The asset tokenization and real-world asset (RWA) space captured the attention of retail and institutional capital investors in 2023 due to its favorable mix of professionally managed products and digital asset mechanisms. Having advised over 40 clients on tokenization strategies and issuances to date, we see the following key themes emerging in these markets in Q3 2023.
Blockchain savings and bottom-line improvements
For investors entering this space, the greatest efficiencies will be realized through end-to-end digital systems – meaning a life cycle in the chain. That means a savings in dollars or manual labor time compared to traditional processes. For example:
Goldman Sachs Digital Asset Platform (GS DAP) achieved savings of 15 basis points on the €100 million digital bond issuance, resulting in an additional return of €150,000 that was passed on to Union Investment as sole buyer.
JP Morgan’s Onyx Digital Assets (ODA) expects $20 million in savings on a projected $1 trillion in tokenized repo volume by the end of 2023.
Broadridge’s Distributed Ledger Repo (DLR) saves sell-side clients such as Societe Generale $1 million per 100,000 repo transactions.
Equilend launched 1Source as a distributed ledger-based securities lending solution to save the securities lending industry an estimated $100 million in collective costs.
Structured financial services platform Intain reports savings of 100 basis points by reducing life cycle costs for SME loans from 150 basis points to 50 basis points through Hyperledger and Avalanche blockchain solutions.
Vanguard makes through Grow Inc. using R3’s Corda to achieve instant processing, saving 100 hours of labor per week.
Liquid Mortgage has reduced Mortgage-Backed Securities (MBS) reporting on the Stellar blockchain from 55 days to 30 minutes.
Money markets and government bonds as low-hanging fruit
Asset managers and issuers are familiarizing themselves with tokenization workflows by trying out money market and treasury products. These tokenized assets generate a return that can be passed on to customers completely on-chain.
While alternative product strategies, such as Hamilton Lane’s digital private equity share classes, are in the works, money markets return ~5% annually in low-risk segments. This asset class had accumulated nearly $700 million in on-chain capital by the end of Q3 2023, up nearly 520% YTD.
Tokenized product distribution via institutional customer bases
One of the weaknesses in the tokenization industry so far is the actual product distribution and capital syndication. Institutions are starting to move beyond just tokenizing assets for operational use and savings (repo, collateral management) and are now placing tokenized products with their own customer base as buyers.
Citi is one of the names leading the way here, offering digital corporate bonds through Singapore’s BondbloX to private banking and asset management clients from Southeast Asia. UBS built on its previous digital bond issuance of more than $400 million to high-net-worth clients with an Ethereum-based money market fund, also in Singapore.
As blue-chips like JP Morgan and Goldman Sachs continue to develop their digital suites, they expect their private banking, wealth and asset management, and alternatives teams to act as distribution channels that unlock serious capital that retail broker-dealers struggle to access.
You can read more about the State of Security Tokens 2023 in the Q3 publication.