Tokenization: A tale of three cities (Part I)

If I had started writing this article three years ago, I’d be reporting on the buying frenzy surrounding non-fungible tokens (NFTs), blockchain-based proofs authenticating the uniqueness of digital objects, namely artwork. 

I have written about NFTs before—but now it’s 2024. Media personalities like Paris Hilton and Jimmy Fallon once breathlessly promoted Bored Ape NFTs as the “next big thing”; in their wake are scores of disillusioned or defrauded consumers as well as a crop of tax-loss harvesting platforms like Unsellable helping mitigate the burst bubble’s collateral damage. NFTs have by and large come and gone. 

But have NFTs really gone away? 

There’s more than one way to answer this question. One option is a staid analysis of market activity as told by blockchain-activity figures. NFT volumes on the Solana blockchain have recently doubled to 60,000 transactions, for instance. Ordinal NFTs are seeing a “renaissance” too.

But it might be more productive to look at what happens when we ask the following questions: Are NFTs all that different from other forms of tokenization? What’s happening to blockchain-based tokens writ large?

Enter Dr. Rachel O’Dwyer, Lecturer in Digital Cultures in the National College of Art and Design, Dublin, and the author of Tokens: The Future of Money in the Age of the Platform. To O’Dwyer, NFTs and more recently ascendant forms of tokens, such as tokenized real-world assets (RWAs), are two sides of the same coin. 

“Tokenized real-world assets and tokenized digital assets—tokenized NFTs—have both been around for a long time,” O’Dwyer told me. “And… I see them as being these two sorts of twin phenomena.”

According to Securitize, a Miami-based platform for issuing and trading digital asset securities, tokenization issues a “digital representation of an asset on a blockchain.” Tokenized RWAs are a subset representing “cash, real estate, equities, artwork, and bonds… [or] anything that has value due to its utility, scarcity, or demand in the real world.” 

On the one hand, NFTs encapsulate a “desire to make ephemeral things like digital art, information, and digital files… solid enough to onboard the market,” according to O’Dwyer. On the other hand, RWAs are “the inverse of that” by turning “things that are quite physical or lumpy more liquid [to] make them flow more easily within a market.” Both attempts to transmute an asset’s thinginess into something somewhat monetary.

RWAs have often been difficult to financialize and fractionalize in a way that’s accessible for everyday investors. Tokenized RWA promotion rhymes with the ways NFTs were packaged as “democratizing access” to art speculation for retail investors—only in this case the assets aren’t Bored Apes or GIFs, but office buildings, apartment complexes, royalties, and more. 

Recycled adages or not, some major institutions believe that these financial instruments could be the next big thing—following in the footsteps of landmark technologies like ETFs. With uncanny timing, Securitize announced today that it raised $47M from BlackRock, Hamilton Lane, and other major investors. Boston Consulting Group, meanwhile, thinks RWA tokenization could cover as much as $16T in assets by 2030. (Though it’s worth taking hypothetical figures like those with a healthy grain of salt.)

Major institutions are clearly thinking about and throwing their weight behind these financial instruments. To make sense of a heavyweight’s logic behind a blockchain-friendly strategy, I interviewed Justin Chapman, who leads Northern Trust’s Digital Assets and Financial Markets group.  

Chapman situated Northern Trust’s interest in digital assets—tokenized RWAs, tokens corresponding to assets like carbon credits, and other financial instruments—in relation to cryptocurrency’s reputational decline over the past two years. According to Chapman, legal action against fraudulent cryptocurrency exchanges like FTX created “a bit of split.” In conjunction with financial institutions, it compelled regulators to think of digital assets separately from cryptocurrencies and attempt to understand how blockchain-based technologies can be applied to financial markets: especially their immutability.

“We don’t differentiate between a digital asset or a traditional asset, or existing market infrastructure or future market infrastructure,” Chapman said, speaking of how that split has affected Northern Trust’s approach to blockchain-based financial instruments. “What we want to do is focus on making sure that we have good connectivity and liquidity to our clients, whatever assets they want to invest in appropriately within the right regulatory framework… We think there is enough maturity coming over the next couple of years in the digital asset landscape to call it traditional and stop calling it digital assets, so they are just called assets. That’s a really important inflection point because we’re trying not to differentiate between a traditional and digital asset, and we’re trying to make sure that we can offer a seamless integration across both sets.”

Over the next three weeks, I’ll explore the implications of this trifurcated rift. Tokenized assets are no longer cryptocurrencies, and may be veering toward being treated as assets tout court in the coming years—at least according to some institutions. What does this mean for fintech and financial institutions, and why are they buying into this technology? In what use cases are tokenized assets actually helpful, what are their risks, and how do they differ (if at all) from preceding tokens? And finally, what would it take for boosters’ visions to become reality?