The Development of Tokenization
The issuance of tokenized bonds has allowed small-scale investors to participate through decentralization in countries such as Thailand and the Philippines. While the advantages of tokenization have primarily been seen in the issuance process, the end-to-end lifecycle of tokenized bonds can improve operational efficiency by at least 40% through data transparency, automation, embedded compliance (such as coding transferability rules into tokens), and streamlined processes (such as asset intermediation services). Additionally, cost reduction, faster issuance speed, or asset fragmentation can improve financing for small issuers by implementing “just-in-time” financing (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 and its benefits. Broadridge Financial Solutions, Goldman Sachs, and JPMorgan currently transact trillions of dollars in repo volumes each month. Unlike some tokenization use cases, repo transactions do not require tokenization of the entire value chain to achieve tangible benefits.
Financial institutions that tokenize repos primarily achieve operational and capital efficiency. On the operational front, supporting smart contract execution enables automation of daily lifecycle management (e.g., collateral valuation and margin calls), reducing errors and settlement failures, and simplifying reporting. On the capital efficiency front, 24/7 real-time settlement and on-chain data analytics can enhance liquidity requirements through short-term borrowing, while also improving capital efficiency by enhancing collateral.
Historically, most repo agreements have had terms of 24 hours or longer. Intraday liquidity can reduce counterparty risk, lower borrowing costs, facilitate short-term incremental borrowing, and reduce liquidity buffers.
Real-time, 24/7, cross-jurisdictional collateral flow can provide channels for higher returns and high-quality liquid assets, optimizing liquidity between market participants and maximizing availability.
The Post-First Wave of Tokenization
The tokenization market is currently progressing steadily and is expected to accelerate with the strengthening of network effects. Given its characteristics, certain asset classes may enter the stage of large-scale adoption more quickly, with tokenized asset volumes exceeding $100 billion by 2030.
McKinsey estimates that the asset classes expected to achieve tokenization first will include cash and deposits, bonds, mutual funds, ETFs, and private credit. Cash and deposits (stablecoin use cases) already have a high adoption rate due to the efficiency and value proposition brought by blockchain technology, as well as greater technological and regulatory feasibility.
McKinsey estimates that by 2030, the tokenization market value for all asset classes could reach approximately $20 trillion, with pessimistic and optimistic scenarios ranging from approximately $10 trillion to $40 trillion. The main drivers of these estimates include the following assets. The estimates do not include stablecoins, tokenized deposits, or central bank digital currencies (CBDCs).
Citi previously estimated in its report “Money, Tokens, and Games: The Next Billion Users and Trillion-Dollar Value of Blockchain” that, excluding tokenized cash, the tokenization market size would reach $5 trillion by 2030.
The first wave of tokenization described earlier has completed the challenging task of achieving mass market adoption. The tokenization of other asset classes is more likely to expand after laying the foundation of the first wave of asset tokenization or with the emergence of clear catalysts.
For certain other asset classes, adoption may be slower either because the expected benefits are incremental or due to feasibility issues such as compliance obligations or lack of incentives for key market participants. These asset classes include publicly traded and non-listed stocks, real estate, and precious metals.
How Financial Institutions Should Respond
Regardless of whether tokenization is at a turning point, a natural question arises about how financial institutions should respond at this moment. The specific timeframe and ultimate adoption of tokenization are still unclear, but early institutional experiments with certain asset classes and use cases (such as money market funds, repos, private funds, corporate bonds) suggest that tokenization has the potential to scale up in the next two to five years. Those who hope to establish a leading position in this ecosystem may consider the following steps.
7.1 Reassessing the 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 provider landscapes and understanding early applications of tokenization will help refine estimates of the technology’s costs and benefits.
7.2 Building Technological and Risk Capabilities
Regardless of where existing institutions stand in the value chain of tokenization, they will need to build knowledge and capabilities to embrace the new wave. The first and most important step is to establish a basic understanding of tokenization technology and its associated risks, particularly regarding blockchain infrastructure and governance responsibilities (who can approve what and when), token design (limitations on assets and enforcement of these limitations), and system design (decisions about ledger and record storage locations and their impact on asset ownership). Understanding these fundamental principles will also aid in proactive communication with regulatory agencies and clients.
7.3 Building Ecosystem Resources
Given the relatively fragmented nature of the current digital world, institutional leaders must strategically develop an ecosystem to integrate it into other (traditional) systems and partners to maintain a competitive advantage.
7.4 Participating in Standards Development
Finally, institutions aiming to be at the forefront of tokenization should maintain communication with regulatory agencies and provide input on emerging standards. Some examples of critical areas to consider for standardization include controls (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 versus native digital records, what constitutes good control positions), token design (support for token standards and related compliance engines), and blockchain support and data standards (which data to keep on-chain versus off-chain, reconciliation standards).
The Path Ahead
Comparing the current state of the tokenization market with other significant paradigm shifts in technology suggests that we are still in the early stages. Consumer technologies (such as the internet, smartphones, and social media) and financial innovations (such as credit cards and ETFs) typically experience the fastest growth in the first five years after their inception (over 100% per year). Afterward, the growth rate slows to around 50% per year and eventually stabilizes at 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 a significant number of tokenized assets were issued. 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 appeared in the first wave of tokenization leading the way.
While it is reasonable to expect that tokenization will drive transformation in the financial industry over the next few decades, and mainstream financial institutions such as BlackRock, Franklin Templeton, and JPMorgan are actively participating, more institutions are still in a “wait-and-see” mode, waiting for clearer market signals.
We believe that the tokenization market is at a critical juncture, and once we see some important signs, the process of tokenization will rapidly advance. These signs include:
Infrastructure: Blockchain technology supporting trillions of dollars in transactions.
Integration: Seamless integration of blockchain for different applications.
Enablers: Wide 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 catalytic signs, we expect the wave of mass adoption to follow closely behind the first wave of tokenization 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: Building the 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
