The tokenization industry has gained momentum at breakneck speed.
New use cases are continually emerging, with Boston Consulting Group projecting that the total size of this nascent sector could reach $16 trillion by 2030.
Others believe it might take a little extra time. McKinsey recently forecast that the market capitalization of tokenized assets will hit $2 trillion by the end of the decade—and potentially $4 trillion in a bullish scenario. That would eclipse the current value of all cryptocurrencies and stablecoins in circulation.
“Blockchain technology has the ability to expand participation in equity markets,” Colin Closser, investor relations manager at Exodus, told Decrypt. The self-custodial crypto platform made headlines last year when it became the first U.S. company to tokenize its common stock on the Algorand blockchain.
The shares are now listed on the premier NYSE American stock exchange—and at the time, executives shared hopes that this would elevate the company’s corporate profile, all while supercharging liquidity.
“By virtue of Exodus trading on the NYSE American stock exchange, blockchain-based finance stands alongside America’s premier traditional markets, which reflects well on both systems,” Closser said.
Why tokenization?
Asset managers are drawn to tokenization because of the tangible benefits it brings. Whereas trades could only once take place during strict business hours and never on weekends, blockchains pave the way for 24/7 transactions. Settlement used to take up to two business days, but is now completed in minutes.
Tokenization also helps drive down the costs associated with issuing and trading equities by up to 50%—automating and streamlining backroom processes.
But one of the biggest benefits tokenization can bring regards liquidity, especially when it comes to assets once considered as difficult to buy and sell easily.
The Chartered Alternative Investment Analyst Association recently argued that a rise in fractional ownership could also tear down barriers to entry, making fine wines and real estate more affordable for a broader cross-section of consumers.
Meanwhile, analysts at Citi believe that the financial sector is barely “scratching the surface” of tokenization’s use cases. Ryan Rugg, Head of Digital Assets for Citi’s Treasury and Trade Solutions, argued that the programmability achieved by smart contracts will prove to be especially transformative—supercharging productively by enabling payments to be released automatically whenever pre-agreed conditions are met.
Innovation in action
Looking forward, the potential use cases for tokenization extend far beyond stocks. Other asset classes that can benefit from this approach include bonds, commodities and a slew of other alternative investments. All of this will help expand participation in equity markets.
“When U.S. regulations allow on-chain stock trading to flourish, blockchain’s technological underpinnings will upgrade equity markets with 24/7 trading and near-instant settlement,” Closser told Decrypt. “These features are expected by blockchain users, who could in turn gain access to the world of equity ownership.”
“At Exodus, we’ve always harnessed the power of blockchain to democratize finance for consumers,” he added, noting that, “Exodus’ pioneering Common Stock Token on Algorand, followed by Exodus’ uplisting to the NYSE American, is no exception.”
Exodus marked a milestone in January when it rang the NYSE opening bell—symbolizing how “crypto and traditional markets are coming together to create a more open, transparent and lasting financial system,” Closser said.
Of course, challenges lie ahead in the ongoing push to take tokenization mainstream. Regulatory clarity is a key sticking point, though progress is being made, with the U.S. Securities and Exchange Commission’s Crypto Task Force hosting a roundtable last month to discuss the technical standards and safeguards needed for this industry to flourish.
For this sector to achieve its full potential, careful thought also needs to be paid to infrastructure, with transactions taking place on blockchains that can scale in line with institutional demand.
Recent State Street research indicated that 70% of respondents to a recent poll are willing to transfer assets between traditional custodial environments and tokenized platforms. Not only does this show there’s healthy demand, said State Street’s analysts—it’s a sign that digital and traditional assets will co-exist “for years to come.”
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