Despite predictions of trillions of dollars of opportunity in tokenisation, volumes remained extremely small until the 2022 rate-hike cycle catalysed the demand for fiat yields from crypto-native investors. However, concerns that the rate-cut cycle might extinguish this promising use case appear misplaced.
The potential opportunity to move real-world assets onto blockchains has been recognised for a long time, with consultants talking about trillions of dollars of opportunity and some banks investing in tokenisation infrastructure as early as 2017. However, the tokenised real-world asset market remained very small until central banks started hiking fiat rates in 2022. This created some demand from crypto-native investors to diversify a portion of their holdings into fiat yields against the backdrop of a crypto bear market and a collapse of previously very attractive crypto-native yields. As these investors preferred to keep their assets on blockchain platforms, this created a demand for tokenised treasuries and money-market funds.
Total assets in tokenised treasuries (USD)
Source: RWA.xyz
The tokenised treasury market has increased 22x since the beginning of 2023 and tripled year-to-date. Although there are concerns that the rate-cut cycles most central banks around the world have embarked on will arrest the growth of this sector, we do not think this is likely.
Slow start
Traditional finance and governments were already supportive of the opportunity to tokenise traditional financial assets in the relatively early days of the crypto market. France introduced a regulatory framework for the issuance of tokenised assets already in 2017, broadening a 2016 Act that allowed the use of blockchains for the issuance and sale of SME bonds.
The ICO boom era created a lot of excitement around the opportunity to use trustless systems and benefit from fractionalisation, instant settlement, 24/7 availability, and the lack of a need for intermediaries. The expectation was that the promise of streamlined trading, settlement and increased liquidity would lead to a sharp growth in the tokenisation of traditional financial assets. Stock exchanges such as Deutsche Börse, LSE and Euronext made investments in tokenisation platforms over 2018–19, and banks such as Société Générale and the European Investment Bank started working on tokenisation projects.
Although there were tokenised assets issued by crypto-native as well as traditional institutions, the tokenised real-world asset market remained very small and highly illiquid. Despite broad recognition of the opportunity, the sector was caught in a chicken-and-egg dilemma: a small, illiquid market did not provide sufficient incentive to traditional institutions to build capabilities to trade, settle and risk-manage tokenised assets, while the lack of investor demand kept issuers away.
This cold-start problem was further compounded by challenges due to immature regulatory frameworks, including questions about legal rights to the underlying assets as well as assurances about the security and real-time veracity of the underlying assets.
In the end, it wasn’t traditional institutions embracing the opportunity that broke the logjam but the demand for fiat yields from crypto-native investors.
Are crypto-native investors the main drivers of demand for tokenised RWA?
Although demand from crypto investors has unlocked the growth of the tokenised real-world asset market, this demand is relatively small and will always remain so. Crypto investors are not primarily interested in fiat exposure, and this will always be, at best, a small portion of their investment. Such diversification will typically happen when the relative market conditions temporarily make a fiat opportunity more attractive, and the decline in fiat yields will certainly reduce demand from crypto native investors.
Investors who embraced the crypto market see a great medium- to long-term opportunity, and indeed, historical returns – although volatile – have been exceptionally high over time. These investors will not prefer exposure to government bonds other than for brief periods or to add a small degree of diversification. This is, at best, a multibillion opportunity but not the trillions of dollars that institutions like McKinsey or Standard Chartered have forecast.
As fast as the tokenised asset market has grown recently, its total size is still very small. USD 2.2bn of tokenised treasuries are of little consequence relative to the USD 28tn US Treasury market – or, for that matter, relative to the USD 2tn crypto market.
The great opportunity for tokenisation is not based on demand from crypto investors. For this reason, as crypto demand for tokenised fiat products ebbs and flows based on market conditions, it has little impact on the medium- to long-term trajectory for tokenisation.
What is the greater opportunity based on?
The great opportunity has always been for traditional financial institutions to move the trading and settlement of traditional assets onto decentralised platforms to achieve efficiency gains and, in some cases, enhanced liquidity.
Demand from crypto investors was a helpful foot in the door, but the real demand will have to come from traditional institutions, and this will be realised as they build out the necessary platforms and operational capabilities to handle tokenised assets.
The trend for traditional financial institutions to build tokenisation platforms is in place and accelerating. There are ever more frequent announcements from leading banks and financial institutions such as Goldman Sachs, JPMorgan, Visa, DTCC or the BIS on building capabilities and running trials. Meanwhile, asset managers such as BlackRock, Franklin Templeton, Fidelity and Janus Henderson are increasingly active in creating tokenised investment products.
These trends are supported by several governments and regulators putting in place the appropriate legal frameworks and, in many cases, offering sandbox environments to encourage innovation and experimentation with tokenised asset issuance and trading. Examples include the UK, Hong Kong, Singapore, and Project Guardian, where the IMF and regulators or central banks from France, Germany, Switzerland, the UK, Japan, and Singapore collaborate. Project Guardian also includes about two dozen financial institutions, including Citi, BNY, DBS, UBS, Deutsche Bank and others.
We believe that the continued commitment and investments from these institutions, with regulatory support, are the key to realising the greater opportunity in tokenisation. This trend is accelerating, and market factors such as the level of interest rates do not affect it.
Other drivers of demand
Once a sufficient number of institutions put in place the necessary platforms and operational processes to handle tokenised assets, providing exposure to illiquid investments will be a further important driver of demand.
The ability to fractionalise high-value assets such as art or trade and otherwise highly illiquid investments such as real estate will further help the tokenised asset market grow, and it will also benefit the demand for the underlying assets. The same is true for certain less liquid alternative investment vehicles such as hedge funds, private equity, private credit, or venture capital.
Does this benefit the crypto market?
The trading and settlement of real-world assets is one of the prime use cases of decentralised ledgers and one of the greatest opportunities. Value accrues to the underlying blockchain on which the assets are issued, as well as to a host of decentralised protocols that participate in the issuance and trading of these assets.
However, this only translates into value for the crypto market if the activity takes place on public blockchains. If institutions instead create private blockchain platforms with limited access that are run by authorised parties, value will not accrue to the tokens of public blockchains. Private blockchains also forego the wider benefits of decentralisation, as they are merely a shared database among frequently transacting parties.
Institutions such as BlackRock or Franklin Templeton have opted for public blockchains such as Ethereum, Solana or Avalanche, but some tokenisation efforts are taking place on private blockchains such as JPMorgan’s Onyx.
Outlook
Although the rate cut cycle will limit demand from crypto-native investors for tokenised fiat yield, the trend for traditional financial institutions building tokenisation capabilities continues to accelerate. With the opportunity repeatedly highlighted by opinion leaders such as BlackRock or McKinsey and with support from regulators and institutions such as the IMF or the BIS, the medium-term outlook for the growth of this sector is very encouraging.
Read more about crypto assets from Sygnum here.
Disclaimer: The information in this publication pertaining to Sygnum Bank AG (“Sygnum”) is for general information purposes only, as per date of publication, and should not be considered exhaustive. This publication does not consider the financial situation of any natural or legal person, nor does it provide any tax, legal or investment advice. This publication does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum to purchase or sell any assets. No elements of precontractual or contractual relationship are intended. While the information is believed to be from accurate and reliable sources, Sygnum makes no representation or warranties, expressed or implied, as to the accuracy of the information. Sygnum expressly disclaims any and all liability that may be based on such information, omissions, or errors thereof. Any statements contained in this publication attributed to a third party represent Sygnum‘s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. Sygnum reserves the right to amend or replace the information, in part or entirely, at any time, and without any obligation to notify the recipient of such amendment / replacement or to provide the recipient with access to the information. Simultaneously, there is no obligation of Sygnum to inform recipients of information, if before provided information later becomes outdated, inaccurate or obsolete, unless otherwise provided by applicable law. The information provided is not intended for use by or distributed to any individual or legal entity in any jurisdiction or country where such distribution, publication or use would be contrary to the law or regulatory provisions or in which Sygnum does not hold the necessary registration, approval authorisation or license. Except as otherwise provided by Sygnum, it is not allowed to modify, copy, distribute or reproduce, display, license, or otherwise use any content for commercial purposes.
Sign up for Future Finance
Join our 40,000 strong global community to future proof your investments. Sign up now to be the first to receive our news, product launches, industry reports and educational series.