Crypto Will Thrive as it has Real-World Use Cases
Part 2: Tokenisation
In my previous article, I explained how DeFi is one example of a fast-growing real world use case of Crypto. Today, I would like to highlight how tokenisation represents perhaps the largest and most exciting real-world use case of Crypto.
What is Tokenisation?
Tokenisation is the process of converting something with tangible or intangible value into digital tokens. Tangible assets like real estate, stocks or art can be tokenised. In a similar vein, intangible assets like voting rights and loyalty points can be tokenised, too. We see Avios as an example of tokenised loyalty points by the traditional airline and credit card industry. However, when tokens are created on a blockchain, they add a level of transparency that previous iterations of tokens couldn’t achieve.
Tokenisation transforms any real-world asset into a digital asset, thereby enabling easier exchange and transfer of assets. The blockchain is therefore totally transforming the financial landscape by making it easier to divide an asset into smaller parts that indicate ownership, democratising investment in previously illiquid assets, and establishing more equitable marketplaces.
Tokens can be created on a distributed ledger for a very wide variety of assets, such as paintings, digital media platforms, real estate, company stock, and collectibles.
Financial services organisations are particularly keen on tokenisation as it solves several friction points and risk factors in their business.
Unlocking Illiquid Assets
Tokenisation is especially applicable to illiquid assets. Illiquid assets include pre-initial public offering (IPO) stocks, real estate, private debt, revenues from small and medium businesses, physical art, exotic beverages, private funds, wholesale bonds and many more.
Real estate is one of the most illiquid asset classes and has been one of the first where we have seen tokenisation. When a property is worth a few million dollars, buying and selling the property can take time. Now, imagine a $1 million home is tokenised, with each token representing fractional ownership of the property. When these tokens are available for purchase in the market, 100 buyers can each invest $10,000 to buy ownership of the property. From an investor perspective, someone in Brazil with $1,000 can now much more easily invest in property in Manhattan.
This fractionalised ownership naturally increases the ease with which illiquid assets can be bought and sold. The asset classes that can benefit from tokenisation also include private equity and venture capital which have traditionally only been available to a small subset of investors.
It is important to note that when an illiquid asset like real estate or art is tokenised, the entire asset class benefits from the liquidity created. This is because it allows for a healthier secondary market and creates more data for better valuation of these assets. A very wide array of asset classes can be classed as illiquid and these even include natural resources, land, commodities, public infrastructure, fine art, computing infrastructure, private equity, and more.
Massive Efficiency Gains
The banking industry is already seriously looking at the potential of tokenisation given the significant efficiency gains and improvements in risk control that it offers. If financial services firms and banks tokenise their asset base, settlements, which used to take two days, can now be instant, freeing up billions in capital in the process. This offers both operational and capital efficiencies. The instant finality that the blockchain offers can help banks see where they stand with their capital health in real-time. Organisations can assess their precise level of capitalisation and make quick and profitable decisions to deploy their capital. In times of market crisis, this same capability is even more critical in helping financial services companies better manage their capital and reduce their risks.
10% of Global GDP
According to a newly released report by consulting firm BCG, there is a huge market for tokenised assets as they help bring liquidity to illiquid markets. “A large chunk of the world’s wealth today is locked in illiquid assets,” the report said.
The authors expect tokenised assets to grow into a $16 trillion business opportunity by 2030, up by more than 50,000% compared to $310 billion in 2022. This would equate to 10% of global GDP by the end of the decade.
The authors added that in just the last two years, global digital asset daily trading volume has soared from 30 billion euros in 2020 to 150 billion euros, noting that this is “still minuscule in comparison to the total potential of illiquid tokenisable assets in the world.”
The report mentioned that more than 56% of assets held by taxpayers with a net worth of between $600,000 and $1 million are illiquid. This means that these assets generally trade at a discount compared to liquid assets and are characterised by lower trading volumes, and imperfect price discovery.
The authors also noted that $16trillion was a “highly-conservative forecast” for the total size of the tokenised market and that in a best-case scenario, the tokenisation of global illiquid assets could reach $68 trillion. However, the potential of tokenised assets will differ across countries due to various regulatory frameworks and asset class sizes.
Real World Use Cases
Given the obvious benefits of tokenisation, it is perhaps not surprising that we are already seeing a growing number of real-world examples of assets being tokenised using the blockchain:
1. Tokenisation of Precious Metals
For many centuries, gold has retained its reputation as a valuable asset and investment vehicle. However, there are obviously various complications in moving and storing gold. Tokenisation not only provides the benefit of fractionalisation but can also reduce entry barriers alongside empowering smaller players to access new markets. Notable examples of projects which are currently enabling the tokenisation of precious metals include Cache, Gold (CGT), Pax Gold, and DGLD. These projects have grown in popularity in gold markets by introducing instant liquidity and negligible fees.
2. Tokenisation of Real Estate Assets
Tokenisation in real estate leverages blockchain technology to allow for fractionalisation of high priced and illiquid real estate assets. The other benefits of using for example the Ethereum blockchain to tokenise real estate is that it is possible to program digital assets to include transaction history and ownership rights.
One tokenisation example in real estate is Elevated Returns. The New York-based asset management firm already completed its first tokenised real estate deal back in 2018. More recently, the company placed the deal for the St. Regis Resort in Aspen, Colorado, with a total value of $18 million on Ethereum blockchain. Interestingly, Elevated Returns had plans to sell almost half of the St. Regis Resort as a single asset. Subsequently, the company settled on offering an 18.9% share in ownership through tokens.
Another example is Realt which offers investors tokenised properties. While the properties listed on the platform cost anywhere from several hundred thousand dollars to a few million, they are tokenised so this means that each token can be valued at less than $50. This makes these property investments affordable for investors in many more places in the world.
3. Tokenisation in Logistics
The logistics industry primarily depends on the Bill of Lading as a method for issuing proof of ownership. However, just using the Bill of Lading can present notable difficulties (like when there are delays in delivery or reclaiming of goods orif you lose or misplace the Bill of Lading). CargoX is one of the new and promising solutions leveraging tokenisation to address the issues in traditional methods used in logistics. The company utilises an open system based on the Ethereum blockchain known as the Smart Bill of Lading or B/L. The Smart B/L system has been tailored for working just like the token system to address the shortcomings found in traditional methods used in logistics.
With the new system by CargoX, the carrier could create the Smart B/L by using their app. Then, the carrier can send the Smart B/L to the exporter. After receiving money from the importer, the exporter can transfer the ownership of Smart B/L token to importers. Subsequently, the importer at the receiving end could claim ownership of the goods by showing Smart B/L token to the carrier. This one example clearly shows how tokenisation is transforming the field of logistics.
4. Tokenised High-End Art
High-end art has been one of the best performing asset classes in recent decades but it is extremely illiquid and unaffordable for ordinary people, factors which make it an ideal tokenisation opportunity. The tokenisation of high priced artworks not only makes these assets available to a wider range of investors, but also helps to ensure authenticity alongside easier transfer of ownership to artists or the highest bidder in an auction for purchasing the artwork. There is a growing number of high-end art fractionalisation platforms – for example Masterworks – offering up fractionalised ownership of the World’s most sought after art including paintings by Banksy and Picasso.
5. Tokenised Securities
ADDX is a Singapore-based blockchain start-up that is currently pioneering efforts in tokenising private market securities. Assets include venture capital funds, private credit funds, real estate funds, ESG bonds and more. Access to such institutional investment vehicles was limited to a select few in the past. Thanks to fractional ownership through tokenisation, accredited investors with a net worth of 2 million Singapore dollars ($1.47 million) can now participate in these assets.
In August 2022, the digital asset investment platform Zerocap announced that companies on the Australian Securities Exchange (ASX) will now be able to trade tokenized bonds, equities, funds or carbon credits after a successful proof-of-concept trial.
6. Tokenised Investment Funds
Global investment company Aberdeen, which holds £508 billion in assets, joined the Governing Council of Hedera blockchain in 2022, with a view to tokenising its funds. Aberdeen believes that distributed ledger technology (DLT) has the potential to transform structural inefficiencies that exist in the fund management industry. Hedera’s network is capable of cutting through management work and making tokenised money management faster and more cost-efficient, while preserving its security and sustainability.
Duncan Moir, Senior Investment Manager at Aberdeen, said: “Hedera offers a highly promising DLT solution for fund management.”
Bill Miller, co-chair of the Membership Committee for the Hedera Governing Council, said: “As Aberdeen leads the investment industry move into tokenised assets, the Hedera network provides them with the underlying technology to overcome barriers and offers an increasingly sophisticated experience to their clients, who pay for the layers of services that contribute to managing their assets.”
Final Thoughts
It is clear that, although we are only at the beginning of the massive trend towards the tokenisation of assets, real world tokenisation of assets across a wide range of asset classes has already begun. Like every other Crypto business use case, this isn’t being driven by a love of technology, but instead, by the real-world efficiency and transparency benefits that the use of blockchain technology offers. For these reasons, the continued growth of tokenisation to — perhaps as of now — impossible to imagine levels (as anticipated by consultancy group BGC) is very plausible.
PTLIB is CIO of Dragonfly Asset Management.
DISCLAIMER: This content is for EDUCATIONAL AND ENTERTAINMENT PURPOSES ONLY and nothing contained in this blog should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.
