Banks Predict Tokenisation to Unleash Trillions of $ in Value
Legacy finance is rapidly changing as the digital asset transformation gains steam, driving product innovation across different asset classes and business models, enabling faster and more efficient market changes. We are in the early days but to stay competitive firms must create new value propositions that meet stakeholders needs.
As a result, we are seeing a proliferation of new offerings, generating a more dynamic and competitive environment for investment services. From cryptocurrencies to blockchain-based applications and more, opportunities for growth and increased profitability are endless. With the right strategies and understanding, firms can take advantage of these new technologies and be well-positioned for the future.
Tokenisation — a Disruptive Technology — Takes Centre Stage
Tokenising securities such as equity and debt is seen by the market as having the greatest potential for growth in the realm of financial assets. It promises to challenge legacy finance, enabling a whole host of capabilities and a more collaborative approach to product solutions.
Asset tokenisation has the potential to offer greater efficiency and cost savings through transfer of value without the need for centralised intermediaries, as well as automated processes that enable faster and potentially cheaper transactions.
Smart contracts are expected to reduce the cost of issuing and administering securities, decrease transaction costs, increase the speed of execution, and simplify transactions, providing the potential for improved liquidity.
Retail investors will benefit from the wider use of assets tokenisation, as it allows for fractional ownership or interest in funds. Being able to divide ownership into smaller claims than typically observed in stocks and bonds, tokenisation of assets will provide access to asset classes and risks that may have been otherwise beyond their capacity, e.g. private equity funds.
This could potentially enable retail investors to better design and diversify their investment portfolio in certain asset classes with larger ticket sizes in their conventional form (e.g. real estate).
“Although the use of tokenisation is currently limited, its potential is significant.”
Source: OECD
Banks Bet Big on Tokenisation
HSBC and Northern Trust are predicting a significant impact of digital asset tokenisation as a true disruption to traditional finance, while Citibank is betting that tokenisation of real-world assets on the blockchain is set to become the next major use case in crypto. The firm believes that the industry is set to grow to between $4 trillion and $5 trillion by 2030, representing an 80-fold increase from current levels.
Citi’s March report “Money, Tokens and Games”, predicts that digital securities will make up the majority of the tokenized assets (up to $5 trillion), with $1.9 trillion coming from debt, $1.5 trillion from real estate, $0.7 trillion from private equity and venture capital and between $0.5–1 trillion from securities.
Tokenisation of these assets to create digital certificates of authenticity on the blockchain that represent a share of a real-world asset will surpass legacy financial infrastructure due to its superior technological capabilities, transparency and fractionalisation properties, making traditionally illiquid assets, such as real estate and infrastructure, more accessible and tradable.
“Traditional financial assets are not broken, but sub-optimal as they are limited by traditional systems and processes,” it said. “Certain financial assets — such as fixed income, private equity, and other alternatives — have been relatively constrained while other markets — such as public equities — are more efficient.”
Citi further argues that blockchain tokenization negates the need for expensive reconciliation, prevents settlement failures and makes tedious operations ever more efficient:
“What decentralised ledger technology and tokenisation offer is an entirely new tech stack that lets all stakeholders do all activities on the same shared infrastructure as one golden source of data — no more expensive reconciliation, settlement failures, waiting for the faxed documents or ‘originals to follow’ by post, or investment choices being restricted by operational difficulty in access.”
The investment bank did, however, acknowledge that there are drawbacks at present, such as a lack of legal and regulatory framework, challenges with building the infrastructure and obtaining a widely followed set of interoperability standards.
Despite all optimism surrounding tokenisation, the investment bank recognises growing pains that come with its implementation. There is still a lack of legal and regulatory frameworks, and many industry players remain sceptical of its success, citing the failed $165 million Australia Securities Exchange ASX project.
However, Citi believes that in time the technology will establish a digital, globally accessible asset infrastructure, with smart contract and blockchain-enabled automation capabilities that are more efficient than traditional systems.
Source: Citi Institutional Clients Group
In a Nutshell
The financial services sector is beginning to embrace tokenisation, a technology that offers automation capabilities, transparency and fractionalisation that surpass legacy financial infrastructure. Banks, such as HSBC and Northern Trust, are predicting a significant impact, with Citigroup expecting the market to skyrocket 80-fold to $4–5 trillion by 2030.
Tokenisation promises to provide a digital, globally accessible asset infrastructure, powered by smart contracts and distributed ledger technology. To ensure consumer protection and financial security, the countries are stepping up regulation to provide a solid foundation.
Despite remaining scepticism, there is growing consensus that tokenisation and blockchain technology will be replacing an outdated, sub-optimal traditional system with a more efficient alternative.
Tokens: Digital representations of the economic value and rights of assets.
Tokenisation: The process of issuing a digital token, powered by distributed ledger technology, that represents a specific asset. The token acts as a digital certificate of authenticity, stored as strings of code on the blockchain.
Asset Tokenisation: The process of representing real-world assets through the issuance of tokens on a blockchain. These tokens can act as a store of value, as they carry the rights of the assets they represent. To ensure that the tokens remain backed by the underlying assets, these assets must be placed in custody, as they continue to exist in the “off-chain” world. This has led to an increasing need for custodianship of assets in tokenisation transactions.
About IAMX
IAMX is a token-based SSI and authentication protocol that empowers individuals with the means to own their identity. Adhering to the strictest of regulatory standards for identity protection, IAMX builds on the foundational principles of SSI to provide a robust and secure system where individuals are able to take control and manage their identity. Users of IAMX will realise significant time and cost savings through novel approaches to identity management and e-commerce transactions, like 1-click fulfillment, which are legally binding and maintain local regulatory compliance. With users in control of their identity data, time-consuming processes like KYC and KYB become near-instant, highly secure transactions.
IAMX builds upon the foundations of SSI, blockchain, and decentralised identifiers (DIDs), enabling individuals, organisations, or any entity to prove their identity independent of external parties or centralised authorities. This way, the authenticity of anything tied to an IAMX DID can be independently confirmed by the entity holding the DID.
IAMX is at the forefront of the Web3 revolution, bringing the world’s most secure, decentralised, and user-friendly SSI solution to the Internet. Adding the layer of identity and authentication to the Internet, with IAMX you can treat the Internet like you are always logged in. Pursuant to its mission and vision, IAMX is working to solve the problem of providing an identity to the billions of people who do not currently have a state-recognised, legal identity. Using a Biometric Identity Gateway, users with or without state-level identification can create their own identity for use online, one that relies on their unique physical attributes, including their face, iris, and fingerprints.
