in the tokenization field should maintain communication with regulatory bodies and provide opinions and recommendations on emerging standards. Some examples of key areas to consider for standardization include controls (i.e., appropriate governance, risk, and control frameworks to protect ultimate investors), custody (what constitutes qualified custody of tokenized assets on private networks, when to use digital twins vs. digital native records, what constitutes good control locations), token design (support for token standards and related compliance engines), and blockchain support and data standards (which data should be kept on-chain vs. off-chain, reconciliation standards).
The Path Forward
Comparing the current state of the tokenization market to other significant paradigm shifts in technology suggests that we are still in the early stages of the market. Consumer technologies (e.g., the internet, smartphones, and social media) and financial innovations (e.g., credit cards and ETFs) typically experience the fastest growth in their first five years (over 100% annually). Afterwards, we see the annual growth rate slowing to around 50% and eventually achieving a more moderate compound annual growth rate of 10% to 15% after more than a decade.
Although tokenization experiments began as early as 2017, it was only in recent years that we witnessed a significant issuance of tokenized assets. Based on McKinsey’s estimates for the tokenization market in 2030, the average compound annual growth rate for all asset classes is projected to be 75%, with the asset classes that emerged in the first wave of tokenization taking the lead.
While it is reasonable to expect that tokenization will drive the transformation of the financial industry in the coming decades and mainstream financial institutions are already actively participating, such as BlackRock, Franklin Templeton, and JPMorgan, more institutions remain in a “wait and see” mode, awaiting clearer market signals.
We believe that the tokenization market is at a critical juncture, and once we see some significant signs, the process of tokenization will rapidly advance. These signs include:
Infrastructure: Blockchain technology supporting trillions of dollars in transaction volume;
Integration: Seamless interconnectivity of blockchain for various applications;
Enablers: Widespread availability of tokenized cash (e.g., CBDCs, stablecoins, tokenized deposits) for instant settlement transactions;
Demand: Buyer participants’ interest in large-scale investments in on-chain investment products;
Regulation: Actions that provide certainty and support a fairer, more transparent, and more efficient financial system across jurisdictions, clarifying data access and security.
While we still await more catalysts, we anticipate that the wave of large-scale adoption will follow closely behind the first wave of tokenization as described earlier. This will be led by financial institutions and market infrastructure participants working together to capture market value and establish a leading position.
Reference:
[1] Tokenization and Unified Ledger: Blueprint for the Future Monetary System
[2] From ripples to waves: The transformational power of tokenizing assets
[3] Tokenization: A digital-asset déjà vu
[4] What is tokenization?
[5] Coinbase, The State of Crypto: The Fortune 500 Moving Onchain
