Companies are finding value in putting real assets on blockchains.
For years, tokenization—creating a digital representation of a tangible asset such as real estate—was just a buzzword in the financial sector. But recently, more companies are making this a reality by weaving it into their corporate finance strategies (i.e. smart contracts, stablecoins and tokenized US Treasury bills).
The bet is that after two years of economic turbulence and severe inflation, tokenization can help increase liquidity, speed up payments, reduce costs and improve risk management. And while established firms are still in the early stages of adopting this Web3 technology, they already boast viable use cases.
Take a look at Citi’s new pilot program with global logistics company Maersk. The third-largest US bank has tokenized a smart contract that serves the same purpose as bank guarantees and letters of credit, reducing transaction processing time “from days to minutes.”
Overall, the firm predicts that tokenized assets will grow 80-fold in private markets to reach nearly $4 trillion by 2030.
“Partnerships like the one Citi and Maersk have entered into are a significant step forward in demonstrating the potential of tokenization to streamline cash management and trade finance,” says Paul Turner, chief executive of Abu Dhabi-based multi-service fintech provider Capex.
Visa is also testing tokenization. In September, the payments giant teamed up with Paysafe in London to integrate a tokenization service that it expects will better protect customers.
That same month, Visa led a $12.5 million funding round for Agrotoken. The Argentina-based startup is touted as the first platform to convert physical grain into a digital counterpart through tokenization.
Like other real assets [RWAs]grain turns from a “real asset” into an investment instrument. Once ownership is registered on the blockchain, it becomes available for trading and can be divided into fractions or stored securely.
“There’s a lot of hype around the desire to put tokenized real-world assets on-chain,” says Richard Johnson, CEO of Texture Capital, a broker-dealer specializing in tokenized assets.
With Agrotoken, farmers can exchange tokenized grain for things like materials, machinery, or fuel. “Grain tokens” can also be used to create a guarantee for requesting loans, exchange for local currency, or as a hedge against inflation.
Tokenization projects are also gaining momentum at Johnson’s former company Société Générale. The French multinational bank, where he once headed quantitative electronic services, is “busy combining more institutional assets.” SocGen made headlines in December when its Ethereum-based stablecoin, EUR CoinVertible, began trading on European cryptocurrency exchange Bitstamp.
The asset management arm of Paris-based insurer AXA then used the SocGen stablecoin to buy €5 million ($5.4 million) worth of tokenized green bonds. According to AXA, this format increases transparency and traceability, and speeds up transactions and settlements.
Also in December, DWS Group (formerly Deutsche Asset Management) confirmed a partnership with blockchain firm Galaxy Digital to launch a euro-denominated stablecoin that will “accelerate digital asset adoption and tokenization into the mass market.”
Scenarios like these will inspire more senior executives to embrace tokenization in 2024, if they haven’t already, says Caitlin Long, founder and CEO of Custodia Bank. “Every bank CEO knows this technology is coming, and if they don’t plan for it now, they’re already behind,” she adds. “Watch what they do, not what they say.”
Among the new use cases for long notices, many revolve around tokenized dollars, which can serve as a cash equivalent for accounting and liquidity coverage ratio purposes. One of the significant advantages of tokenized dollars is that they are programmable and “can be built into all kinds of software applications, including smart contracts and artificial intelligence,” she explains.
Tokenized securities are also useful because they are believed to have a lower chance of error. “I’m always surprised by the inaccuracies in the lists of corporate shareholders and bondholders,” Long says. “Tokenization will help correct these inaccuracies and also reduce costs.”
Token Economy
Observers of the “token economy” trend say clashing views could prevent mass adoption. On one side, there are proponents like BlackRock’s Larry Fink. On January 12, the CEO of the world’s largest asset management company praised the US Securities and Exchange Commission (SEC) for finally approving a Bitcoin exchange-traded fund (ETF) after years of controversy.
BlackRock’s iShares Bitcoin Trust was among the cryptocurrency ETFs that debuted in U.S. trading last month. Fink now wants Ethereum ETFs to get SEC approval, but so far the agency led by Gary Gensler has refused.
“These ETFs are stepping stones on the path to tokenization, and I believe that’s where we’re going,” Fink said in a televised speech.
In contrast, there is JPMorgan Chase CEO Jamie Dimon, who told lawmakers during a Dec. 6 Senate hearing that he has “always been deeply opposed to cryptocurrencies, bitcoin, etc.”
Dimon didn’t specify whether “etcc” includes all tokenization, but it’s worth noting that his firm claims to process $1 billion worth of transactions daily on its private blockchain network.
This “hot and cold” tone underscores a lack of focus on the technology’s usefulness, says Jack O’Holleran, CEO of San Francisco-based blockchain startup Skale Labs. “The beauty of web3 is that it gives power, transparency and ownership to the users and workers of networks and markets,” he adds. “Web3 will come with or without the support of central banking leaders.”
There is a different atmosphere abroad. During a recent visit to the Token 2049 event in Singapore, O’Holleran noticed that his colleagues in the Asia-Pacific region were being actively encouraged to embrace tokenization.
“Projects in Asia-Pacific” have “an innovation ecosystem, a supportive regulatory framework and an active community that actively supports blockchain and tokenization initiatives,” he says. “The US is falling behind in the race for global Web3 market share. I hope that changes.”
Capex’s Turner shares a similar view. “The US regulatory environment is still evolving, with different agencies overseeing different aspects, leading to uncertainty and preventing clear implementation guidelines,” he adds. “The large size of the U.S. economy and its financial markets may hinder the incentive to be a pioneer in this area.”
Meanwhile, Turner notes, countries like Singapore are “more proactive and supportive of the regulatory framework for tokenization, aiming to attract startups and companies to explore the technology and become a global hub for the industry.”
In November, the Monetary Authority of Singapore launched several tokenization pilot projects. The campaign attracted prominent US firms, including Citi, T. Rowe Price Associates, Fidelity International, BNY Mellon, Franklin Templeton, Apollo and, yes, even JPMorgan Chase.
The EU is also preparing for tokenization, Johnson said, citing regulators “coming up with a new set of rules.” In May, the EU passed the Markets in Crypto Assets Act (MiCAR), establishing a common framework for crypto asset markets across the region.
That’s a positive thing, says Johnson, “whereas here in the US the mantra was that [regulators] no new rules needed. “I think it’s wrong”.
Skeptics also point to questionable events occurring at some of the most prominent companies in the crypto industry. In 2022, there was a $32 billion “fiasco,” as Johnson calls it, that engulfed the FTX cryptocurrency exchange.
Less than a year later, stablecoin issuer Terraform Labs went bankrupt and crypto lender Celsius went bankrupt for $4.7 billion. And like FTX’s Sam Bankman-Fried, Celisus founder and former CEO Alex Mashinsky has faced fraud allegations.
Online security is also an issue. More than $1.8 billion worth of digital assets went missing last year, according to research from blockchain company CertiK. This is a high figure, despite the fact that it is 51% less than in 2022, when losses from hacking attacks and other incidents amounted to $3.7 billion.
Betsabe Botaitis, CFO of blockchain software developer Hedera, the advice is simple: “Prioritize cybersecurity measures to protect your company’s assets and sensitive information.”
“CFOs must begin to understand that their companies will eventually use digital assets as an integral part of their operations,” says Botaitis. Their teams “will need to anticipate and be prepared to account for and communicate any digital asset position.”