Tokenization Is on the Horizon. How Do We Get There?

Compared to the 6 million years it took for our ape-like ancestors to become modern-day humans, financial markets are evolving at lightning speed.

Pretty soon, it won’t just be crypto that’s trading on the blockchain, but all assets and products — stocks, bonds, ETFs, mutual funds, alternatives and more — that will be tokenized, making transactions quicker, cheaper and more transparent. “By the time all assets are tokenized becomes a reality, [it will] probably be 10, 15, 20 years from now,” David Abner, Northern Trust head of global ETFs and funds, said at a recent Financial Times conference.

So how do we actually get there? 

J.R.R. Token

Tokenization is expected to be a two-step process. First is putting already established financial products like ETFs on the blockchain. “The token products today, at least from the more mainstream firms, live in both worlds of traditional finance and decentralized finance,” said Karan Sood, CEO of asset manager Vest. 

The next step is tokenizing the underlying assets of those products, which will require a regulatory framework. “There’s been a big question mark, especially with the last administration, whether there was alignment to support the development of token and decentralized finance in general,” Sood told Advisor Upside. “Even though we don’t have any specific regulation just yet, the [Trump] administration’s posturing seems very supportive.”

Major firms have already started on steps 1 and 2:

• BlackRock is working toward tokenizing ETFs to be traded on a blockchain, Bloomberg reported last month.
• Over the summer, Goldman Sachs and BNY Mellon partnered to tokenize money-market funds.
• Robinhood, Gemini and Kraken have already launched tokenized stock trading in Europe, and are looking to do the same in the US. However, Wall Street firms have warned the unregulated market could expose investors to hidden risk.

Currently, the real-world asset tokenization market is about $24 billion in size. While that figure may sound relatively small, it represents 380% growth in the past three years, and it’s projected to reach an eye-popping $30 trillion by 2034, according to Standard Chartered. Crunch the numbers on that, and you get about 125,000% growth.

That’s a lot, by the way.