Markets
What crypto investors should know as tokenization affects all assets
Tokenization is coming quickly for all financial assets
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In addition to the innovation and wealth creation that blockchain and cryptoassets have created and spread across the world and into financial markets, these technologies and assets have also spurred a new conversation about how markets and payments will evolve in the future. In the United States, in particular, these discussions appear to have gained renewed vigor in the run-up to the presidential election, but this misses the point. The benefits of blockchain and tokenized payments – faster, instantaneous and cheaper transactions and recordkeeping – are clear to both individuals and institutions. The continuation of these conversations, the tokenization and digitization of all assets, represents a significant step forward for blockchain, cryptoassets, and tokenization opportunities in general.
Also worth noting is the estimated size of this opportunity; despite all the promises and reality of cryptoassets, this market remains much smaller than TradFi assets and markets. Tokenization of these assets has the potential to change this; Blackrock estimates – and invests in – programs to achieve up to 10 trillion dollars of value in the tokenization of real-world assets (RWA). However, even with such investment and appetite, there is a need to put some sort of regulation or guardrails in place to help these efforts succeed as advertised.
This is why the recent hearings on the tokenization of RWA are so important to investors and crypto advocates in general, and have several implications for the future.
Tokenization has arrived in DC
While the Financial Services Committee recently held audiences On this topic, it is worth understanding 1) how important these hearings are and 2) what these hearings indicate for political interest and appetite for token assets in general. An important component of the hearing will be a discussion of the “Tokenization Reporting Act of 2024” (HR 8464). This law requires the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the National Credit Union Administration Board to jointly submit a comprehensive report focused on asset tokenization.
It remains to be seen how far these hearings, proposed legislation, or any such future plans will ultimately go, but the fact that these hearings are taking place should provide cause for optimism. Given recent congressional action on SAB 121, the passage of FIT21 in the House, and the general pivot toward more pro-innovation and pro-crypto sentiment, it seems clear that crypto has decisively moved towards the mainstream of political debates.
Financial advisors will integrate tokenized assets
Since ETF trading in the United States, there has been a dialogue about when or how quickly financial advisors and other investment professionals would begin recommending or allocating funds to cryptoassets. While facing the volatility and regulatory ambiguity that continues to exist and fuel discourse in the token asset space, certain facts continue to make bitcoin and other cryptoassets attractive to investment advisors .
Research of Coin Office reveals that 1) Bitcoin has outperformed large- and small-cap stocks, Treasuries, investment-grade bonds, as well as gold and REITs in nine of the last twelve years. Additionally, Bitcoin’s correlation with all other major asset classes was less than 25%, with a 1% allocation improving returns by 0.67% over the past 11 years. Importantly in this context, investors (and advisors) should not assume that bitcoin and cryptoassets will generate overly optimistic returns, but that they can in fact invest in cryptoassets, even as neutral investor.
Tokenization will change financial markets
The tokenization trend is taking a when-and-if turn, and this transformation will change how financial markets operate as well as how investors interact with financial products and services. The most significant change that will result from the tokenization of financial assets as a whole will be the speed with which trades and transactions are settled and finalized. Accelerating the speed of transactions will benefit institutions by reducing costs and freeing up capital to deploy towards other initiatives, with individuals benefiting from the instant nature of tokenized transactions. Business owners of all sizes, but especially small and medium-sized businesses, will benefit from reduced transaction processing costs and faster access to customer payments.
Broader discussions around tokenization will also contribute to the acceleration and wider adoption of cryptoassets. A persistent problem and barrier to broader and more widespread adoption – in addition to somewhat inaccurate perceptions of volatility – concerns the terminology used by advocates and the lack of understanding of the quantitative benefits. Whatever form tokenization ultimately takes, the fact is that tokenization and the increased integration of blockchain into financial markets increasingly looks like the future of financial markets and transactions.
Tokenization is reaching the general public and all market participants should take note.