Author: Yves La Rose

What asset tokenization will look like in 2024 and beyond

https://forkast.news/what-asset-tokenization-will-look-like-in-future/

During the 2018-19 crypto winter, skepticism and reluctance were the norms among financial institutions regarding direct engagement with cryptocurrencies. The volatile nature of tokens, coupled with regulatory uncertainties, fostered an environment of caution. But as we edge closer to 2024, there’s a discernible change in the air. 

Tokenization is increasingly being viewed as a palatable option for governments and regulatory bodies alike, with world governments exploring the benefits of blockchain technology, such as enhanced liquidity, fractional ownership and global accessibility, without full exposure to the volatility of cryptocurrencies. 

For the first time, governments around the world find themselves required to make changes to their respective regulations, if they wish to leverage blockchain technology that will stand to benefit them in the future.

A multi-trillion market by 2030

Real-world assets are predicted to be a key driver of digital asset adoption. Over the last year, several established financial powerhouses have embraced the notion of tokenizing real-world assets, incorporating ownership of valuable assets such as precious metals, art and real estate onto the blockchain. A report by Boston Consulting Group predicted that by 2030, the tokenization of assets in general is going to be a multi-trillion dollar market. 

In the face of market volatility, tokenized real-world assets have emerged as a sought-after hedge, offering stability and resilience during times of market turbulence, an enticing prospect for investors seeking to safeguard their portfolios. The renewed interest isn’t confined to private, closed ecosystems. Banks and financial powerhouses are increasingly exploring the use of tokenized financial instruments within institutional decentralized finance frameworks. What’s remarkable here is the choice of infrastructure: Many are opting for public blockchains. This decision underscores a growing confidence in the security and potential of these decentralized networks, a stark contrast to the apprehension witnessed a few years ago.

In fact, a research report by Bank of America published this year concluded that the tokenization of real-world assets, such as commodities, currencies and equities, was  a “key driver of digital asset adoption.” BofA analysts Alkesh Shah and Andrew Moss wrote in the report that “though we are only in the first innings of a major change in infrastructure and applications, tokenization can reshape how value is transferred, settled and stored” across all industries.

This industry sentiment has been brewing for quite some time. In October last year, Hamilton Lane — an investment-management firm with US$824 billion in assets under management and supervision — announced plans to tokenize three of its funds under a partnership with digital-assets securities company Securitize. 

Of course, we’re still quite a way off from total digital asset acceptance. But we are witnessing a shift in how real world assets are being viewed by the world governments and regulators. Historically, real world assets have been forced to sit within the limitations of current regulations. In the last couple of months, however, we are witnessing a shift as jurisdictions around the world have been forced to consider regulatory changes in order to be able to benefit and/or launch their own real world assets for their own needs.

With the number of crypto enforcement actions having risen over the years, companies will need to demonstrate inherent value in order to withstand regulatory scrutiny. Tokenized real-world assets will also likely necessitate the creation of robust, scalable infrastructure designed to coalesce with the traditional financial ecosystem versus trying to replace it. As we progress in this direction we are going to need more governments who support the building of the missing pieces that are key in connecting current Web2 to Web3.

Government as pioneers

Examples of this growing trend to support tokenization can be witnessed in Asia, where governments such as Hong Kong and Thailand, are not just acknowledging its potential for real-world assets — policymakers are actively shaping its use. By reforming regulations to better accommodate the tokenization of real-world assets, these governments are laying the groundwork for innovation and growth that will go on to serve as examples for other governments. 

Take the example of Hong Kong. Historically Hong Kong has limited the sale of new northern territories to developers within the country, but now wants to open the sale of lands in the northern territories to further global partners, not limited to the in-house Hong Kong developers. This would have meant categorizing the sale as a collective investment scheme. However, the Hong Kong government aims to broaden participation to global partners, planning to pilot this through asset tokenization. This approach would not only widen the investor pool but also lower entry barriers by allowing fractional ownership.

Thailand’s government is also looking at integrating real-world assets with blockchain technology. Following a recent political shift, the Thai government has been keen on distributing tokens to its citizens. Unlike Hong Kong, Thailand’s primary hurdle isn’t regulatory but technical. The government can expedite legal processes, but the challenge lies in executing the technical aspects of airdropping tokens. To do this they are exploring pilot projects and collaborating with layer-1 and layer-2 blockchain platforms to resolve these technicalities. 

We are now at a point in the evolution of Web3 that we can confidently state that blockchain technology will, at some point, be integrated into our daily lives. Whether or not the average person is aware of it is somewhat irrelevant. We are currently witnessing a global trend where governments are earnestly seeking blockchain integration to unlock new revenue streams and reduce costs, with the focus primarily on the utility and applications of the technology itself.

Real estate, fine art, commodities and other real-world assets are a perfect example of a use case that can benefit from tokenization. Whether it’s in the next year, the next five years, or in the next 10 years, recognizing and harnessing this immense opportunity could be incredibly significant for the future of finance itself.

‘Be Your Own Bank’ Mantra More Relevant Than Ever

https://blockworks.co/news/be-your-own-bank

We’re not even three months into 2023 and we’ve already had the first major instance of contagion in the crypto industry. The collapse of Silicon Valley Bank (SVB), New York lender Signature Bank, and crypto-friendly bank Silvergate sent shockwaves through the financial world over the past week as investors, regulators and customers scrambled to get their ducks in a row (and in the case of the latter, desperately withdraw deposits). 

These banking disasters, just like FTX’s collapse last year, shine a spotlight once more on the counterparty risk inherent not just in the banking system — but in any centralized financial system at all. And although the US government stepped in to assure depositors they would be able to recover their capital, the imbroglio saw top stablecoin USD Coin (USDC) depeg, at one stage dropping to just 87 cents as contagion fears spread. The world’s fifth largest cryptocurrency is owned by Circle, which had $3.3 billion deposited at the doomed SVB.

An eye-opening near miss

Although USDC has thankfully since regained its dollar peg, it would be foolish to breathe a sigh of relief and take an “all’s well that ends well” outlook going forward. It is deeply troubling that the collapse of a fiat bank could rock a top five digital asset to this extent. It’s even more troubling that 33% of the cash reserves backing USDC were held at a bank with a $1.8 billion hole in its balance sheet. The initial fears of contagion were clearly not without foundation either: Multiple stablecoins, including DAI and FRAX, use USD Coin as collateral and also lost their peg as a result.

As in the aftermath of FTX, Three Arrows, Terra and Celsius last year, crypto investors have received yet another warning shot. The mantra “Be your own bank” has been repeated ad nauseam, but perhaps the message will finally hit home for the wilfully blind in 2023. In this case, of course, it was fiat banks tanking and Uncle Sam that made them whole — but the significance for crypto cannot be ignored.

Some of the main problems with “crypto” right now are the points of friction between the traditional financial system and the parallel digital assets exchanges and tokens systems. These pain points stand out most in terms of how traditional firms are regulated versus this newer breed of financial instruments.

Circle isn’t the only crypto bellwether that keeps reserves in fiat banks like SVB, whose deposits expanded significantly during the pandemic while tech stocks boomed. Crypto-friendly bank Silvergate, meanwhile, was one of comparatively few regulated financial firms that provided banking services to a swath of crypto companies and platforms.

In the not too distant past, banks wouldn’t touch crypto companies with a barge pole. That’s no longer necessarily the case, with regulators having forced the crypto industry to bend the knee to operate and establish partnerships that could bridge both worlds. But if you cast your mind back far enough, you’ll recall that crypto only bloomed into being because the bright minds pushing it forward were deeply cynical about the traditional system itself. It was broken, they said, and decentralization was the answer.

Bitcoin was introduced to the world right after the 2008 financial crash, and fifteen years later, we’re witnessing anew the failure of reserve banking and a debt-based system. Effectively, we’re paying the bill for a decade of partying and profligacy with no accountability thanks to 0% interest rates. Alas, the bill must be settled eventually.

Where do we go now?

Certainly, Circle’s close call has highlighted the very real possibility of fiat banking failures impacting not just any singular token involved, but the crypto industry at large. While it’s tempting to think this reality then emphasizes the value of a decentralized stablecoin like DAI, as mentioned, DAI is partly backed by a basket of stables including USDC itself.

This is not a rallying cry for the industry’s power brokers to abandon the traditional banking world en masse. Rather, it is an acknowledgement that we remain very dependent on TradFi, and particularly its rails, to do business. Perhaps it was naive to think this was not the case, but it is eye-opening nonetheless.

The world viewed USDC as one of the safest stablecoins, and since it did regain its peg in just a few days, it’s just about managed to preserve that reputation. But make no mistake, what happened was a near miss, and it almost caused a catastrophic cascade of instability across all markets. And this catastrophic cascade would not and could not have been blamed on any “crypto problem” — it would have been due to the collapse of a fully regulated, 40-year-old bank.

Get the day’s top crypto news and insights delivered to your email every evening. Subscribe to Blockworks’ free newsletter now.

Want alpha sent directly to your inbox? Get degen trade ideas, governance updates, token performance, can’t-miss tweets and more from Blockworks Research’s Daily Debrief.

Can’t wait? Get our news the fastest way possible. Join us on Telegram and follow us on Google News.