The Benefits of Institutional Tokenization
Modernizing a Core Industry
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Introduction
By the end of this read, you'll discover how asset tokenization can not only lower risks and reduce costs for financial institutions but also pave the way for a more prosperous and secure financial future for you, the investor.
Topics Covered
Benefits and Overview of Tokenization
Current challenges of Institutional Tokenization
Implementation Benefits and New Technology
Strategies For Institutions to Implement Tokenized Assets
Quick Notes ✍️
Asset tokenization is a technology that can drive operational and capital efficiency
AND drive new product streams for institutional investors.
With that in mind, it is projected that tokenized assets will be an industry worth a few trillion dollars within the next 5 years.
But the current traditional finance infrastructure, recent market inception, and fragmented solution set have deterred institutions from adopting this revolutionary technology.
Despite these hurdles, major institutional players like BlackRock are inching their way toward a tokenized future.
Leveraging tokenization technology has advantages that can increase institutional ROI.
Optimizing settlement significantly reduces risk which both institutions and clients will appreciate.
Reducing intermediaries by putting assets in smart contracts not only reduces the time to execute transactions
But also reduces human capital hours leading to client savings.
Crypto firms like Chainlink are building systems to bring TradFi businesses on-chain.
With these new blockchain technologies, Chainlink is eliminating challenges that deter institutions from embracing tokenized assets.
Ultimately, institutions need to work on strategies and start piloting the new technologies.
OR they will be disrupted by businesses that do.
Full Analysis📝
Asset tokenization opens a portal to the future of finance, unveiling the critical synergy between real-world assets and blockchain technology.
For investors, Asset tokenization can open new possibilities for financial growth and security.
In previous articles, we’ve discussed projects that are categorized as real-world assets (RWA’s)....
But diving in deeper can provide a clearer understanding of asset tokenization that can lead to improved investment strategies and greater financial security.
Thus, this knowledge can help aid investors with decision-making for what asset managers they should consider using.
Tokenization is a process that will allow for real-world assets to live on blockchains.
Effectively, tokenization enables an asset to be represented on-chain.
These assets can be tangible assets like real estate,
Financial assets like credit which is closer to what was covered with Maple Finance,
Or intangible assets like digital art and intellectual property.
At the heart of asset tokenization lies a revolutionary concept, one that promises to reshape the financial landscape in profound ways.
Institutional investors agree.
With the increased interest from institutional investors in the crypto space,
There will be TradFi institutions that will scramble to create different products.
The first products that TradFi institutions are focusing on are Exchange Traded Funds (ETFs).
BlackRock’s goal is to create a Bitcoin spot ETF and recently was found to be putting plans for launch in motion.
Bitcoin ETFs are just the beginning of institutional crypto products
And will pave the way for the exploration of tokenization in institutional finance.
According to Citi 4 trillion to 5 trillion dollars of tokenized digital securities could be issued by 2030.
While tokenizing assets is still a newer technology, some institutions are already adopting the practice.
Asset tokenization can solve real-world financial challenges and is an exciting opportunity for investors and institutions.
US-based Broadridge, a fintech infrastructure company, now facilitates over $1 trillion worth of tokenized repurchase agreements monthly on its Distributed Ledger Repo (DLR) platform.
Broadbridge will be one of many financial institutions that will leverage tokenization in a few years.
But, It seems like Blackrock is looking to be a leader in tokenization.
The asset manager recently used JP Morgan’s Blockchain Onyx to tokenize one of its money market funds.
Tokenization Unlocks the Future of Operational Excellence
Tokenization has operational benefits for TradFi institutions.
These benefits include improved capital efficiency, operational cost savings, democratization of access, and transparency.
Improved capital efficiency optimized the speed of settlement.
Consider this…
The longer a financial institution is exposed to another party, the greater the chance that this party might default on its obligations.
But optimizing settlement times can reduce risks like length of exposure to trading counterparties.
Without these risks, institutions are better positioned to respond to market changes and opportunities.
Additionally, it lowers requirements for clearing members in addition to lowering both market and liquidity risk.
Settlement via tokenization decreases the time it takes for investors to receive funds.
The operational cost savings include eliminating manual processes.
Eliminating manual processes and importing them into a smart contract saves time
But it also reduces the intermediaries required to execute certain transactions.
Ultimately, this could reduce the cost of services like securities lending.
This technology will enable asset managers to perform real-time portfolio balancing.
Efficient capital allocation by asset managers not only optimizes returns for clients,
But client preferences are instantaneously considered.
Additionally, versatility gives asset managers a competitive edge in dynamic markets.
As a result, overall client satisfaction can be significantly enhanced.
True to the ethos of crypto, tokenizing assets can broaden investor opportunities.
Institutional investors can offer products that smaller investors can participate in…
And globally, they may be able to ease access due to the on-chain nature.
But, it still may be challenging for non-accredited US investors to participate.
Alongside operational benefits for institutions, tokenization helps with transparency.
Tokenization enables the automation of compliance, accounting, and other records.
The records will live on the immutable blockchain, thus making them more transparent.
Implementing Tokenization is an Upstream Swim
McKinsey points out the challenges of adopting tokenization within institutions.
While the aforementioned Onyx by JP Morgan is being leveraged more…
One reason tokenization has been underutilized is the nascency of the industry.
Institutions are looking for cross-bank solutions that enable instantaneous settlement.
While stablecoins are in existence and widely used, there are regulatory questions.
In the US, those regulatory questions are starting to be answered with recent rulings
But the lack of clarity contributes to the timid movement to leverage the tech.
Despite the uncertainty, one project that is working to make processes easier is Chainlink.
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