Tokenization: A tale of three cities (Part II)

Last week, I kicked off a series on tokenization: the phenomenon of issuing digital representations of an asset on the blockchain—things like art, equities, bonds, real estate, and other stores of value.

Interviews with major financial institutions, up-and-coming tokenization platforms, and academic experts make clear that asset management heavyweights see tokenization as a viable path for the further financialization of assets. 

“We don’t differentiate between a digital asset or a traditional asset, or existing market infrastructure or future market infrastructure,” Justin Chapman of Northern Trust 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.” 

In this next part of the series, we’ll dive into what this means for fintech and financial institutions. If digital assets are treated as assets, period, how does this shape the financial landscape? And why would these parties buy into such a nascent technology? 

The latter question offers a path to answering the former. To the Tokenized Asset Coalition—a private-sector consortium of traditional and blockchain-based institutions—real-world asset tokenization represents the next frontier of financial technology. 

According to the Coalition, the tokenized issuance and transfer of assets can reduce trading times, (eventually) bring down the cost of issuance and management (under the right regulatory frameworks), and increase transparency. Its most recent report suggests that tokenization boosters see the technology as as big of a paradigm shift as ETFs, which have fundamentally altered stocks and corporate governance. 

“And while ten years, five years, or even one year seem like a lifetime among crypto-native communities, rearchitecting legacy infrastructure and institutional workflows will take time,” the report concludes, encouraging financial institutions to contemplate the potential winnings involved over the long run. “Consider, it took 25+ years for U.S.-listed ETFs to hit $4 trillion in AUM and global bond ETF AUM to hit $1 trillion.”

A conversation with Colin Butler, Global Head of Institutional Capital at Polygon Labs, suggests that, while tokenization’s eventual efficiencies could let institutions broaden their revenue, a belief in cryptocurrency’s long-term viability also undergirds this push into tokenization in the form of investment vehicles like bitcoin ETFs. That is, the full greenlighting of cryptocurrencies in the form of ETFs and other securities means “the whole world explodes”—meaning the market landscape—letting “trillion-dollar-plus players” enter the world of blockchain-based finance where it was once buttressed by more speculative VCs and mid-sized hedge funds. 

In this respect, tokenization presents a use case as well as, potentially, a viable future for the blockchain-based financial technologies by opening up the door to heavyweights. However, Butler elaborates that the regulatory systems are not yet in place to make tokenization an efficient technology for issuance, trading, and management. This year will see more sandbox regulatory environments emerge related to tokenization—such as in Abu Dhabi. Large players may adopt a “wait-and-see” approach to understand how tokenization will be concretely regulated; and regulators, in turn, may copy from first-mover jurisdictions and learn from their successes and failures. 

Over time, if digital assets do become assets tout court in the way Northern Trust’s Justin Chapman envisions, fintechs and FIs may find themselves scrambling to secure the right talent to tap into this revenue source. A mad dash for world-class workers may favor deeper-pocketed institutions, or those with more alluring visions for the place of tokens in our financial future.