Tokenization empowers investors and disrupts Wall Street

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This classic opening line from one of Bob Dylan’s most endearing songs, “The Times They Are-A Changen,” has become the most apt phrase when discussing contemporary asset holding models.

A detailed market study conducted last year by Ernst&Young (E&Y), one of the Big Four accounting firms, pointed to a significant increase in allocation to digital assets and interest in tokenization. The report found that institutional investors are becoming increasingly confident in the long-term value of blockchain and digital assets. According to the E&Y survey, 57% of institutional investors expressed interest in investing in tokenized assets, while 93% of respondents believe in the long-term value of blockchain or digital technology and digital assets.

Interestingly, not only were they eager to tokenize assets, but most of them had a clear strategy on how to proceed. For example, 71% of surveyed institutional asset managers sought to tokenize their assets through partnerships with digital native or tokenization firms. Meanwhile, 21% planned to build infrastructure in-house and 5% looked forward to purchasing a tokenization startup.

What benefits do these experienced fund managers see that compel them to plan so meticulously for tokenization?

The empowering potential of tokenization

In one of its explainers, McKinsey & Company defines tokenization as “the process of publishing a digital, unique and anonymous representation of something real.” On a practical level, tokenization requires a blockchain on which to perform the process. Institutional investors prefer publicly permitted blockchains for the tokenization of their assets, followed by private chains (40%) and public chains (22%).

One of the most attractive aspects of tokenization is its inclusivity, allowing a wide range of assets to be tokenized. These include real estate, art, bonds and stocks, intellectual property rights, and even identity and data.

There are numerous examples of real-world assets being tokenized and made available to a broad base of new customers and investors. For example, consider Gold, one of the most reliable assets throughout human history. Last year, the total market value of tokenized gold assets exceeded $1 billion.

Tokenized gold involves physical gold bullion whose ownership rights are stored as digital tokens on a blockchain. Those offering gold mint digital tokens, tokenized on a blockchain to denote ownership rights to physical gold bars or coins, while physical gold remains in secure off-chain custody protected by financial institutions. Equivalence (such as an on-chain token representing one gram of physical gold stored off-chain) is determined by the issuing company.

Multiple companies now offer such tokenized gold coins. For example, New York-based fintech firm Paxos Trust Company offers Pax gold (PAXG) coins, while well-known blockchain startup Tether offers Tether gold (XAUT).

Like gold, art is another asset class that has enthusiastically embraced tokenization. For example, in April 2023, soon-to-launch blockchain platform Freeport announced that it had completed its SEC review and was preparing to launch its tokenized art platform with four iconic Warhols from collectors, including the legendary Baby Jane Holzer. . While the platform failed to survive, it made a useful observation in its press release; he said:

“Blockchain technology has provided access to exclusive investment opportunities that were once beyond the reach of the average retail investor, especially today’s younger generation. But when it comes to fine art, the entry bar remains too high for ordinary retail investors, leaving them unable to participate in an investment class that has outperformed the S&P 500 over the past 25 years and is generally insulated from broader market conditions.

Freeport was right on target. The world witnessed Sygnum Bank tokenize Pablo Picasso’s 1964 masterpiece Fillette au Beret; this allowed 50 investors to collectively own the artwork through 4,000 tokens. Further exemplifying this shift, well-known artists such as Damien Hirst and renowned digital artist Beeple have joined the growing chorus of successful artists to embrace tokenization.

As this trend accelerates, the tokenization of real-world assets is transforming many other asset classes as well. The total size of tokenized assets, including those considered less liquid such as real estate and natural resources, could exceed $16 trillion by 2030, according to Boston Consulting Group.

Tokenization of global illiquid assets by 2030 | Source: Boston Consulting Group

So what lies behind this huge increase in value? How is it possible for such a new technology like blockchain to unlock trillions of untapped liquidity? There are various factors driving growth in this market.

Factors that make asset tokenization a winner

One of the key factors that makes asset tokenization an instant winner is its potential to make asset holding more democratic, fair and inclusive. These are inherent features of blockchain, which envisions a world without costly, prohibitive intermediaries. This vision extends seamlessly into the real-world realm of asset tokenization.

Take, for example, high-value works of art or real estate that are often beyond the reach of the average retail investor. Investing in such assets has become more accessible thanks to fractional ownership through digital tokens. Imagine 50 investors collectively purchasing shares of a Picasso masterpiece or a luxury property. Tokenization democratizes the process, allowing buyers to own a piece of something extraordinary.

This innovative approach works through automated smart contracts within the systematic framework of blockchain protocols, enhanced with cryptographically secure tokens. It effectively eliminates the monopoly of brokers, from local real estate agents to investment managers who sit in swanky Wall Street offices and dictate the market. They no longer need the services of retail investors. They can invest from the comfort of their home, equipped only with a digital wallet and an internet connection.

Tokenized assets and the potential for democratic ownership also lead to improved price discovery and reduced costs. In turn, the market could reach a whole new group of investors who may be hesitant to invest in asset classes like art or luxury real estate. As a result, liquidity increases in multiple directions.

Asset holding often faces fraud problems, especially in categories such as real estate. Statistically speaking, one in ten Americans has been the target of real estate fraud, and half of these victims have even suffered financial losses. Such a massive real estate scam is alarming. Ultimately, this results in financial losses worth $446 million annually, with the average consumer loss to real estate fraud reaching up to $70,000 per incident.

Asset tokenization provides the system with improved transparency and much tighter security. The combination of blockchains, smart contracts and decentralized oracle networks reduces dependence on intermediaries. Since it comes with immutable ownership records stored on a blockchain ledger, it becomes much easier to verify the authenticity of tokenized property. These ledgers enable resource tracking and come with auditable data trails.

Investing in tokenized assets is also more efficient. Programmable smart contracts help streamline the backend and keep the process free from possible administrative errors. So it’s no surprise that tokenization is on the rise. Who wouldn’t want a more democratic, efficient, inclusive and cost-effective investment environment?

The future of tokenization: Innovation and creativity

It will attract innovation and creative solutions, as the market is predicted to reach trillions of dollars in the coming years. Interoperability plays a crucial role by bringing isolated systems together under a single operational paradigm, increasing scale, transparency and efficiency with enterprise-grade infrastructure and programmable logic.

Tokenization is rapidly expanding into various areas, including the financial services sector, where cash tokenization is gaining momentum. McKinsey & Company estimates that $120 billion of tokenized cash is in circulation, all in the form of reserved stablecoins. In a world grappling with climate change and global warming, tokenizing carbon credits offers an innovative solution. These tokens contain all the information and functions of the credits within them.

Carbon credits can now be issued locally on-chain and their attributes made publicly available. This transparency encourages greater acceptability and adoption, and these credits can be transferred to the blockchain via carbon bridges. These bridges can eventually connect to traditional records like Verra and Gold Standard.

The potential for tokenization goes beyond authorization. Anyone with a digital wallet can participate, regardless of their financial situation. Tokenization has democratized access to high-value assets that were once only aspirational, like a lucrative piece of real estate or a masterpiece of art.

Previously, such assets were only available for most investors to admire from afar. Now investors can partially own some of these assets through tokenization and benefit from their extraordinary growth potential.

This means that a disintermediated, empowered class of investors can now optimize their returns and explore opportunities as broadly as possible, depending on the asset classes they are interested in.

Cloris Chen

Cloris Chen is the CEO of Cogito Finance, a defi platform that offers institutional-grade investment products by tokenizing fixed income assets and stocks. Cloris combines his banking background with hands-on defi experience. He spent six years at HSBC and served as treasury director at a unicorn startup. This diverse experience of the CEO helps Cogito address challenges in identifying unsustainable yield farming, credit risk, and regulatory uncertainty through tokenization. As a SingularityNET partner, Cogito leverages Ben Goertzel’s AI expertise for the company’s processes, including portfolio management.