An unintended consequence of the brutal bear market in Bitcoin has been to focus the blockchain industry’s attention where it is most needed: real-world assets.
Both institutional and individual investors want to progress beyond holding speculative cryptocurrencies or stable digital dollars with limited upside. They have ample demand for tokenized bonds, equities, funds, structured products, and sovereign assets like the carbon sink in the mangroves and seagrasses of Seychelles.
By distributing risks over small parcels, tokens can bring big-ticket investments like private equity, credit, and expensive artwork to ordinary people. The rich can exploit the technology for estate planning.
But for demand to be met, supply has to keep pace. To be successful financial products, these digital representations must have robust trading liquidity. And for that, they must convince market makers of the inherent time- and cost-saving advantages of distributed-ledger technologies, such as instantaneous settlement and embedded “smart contracts,” or software that automatically executes action like crediting a coupon or dividend payment into a crypto wallet.
This is yet to take place. What’s currently getting marketed as digital assets is mostly synthetic stuff — traditional products wrapped inside a coin. While the tokens change hands on a public blockchain, the settlement, accounting and reconciliation of the underlying asset ownership is still done manually. The promised efficiency gains of blockchain continue to elude, damping interest.
“Today the decision to buy a money market fund on-chain versus off-chain is a marginal one,” says Andrew Scott, head of digital assets at Marketnode. “The next big catalyst for adoption will be meaningful product improvement, like when you start thinking about airdropping corporate dividend payments or issuing on-chain equity to raise capital.”
Marketnode, a joint venture of Singapore’s stock exchange and its state investor, Temasek Holdings Pte, began with the mandate to put funds sold to investors in the city on the blockchain. The idea was to eliminate the back-and-forth of faxes and emails between asset managers and their distributors, fund administrators, trustees, and registrars, and cut down the week or longer it took for purchases to conclude. Having met its goal of squeezing the timeline, Marketnode wants to do something similar with wealth products.
A typical private bank in Singapore processes hundreds of structured products, such as equity-linked or fixed-coupon notes, every day. These are standardized enough for high-volume execution but tailored to a client’s specific strike price or stock preference. If the underlying asset stays above a set barrier, the client nets a high coupon. However, the high fees don’t eliminate the risk of human error: If a relationship manager inputs a wrong strike price or an incorrect valuation date during the trade entry, the product’s entire lifecycle is compromised from day one. “It’s the perfect product to disrupt with blockchain,” Scott says. “If you can halve the 1% fee for investors, then you’re talking about real efficiency gains.”
While stock and bond prices are easily verifiable, making tradeable tokens out of sovereign real-world assets is far more complex.
Still, it’s a worthwhile project. Take the carbon-capture ability of forests and seas. Nations want to benefit from their green and blue economies, but investors need to know what they’re paying for. They want assurances that the woodlands in Indonesia’s Kalimantan or the meadows on the ocean bed around the Seychelles islands aren’t being degraded. Capturing the reality using satellite imagery and artificial-intelligence tools can enable real-time reserve verification on the blockchain. That’s what EDENA Capital Partners is trying to do — founder Wook Lee has put together a $20 billion-plus pipeline of sovereign assets across Asia, Africa, and the Middle East that he aims to take to Wall Street.
US investors aren’t currently in a mood for more crypto exposure. The 46% slump in Bitcoin prices since October is leading to a capital flight out of Bitcoin exchange-traded funds. Publicly traded digital-asset treasuries, or DATs, are under pressure to sell assets. But the promise of blockchain as the 21st-century’s financial architecture will survive speculative booms and busts. Last year, Ripple and Boston Consulting Group predicted in a joint report that on-chain real-world assets would, in their baseline scenario, swell 30 times to $19 trillion by 2033.
It will take time to get traditional financial instruments ready for the promised benefits of tokenization. However, that’s exactly where the bigger prize lies.
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