New Infrastructure is Required to Realize Asset Tokenization Markets

By Miguel Buffara

The power of digital technologies has facilitated a more interconnected global market in ways that we couldn’t have imagined just a few decades ago. However, most institutions still rely on outdated financial technologies that are holding back markets from realizing their full potential. In an instantaneously connected world, most global markets are in limbo between a proverbial stone age and the digital era. Tokenization, though, is poised to act as a transformative force, capable of redefining the way assets are bought, sold, and traded.

Digital ledgers, powered by blockchain technology, have the capacity to usher in a new era of efficiency and accessibility in global markets, breaking down barriers and democratizing market participation. The proliferation of tokenized assets, from securities and bonds to real estate and fine art, promises an increasingly effective and streamlined financial ecosystem.

Tokenization not only brings enhanced market efficiency but also opportunities for a diverse range of new investors to enter into global markets, reshaping the future of finance. While the concept of tokenization has been widely discussed, its potential is now being realized as institutions embrace its benefits.

In 2023, significant advancements were made in applying blockchain technology to tokenize assets. Goldman Sachs settled a €100 million digital bond for the European Investment Bank, all on a private blockchain. On traditional financial rails, this transaction would have taken days to settle. When tokenized on the blockchain, it took only 60 seconds, and had the benefit of greatly improved security.

The United Nations, Bank of International Settlements, and the Hong Kong Monetary Authority pioneered “Project Genesis 2.0” in which they successfully created two prototypes for green bonds. The Hong Kong Monetary Authority also successfully completed the sale of the world’s first tokenized green bond which was worth over $100 million USD.

Two of the world’s most recognizable names in finance came together this year when BlackRock utilized JP Morgan’s Tokenized Collateral Network to convert shares from one of its money market funds into digital tokens. These tokenized assets were subsequently transferred to Barclays as collateral for an over-the-counter derivatives trade. Executives on both sides of the transactions stressed that this innovation can significantly reduce risk, especially during times of market volatility.

These advancements not only save time and capital but also improve transaction security. The potential for major financial institutions and investors alike is revolutionary, as it unlocks liquidity and invites new participants into the market.

report by Boston Consulting Group estimates that the global value of tokenized illiquid assets will reach $16 trillion by 2030, accounting for 10% of global GDP. This begs the exciting question, what will this tokenized economy look like?

The answer is a more open, efficient, and secure market than ever before.

Even with the convenience of digital banking apps, it’s important to acknowledge that markets are limited by outdated technology. One of the most outstanding issues faced by investors worldwide is the friction in financial infrastructure.

Investors today deal with problems like slow settlement times, liquidity issues, and information asymmetry. This friction stunts capital formation and restricts market access for many participants around the globe.

Asset tokenization is the solution to this friction.

Blockchains offer unmatched accuracy, security, and speed in record-keeping technology. By eliminating intermediaries, streamlining compliance and regulation, improving clearing and settlement times, enhancing security, and facilitating global participation, this technology can eliminate many burdensome costs.

In addition to reducing friction, tokenizing assets also allows fractionalization, which means splitting high-value assets into smaller, more tradable units. This effectively lowers the cost barrier for participants to invest in assets that they would traditionally be priced out of.

Fractionalization is commonly used in traditional real estate or fine art investment. Imagine owning a piece of a Picasso painting, or a part of a Beverly Hills mansion, or even a private jet. The possibilities are endless.

There is no ceiling for how wide reaching the effects of this technology can be. Just a few weeks ago, Larry Fink, CEO of Blackrock, commented that “ETFs are step one in the technological revolution in the financial markets,” he said. “Step two is going to be the tokenization of every financial asset.” The playing field is being set, and all the world’s most preeminent asset managers are looking for ways to update the technology upon which they operate like never before.

It is an exciting moment for technologists, economists, and investors alike as new technologies and financial institutions are collaborating to bring financial infrastructure into the digital age. This achievement is no small feat and the benefits will reverberate through markets and bank accounts for many years to come.

About Miguel: 

As the Lead Financial Engineer and Core Contributor at RACE, Miguel skillfully merges his technical expertise with financial knowledge to create robust frameworks for investor onboarding, governance, and tokenomics modeling. His financial career began at Bank BOCOM BBM in 2019 as a distressed credit research analyst, paving his path into investment management. Miguel’s pivotal role at Metrix and Apollo Partners, particularly at Apollo Partners recognized as the first on-chain vault in Optimism and a frontrunner in the blockchain fund space, involved managing a groundbreaking quant crypto fund using on-chain data to model investor behavior and evaluate protocol fundamentals, thereby enhancing risk management and asset selection. This experience proved invaluable as Miguel ventured into the decentralized finance sector, applying his comprehensive traditional finance background to innovate in user onboarding and investor behavior modeling, cementing his reputation as a visionary in financial technology.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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