4 Reasons Banks Are Turning to Real-World Asset Tokenization
The tokenization of real-world assets using blockchain technology has captured the attention of banks due to numerous benefits, including faster settlements, automated processes, fractional ownership, and real-time transaction data. Examples include the issuance of bonds by major banks on blockchain and forecasts of increased tokenized asset values by 2030.
Tokenization technology is fundamentally transforming financial markets, with banks widely adopting it due to its efficiency and high potential. This review references the article “Reasons for Tokenizing Real-World Assets”.
Table of Contents
Tokenization has captivated the financial sector, promising greater settlement efficiency and fundamental changes to current illiquid markets. Over the past five years, financial institutions have been exploring blockchain to scale tokenization efforts. Today, few Tier-1 and Tier-2 banks globally are uninvolved in digital assets or blockchain initiatives. Many financial institutions are seriously examining the potential of tokenizing real-world assets.
In January 2023, Dutch bank ABN AMRO made headlines by issuing €450,000 worth of bonds on the Stellar blockchain. In November 2023, Goldman Sachs, Société Générale, and Santander assisted the European Investment Bank in issuing a €100 million two-year bond. J.P. Morgan has also explored how tokenization affects foreign exchange, completing a transaction involving tokenized Japanese Yen and Singaporean Dollar.
Despite the crypto market slowdown, more projects are nearing full production. The Boston Consulting Group predicts that by 2030, the total value of tokenized illiquid assets—such as real estate and natural resources—could reach approximately $16.1 trillion.
What Is Tokenization?
Simply put, using blockchain technology, organizations can represent real-world assets as tokens. These tokens can incorporate various types of information and functionalities, such as automated adaptive actions like recalls or freezes. Consolidating all asset-related data within a token allows the trading of tokenized assets 24/7 while providing real-time, automated transaction data on the blockchain ledger.
Four Key Benefits of Tokenization
1. Faster and More Efficient Settlements
Settlement delays often arise from inefficient, manual asset services or settlement cycles designed to manage counterparty risks. Tokenization, in contrast, enables real-time transaction data and automated processes, such as profit calculations. Instant settlements on blockchain ledgers secure transactions within minutes.
This brings significant operational benefits to global businesses, which regularly struggle with assets being “trapped” in traditional settlement cycles. For instance, in February 2023, Siemens accelerated the issuance of €60 million in digital bonds on the Polygon blockchain, showcasing the operational flexibility of tokenization.
2. Automated Processes
Tokenization facilitates the automation of asset services and transactional functions, digitizing end-to-end processes with transaction data as a single source of truth. This significantly reduces settlement costs and eliminates errors caused by multiple intermediaries.
The programmability of tokens also supports smart contracts, which automatically execute pre-agreed functions such as calculations, compliance checks, or payments. For example, the Hong Kong government utilized this efficiency in February 2023 to issue $100 million in tokenized green bonds on Goldman Sachs’ GS DAP protocol.
3. Fractional Ownership
Fractional ownership of assets often requires complex legal structures. High legal and administrative costs limit participants and reduce liquidity. Tokenized titles simplify ownership allocation and management, lower barriers to entry, and open markets to new investors. This democratizes access to asset classes previously exclusive to a small group, such as real estate, infrastructure, or venture capital investments.
By making these products accessible to more investors, tokenization can increase capital flows into these markets, ultimately benefiting the real economy. A notable example occurred in April 2023, when the market value of tokenized gold surpassed $1 billion.
4. Real-Time Transaction Data
Blockchain’s immutable ledger provides banks and their clients with valuable, auditable transaction data. This eliminates the need for costly, inefficient transaction management systems while enhancing digital portfolio management with a comprehensive view of private and public asset data.
Conclusion
Tokenizing real-world assets has the potential to revolutionize finance. From real estate and art to commodities, the possibilities are endless. A recent BNY Mellon survey confirms this, with 97% of institutional investors believing tokenization will significantly transform asset management. Investment giants like BlackRock and State Street also trust in the transformative potential of tokenization.
As traditional institutions like banks continue to research and evolve in this groundbreaking field, one thing is clear: the financial world, as we know it, is on the brink of a monumental shift.
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