Tokenization of real-world assets like stocks, bonds, carbon credits and more is fast becoming the driving force behind many of today’s most innovative businesses. Because these assets are stored on a blockchain, the benefits of transaction speed, liquidity, cost-savings and round-the-clock access have made it one of fintech’s most promising blockchain use cases.
Building on an early wave of adoption in art and gaming, the process of representing real-world assets such as financial instruments or real estate as digital assets on a blockchain is gaining momentum across a wide range of industries. Boston Consulting Group predicts real-world asset tokenization will be a $16 trillion industry by 2030. And Bank of America has already reported that the tokenized gold market is now more than $1 billion.
Global financial leaders agree; an impressive 72% of participants in Ripple’s 2023 New Value report survey expect to use tokenization in their businesses over the next three years. A new visualization from that same report shows 80% believe the technology will significantly impact the trading of assets, real estate transactions and derivatives, and carbon markets.
Growing range of tokenization use cases
At its core, tokenization helps unlock liquidity from even the most illiquid asset classes. In particular, New Value report respondents emphasized benefits of 24/7/365 market access, improved security and data protection, enhanced financial agility and increased efficiency through tokenization.
Additionally, tokenization can significantly reduce transaction costs as well as intermediary costs like management fees and insurance. Digital assets are also much better suited for programmability and automation than traditional assets, and the underlying blockchain technology ensures full transparency and immutability of the ownership and exchange of tokenized assets.
These powerful advantages are why Bank of America labeled tokenization a “key driver of digital asset adoption” and the reason why leading banks and enterprises are already embracing it. In late 2022, JPMorgan executed its first live trade using tokenized Japanese yen and Singapore dollars as a part of the Monetary Authority of Singapore’s pilot program, Project Guardian. In the U.S., the State of California announced a blockchain pilot for a new DMV identification program earlier this year. Innovators are exploring the use of tokenization on the XRP Ledger for real-world assets like NFTs in real estate and carbon credits.
Marc Beckman, a Senior Metaverse Fellow and Adjunct Professor at New York University, predicts the benefits of tokenization will lead to significant growth in the number and type of digital assets in the coming years: “Its reach stretches from automotive titles and land deeds, even to consumer lifestyle sectors such as wine and spirits.” Almost anything can be tokenized, but real-world assets — particularly illiquid assets — are top of mind because of the massive efficiency gains associated with blockchain technology.
CBDCs as a turning point
Of course, that reality requires traction beyond the early pilots underway today. For the next phase of growth to occur and tokenization to truly live up to its potential, financial innovators must first demonstrate adoption for more traditional assets like currency, equities, stocks and bonds. It will also necessitate the development of protocols and marketplaces upon which these tokens can be created and exchanged.
Established cryptocurrency stablecoins like Tether and USD – an asset class that topped $7.4 billion in trading volume in 2022 – are proof that tokenization can work at scale and can serve as inspiration. The exploration of Central Bank Digital Currencies (CBDCs) by 90% of the world’s central banks could also be the inflection point that accelerates the tokenization boom.
“I think we’ll soon see advanced derivatives and options, algorithm-based complexities that we haven’t yet discovered, all of which will be built on a blockchain foundation,” says Ripple’s Head of Liquidity Products Brad Chase. “Bringing assets on-chain is just step one.”
The future of business is tokenized
Real-world asset tokenization is far more than just a fad; it represents a fundamental shift in business operations. Built on a blockchain foundation, tokenization unlocks liquidity, transparency, simplicity and automation for both financial institutions and enterprises. It underpins an Internet of Value in which digital assets are seamlessly integrated into the existing systems so they can move as freely as information does today.
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