The future of tokenization & why I’ve joined White Star Capital as an Entrepreneur in Residence
By Jack Chong, Entrepreneur in Residence at White Star Capital
Continued innovation in the digital asset space presents a paradigm shift in how software is eating financial services. With each shift, a whole new category of products emerges:
- FinTech 1.0 — Paypal and Stripe focused on Payments, the transfer of money as a singular unit from one party to another
- FinTech 2.0 — Plaid and Cross River focused on Banking, the transfer of data in and out of bank accounts as a singular unit
- Fintech 3.0 — focuses on Tokenization, the transfer of value in Capital Markets via programmable assets as a singular unit?
I believe that capital markets software is the next frontier of financial technology, and blockchain-based solutions present an opportunity for customers, builders, and investors to leapfrog and reap benefits from building an open, composable, efficient financial software stack.
This hasn’t arrived out of the blue (BCG 2016), it is an opportunity years in the making that has now ripened for adoption.
Looking ahead to the next cycle of innovation, the tokenization of ‘real world assets’ is particularly interesting as an emerging category. It has captured the attention of both crypto-natives and traditional financial institutions, and will be the clear entry point into Decentralized Finance/Digital Assets, especially for institutional investors.
As I embark on my journey to build a groundbreaking company in tokenization, I’m thrilled to announce that I have joined White Star Capital’s Digital Asset Fund (DAF) as an Entrepreneur in Residence (EIR). White Star Capital is a prominent global technology investment platform with an active presence across North America, Europe, Asia, and the UAE.
Over the past few months, I’ve worked closely with the exceptional DAF team at White Star Capital, providing me with the opportunity to engage with the GPs, collaborate with the team, and tap into the extensive White Star global network. The team employs a thesis-driven approach and provides hands-on support to founders, making them an ideal partner for me. Their unwavering confidence in the industry and dedication to supporting founders is truly inspiring.
The future of tokenization
While tokenization might be an inevitable trend, the opportunity presents itself differently depending on your vantage point: are you an incumbent or a challenger?
Tokenization has the opportunity to disrupt the traditional relationship between Issuers, Servicers, Investors, and the underlying Financial Markets Infrastructure (FMI). Or, it could consolidate their existing moat, deepen customer pain points, and strengthen their pricing power, to the end-customers dismay.
Consider the different approaches that Franklin Templeton, Northern Trust, and SS&C, alongside JPM and BlackRock, are taking towards tokenization, compared to startups such as Ondo Finance, Centrifuge, Figure Technologies, or Securitize. Perspectives on how disruptive tokenization could be are highly dependent on one’s role in the capital markets ecosystem.
Nonetheless, the tokenization of real-world assets has received much attention lately, especially since the total value of private credit brought to the blockchain has now exceeded $500M+.
The current dominant business models seem to fall under two categories:
- Building a protocol or a marketplace for capital in a specific asset class
This protocol/marketplace would handle relationships with originators that source assets in the real world while handling the digital middleware and attracting investors via different distribution channels.
Examples include Centrifuge, Figure, Goldfinch, Credix, Maple, Ondo etc.
2. Building a regulated financial market infrastructure
These are companies that are in the 2018 Security Tokens Offering (STO) vintages, that then sought regulatory licensing specifically Broker Dealer/ATS designations in the US, or equivalent thereof in other jurisdictions.
To some extent, regulated banks also developed their in-house tokenization platforms. That could fall under this category too. See JPM’s Onyx, Goldman Sachs’ DAML and SocGen’s Forge.
Examples include Securitize, tZero, INX, Figure, Oasis Pro etc.
A larger opportunity set remains to be explored…
I believe that a third category exists that could open up a larger opportunity set.
Taking inspiration from how Stripe reinvented payments by empowering e-commerce use cases, Plaid by hyperscaling banking connections, and stablecoins by disrupting cross-border payments, the killer use cases of tokenization are slowly forming. And there are opportunities in enabling the great work that current startups in the space are doing, such as Figure, Securitize, Ondo, Centrifuge, Goldfinch, Credix, and Maple.
Just as Stripe enabled the GDP of the Internet to grow and Plaid enabled the composability of fintech applications, tokenization should now enable new types of issuer—servicer—investor relationships. Nascent asset classes, new types of servicing, and emerging groups of investors all pose interesting focus points for the apps of the future to provide solutions for.
But to get there, a few hurdles remain.
Stay tuned! I’ll continue to publish additional research on tokenization and institutional adoption of digital assets. If you come from an enterprise fintech (Stripe, Plaid, Modern Treasury etc.), or capital markets software (growth-stage, or PE-backed), I would love to chat. The intersection of Web3 and the solutions you are working on has more overlap than you might think.
Feel free to reach out to me at jchong@whitestarcapital.com.
