Tokenization of Digital Securities

Table of Contents

• Introduction
• What is the tokenization of digital securities
• Benefits of Tokenization
• Why tokenize traditional financial assets
• Size of the market
• What is slowing down adoption?
• Conclusions
• Are you interested?

Introduction

Tokenization refers to the process of representing real-world assets, such as physical assets, securities, or even intellectual property, as digital tokens on a blockchain. These tokens can be bought, sold, and traded, providing fractional ownership and increased liquidity for traditionally illiquid assets. Therefore, tokenization unlocks new possibilities, revolutionizing the way assets are owned, traded, and utilized. It fosters innovation and empowers individuals to participate in the global financial ecosystem in a decentralized manner. According to a report by the World Economic Forum, the global market for tokenized securities could reach $24 trillion by 2027.

What is the tokenization of digital securities

Tokenization of digital securities refers to the process of converting traditional securities such as stocks, bonds, and other financial instruments into digital tokens that can be bought, sold, and traded on blockchain networks. Tokenization involves creating a digital representation of the asset and then dividing it into smaller units, or tokens, which can be bought and sold by investors.

Benefits of Security Tokenization

Tokenization of digital securities allows for increased liquidity and accessibility, as it eliminates many of the barriers to entry that exist in traditional financial markets. It also enables fractional ownership, which means that investors can buy and sell smaller portions of an asset, rather than having to purchase the entire asset. Furthermore, tokenization provides increased transparency and security, as the transactions are recorded on a blockchain, that is a decentralized and immutable ledger. This eliminates the need for intermediaries, such as brokers or custodians, which reduces costs and increases efficiency. As tokenization enables fractionalization of high-value illiquid assets, it makes it easier to trade, transfer ownership, and update the related records. It also provides operational efficiencies, reduces costs, and facilitates broader access to assets. The use of smart contracts and blockchain technology may reduce counterparty risk and eliminate the need for trust among buyers, sellers, and brokers.

Why tokenize traditional financial assets

The traditional financial industry is limited by outdated systems and processes, which have led to some financial assets, such as fixed income and private equity, being relatively constrained in comparison to more efficient markets like public equities. The industry has accepted this sub-optimality and has under-allocated such assets in their portfolios while paying a premium for assets with operational access. However, assumptions that investors don’t want certain asset classes may have been made based on them being harder to access or manage. The financial market infrastructure has multiple layers of intermediaries, resulting in a lot of back-and-forth reconciliation. Cross-border payments and post-trade settlement processes involve several steps to reduce risk and failures in traditional workflows. The use of distributed ledger technology (DLT) and tokenization allows all stakeholders in the financial industry to operate on the same shared infrastructure, which serves as a single source of reliable data. This eliminates the need for expensive reconciliation, settlement failures, and delays caused by waiting for physical documents. Furthermore, the adoption of DLT and tokenization provides greater access to investment opportunities that were previously restricted by operational difficulty.

Size of the market

According to a report by the World Economic Forum, the global market for tokenized securities could reach $24 trillion by 2027. This represents a significant increase from the estimated market size of $712 billion in 2020. A report by the research firm Research And Markets projected that the global tokenization market will grow at a compound annual growth rate of 20.5% from 2021 to 2026, driven by the increasing adoption of blockchain technology and the growing demand for more accessible and efficient financial instruments. Another report by Citi predicts that the TAM (Total Addressable Market) for tokenized digital securities will grow to $42 trillion by 2030 out of which $1 trillion will be tokenized. In addition, the report considers that the trade finance market will also benefit from the adoption of distributed ledger technology (DLT), with volumes potentially reaching $1 trillion or 8-10% of global trade finance volumes by 2030. Several high-profile companies and institutions have already entered the market for tokenized securities, including Nasdaq, which launched a platform for trading tokenized securities in 2020, and the Swiss stock exchange SIX, which launched a platform for trading tokenized assets in 2019. While the market for tokenized securities is still in its early stages, the potential for growth and disruption is significant. As blockchain technology and tokenization continue to evolve and mature, we can expect to see increasing adoption of digital securities and a growing market for these assets.

What is slowing down adoption?

The lack of an established legal and regulatory framework, building new infrastructure, potential disintermediation, lack of standards and interoperability, fractured liquidity, and public blockchain infrastructure being a complicated fit are key factors holding back tokenization initiatives. Some jurisdictions have begun creating legal frameworks to support tokenized instruments, but building new infrastructure to replace the existing one will be challenging and expensive.

Conclusions

Tokenization has the potential to revolutionize the way financial markets operate, by making them more accessible, transparent, and secure. Brightnode offers Tokenisation Consulting services. Several reports predict a growth of Digital Securities tokenization that will be in the trillions order of magnitude by 2030. However, in spite of the huge potential market, some hurdles, both at regulatory and technical level, have to be overcome and this will slow down the adoption process. Also check out another post about the future of tokenization!

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