Bitcoin? It’s a bit old hat, say a cohort of crypto investors who are betting on blockchain technology breathing new life into traditional assets.

As crypto prices see-saw ahead of their next swerve, the market for “tokenisation” — issuing blockchain-based digital tokens that represent assets from bonds to stocks and real estate — may finally be reaching a critical mass.

Big finance firms such as the London Stock Exchange, WisdomTree and Mirae Asset Securities have either invested in token trading and investment platforms over the past year, or are in talks to develop them. Others like Franklin Templeton, UBS Asset Management and ABN Amro have launched tokenised versions of assets such as money market funds and green bonds.

More than a third of institutional investors in the US and almost two-thirds of high-net-worth investors plan to invest in tokenised assets this year or next, according to two surveys of more than 300 players in total conducted by EY-Parthenon in May.

It’s potential for savings on transaction costs that have big investment players circling, according to Colin Butler, global head of institutional capital at blockchain firm Polygon Labs.

“It’s a knife fight right now for market share and profits, so these cost-reduction ideas are very powerful,” he said, adding that institutions had spend years researching tokenisation and were now more comfortable launching projects.

Backers say tokenisation offers traditional finance more transparent trading, increased liquidity, plus reduced costs and settlement times, by automating processes via smart contracts — blockchain-based covenants that settle automatically.

Big gaps

On the other hand, critics point to big gaps in trading infrastructure, a lack of cohesive global regulation and still-limited traction with investors. Indeed, the actual issuance and value of tokenised traditional assets remains small.

The market cap of tokenised public securities is US$345-million, according to Dune Analytics data, a sliver of the $1-trillion wider cryptocurrency market. Those tokens have seen 2.3% growth over last 30 days, lagging bitcoin’s rise of about 10% over the same period.

Some see a bigger future, though; a joint report by Northern Trust and HSBC earlier this year estimated that 5-10% of all assets would be digital by 2030.

While the idea of tokenisation has been around nearly as long as bitcoin, the fledgling market hasn’t lived up to much of hype. Some market players now see significant advances.

“I do think this time is different, largely because now you’re seeing senior-level buy-in from large firms,” said Morgan Krupetsky, head of institutions and capital markets at Ava Labs.

Hurdles remain, with market participants also pointing to, among other things, the need for larger trading pools. Yet some are optimistic.

“In the future people are hoping for a better network effect where more firms are adopting the same platforms so assets become more tradeable,” said Doug Schwenk, CEO of Digital Asset Research. — Lisa Mattackal and Medha Singh, (c) 2023 Reuters