From Ripples to Waves
The following text summarizes the article “From Ripples to Waves: The Transformational Power of Tokenizing Assets” published by the esteemed financial institution McKinsey & Company. Written by Julian Sevillano, Anutosh Banerjee, and Matt Higginson, with contributions from Donat Rigo and Garry Spanz, the article provides a coherent and engaging framework for understanding asset tokenization.
It aims to inform readers about the immense potential and benefits of this innovation. This summary serves as both an independent article and an invitation for professionals in finance, blockchain, and digital assets to explore the original piece and engage further with the topic.
Table of Contents
Introduction
The article begins with an introduction to the concept of “asset tokenization”—or “creating tokens corresponding to assets,” referred to in English as “Tokenization”. This section outlines the importance of the concept, including a footnote summarizing its foundational principles, definitions, and related concepts. The authors aim to make the article more comprehensive and accessible to a broader audience.
Despite its straightforward writing style, the article is highly technical and precise, which may present challenges for beginners. The introduction also explains the article’s structure.
The main content unfolds over nine key sections:
- Tokenization in Waves
- Asset Classes with the Fastest Paths to Adoption
- Mutual Funds
- Loans and Securitization
- Bonds and Exchange-Traded Notes
- Spotlight on Repos
- Subsequent Waves of Assets
- Overcoming the Cold Start Problem
- A Path Forward
As suggested by these titles, the article delves into financial tools, domains, and the possibilities and capacities of asset tokenization, ultimately concluding with a vision for the future of this transformative process.
Tokenizing Assets: A Power Beyond Imagination
Tokenizing assets involves creating a unique digital representation of an asset on a blockchain network. Over the years, this process has undergone development and refinement. In essence, tokenization creates a proxy for an asset and its sensitive information, allowing direct interactions with the underlying asset—akin to how traditional receipts represent physical assets like gold.
Tokenization offers advantages such as programmability, process integration, and transparency. Financial institutions can leverage these benefits to enhance operational efficiency, innovation, speed, and revenue, as well as to improve liquidity management.
Today, billions of dollars are transacted through blockchain-based applications using this approach. However, early missteps and numerous challenges have emerged. The widespread adoption and integration of these technologies will require increased collaboration and alignment among stakeholders.
Imagine the future of financial services: a substantial share will undoubtedly be allocated to tokenized digital assets due to their growing adoption and the myriad opportunities they provide, including equitable, instantaneous, and global access, as well as real-time international collateral provisioning.
The Chairman of BlackRock has also acknowledged that digital representation through tokenization is the next step in the financial industry. Consequently, more institutions are developing tokenized products, from bonds to cash equivalents.
With blockchain technologies maturing and their benefits becoming more evident, the digitization of assets appears irreversible. However, achieving widespread adoption remains a challenge due to infrastructure modernization, regulatory complexities, and resistance to change within supply chains. This suggests that adoption will occur in waves, from smaller to larger scales.
Initially, simpler yet established applications—such as tokenizing accumulated returns—will join the wave. Gradually, asset classes with less apparent advantages or greater technical and legal challenges will follow suit.
Tokenization in Waves
The adoption of tokenization varies across asset classes due to differences in benefits, feasibility, time to impact, and risk tolerance. Asset classes with larger market sizes, greater friction along the chain, less mature infrastructure, or lower liquidity stand to gain the most. Additionally, those with fewer technical and regulatory challenges are more feasible for tokenization.
Investing in tokenization is less attractive where inefficiencies and operational costs are high. However, outsourcing functionalities and achieving economies of scale can drive rapid returns on investment, increasing interest in tokenization.
Adoption in a specific asset class can be facilitated by improving regulatory transparency, infrastructure, and investment conditions. Geographical variations in market regulations and conditions also influence the feasibility of this process.
Asset Classes with the Fastest Paths to Adoption
Tokenization is steadily advancing and is expected to accelerate as network effects increase. By the end of this decade, tokenized assets in certain classes are projected to surpass $100 billion, including cash, deposits, bonds, and exchange-traded funds (ETFs). These assets have already gained traction due to blockchain efficiency and regulatory review.
Overall, the market value of tokenized assets could reach $2 trillion by 2030, with estimates ranging from $1 trillion to $4 trillion. The expansion of tokenized assets will also lead to the elimination of certain cryptocurrencies and stablecoins from many exchanges to prevent double counting, as these currencies are often used for settlement in tokenized asset transactions.
Mutual Funds
Assets under management for tokenized money market funds have surpassed $1 billion, indicating strong investor demand in a high-interest-rate environment. These funds are offered by traditional firms such as BlackRock and WisdomTree, as well as Web3 companies like Superstate, Ondo Finance, and Maple Finance. As a result, they may become popular as on-chain stores of value and potentially compete with stablecoins. Other mutual funds and ETFs could diversify on-chain capital as well.
On-chain funds offer significant advantages, including instant settlement and payment functionality. As tokenized funds expand, operational and product-related benefits—such as tailored investment strategies through composability and reduced errors and costs—will also become available. Demand for tokenized money market funds, influenced by interest rates, may kickstart broader adoption for other funds in this format.
Loans and Securitization
Blockchain-based lending is expanding, with companies like Figure Technologies becoming major players in the U.S. nonbank home equity line of credit (HELOC) market, achieving billions in initial volume. Alongside Web3 companies like Centrifuge, they have facilitated over $10 billion in blockchain-based loans.
The adoption of tokenization in lending processes, particularly in blockchain loans and securitization, is expected to grow. Traditional lending involves labor-intensive processes filled with intermediaries, whereas blockchain-based lending offers advantages such as real-time data monitoring, smart contract-based payments, and reduced labor costs. Additionally, shorter settlement cycles and enhanced capital accessibility reduce borrowing costs.
In the near future, tokenization could enable fully automated underwriting, fairer and more precise financial data assessments of borrowers, and monitoring of on-chain cash flows.
Bonds and Exchange-Traded Notes
Over the past decade, more than $10 billion in tokenized bonds have been issued—albeit a small fraction of the $140 trillion bond market. Blockchain-based repurchase agreements (repos) have also seen significant growth, with monthly volumes reaching trillions of dollars in North America.
Digital bonds are expected to grow due to their advantages and minimal barriers. In markets seeking to develop their capital markets, a fully tokenized bond lifecycle could enhance operational efficiency by at least 40% through data clarity and automation. This results in reduced costs and faster issuance, enabling real-time financing.
Spotlight on Repos
Tokenization is already demonstrating its benefits in repurchase agreements (repos). Companies like Goldman Sachs and J.P. Morgan transact trillions of dollars monthly in this domain. Unlike other cases, repos do not require the entire value chain to be tokenized for their benefits to manifest.
Tokenizing reserves significantly improves operational efficiency and capital quality. Smart contracts automate tasks like collateral valuation, settlement failures, and simplifying reporting. Real-time settlement and on-chain data enhance liquidity and capital efficiency.
This daily liquidity provisioning reduces risks and borrowing costs, enabling short-term lending from unused liquidity. It also optimizes collateral dynamics and accessibility among market participants.
The adoption of tokenized financial assets faces a cold start problem because it requires more products and users to create network effects. While issuing tokens is straightforward, scaling depends on attracting more investors who recognize tangible benefits like cost savings, greater liquidity, or improved compliance. Limited liquidity hinders broader issuance of tokenized products and increases costs for early adopters maintaining legacy systems, fostering resistance.
Tokenized bonds illustrate this challenge. Despite repeated issuances, current benefits remain minimal, and secondary trading is limited. Scaling solutions require coordinated efforts on high-performance blockchain networks to better demonstrate the full advantages of tokenization.
It’s also worth noting that while both public and private blockchains have seen successes, it remains unclear which will dominate transaction volumes. In the U.S., federal regulations restrict the use of public blockchains, but globally, Ethereum stands out due to its high liquidity and composability. The choice between public and private networks remains an ongoing debate.
A Path Forward
Tokenization of financial assets is in its early stages, akin to technologies like the internet and credit cards. The initial rapid growth was expected, starting with the issuance of tokenized products in recent years. By 2030, the volume of tokenized assets could grow by 75% annually, naturally driven by early adopters.
Early movers can capture market share and set standards, but they also face risks such as high costs, first-mover disadvantages, and uncertain regulations. As infrastructure and regulations develop, tokenization could significantly enhance market value and adoption, benefiting those who embrace innovation early.
