During the crypto winter of 2018-2019, skepticism and reluctance were the norms among financial institutions regarding direct involvement in cryptocurrencies. The volatile nature of tokens, coupled with regulatory uncertainties, created an environment of caution. But as we get closer to 2024, there is a noticeable change in the air.
Tokenization is increasingly seen as a palatable option for governments and regulators alike, with world governments exploring the benefits of blockchain technology, such as improved liquidity, fractional ownership and global accessibility, without full exposure to the volatility of cryptocurrencies.
For the first time, governments around the world are required to make changes to their respective regulations if they want to leverage blockchain technology that will benefit them in the future.
A multi-trillion market by 2030
Real assets are predicted to be a major driver of digital asset adoption. Over the past year, several established financial powerhouses have embraced the idea of tokenizing real-world assets, bringing ownership of valuable assets such as precious metals, art, and real estate into the blockchain. A report from Boston Consulting Group predicted that by 2030, asset tokenization in general will be a multi-trillion dollar market.
In light of market volatility, tokenized real-world assets have emerged as a sought-after hedge, providing stability and resilience in times of market turbulence, an attractive prospect for investors looking to protect their portfolios. The renewed interest is not limited to private, closed ecosystems. Banks and financial powerhouses are increasingly exploring the use of tokenized financial instruments within institutional decentralized financial frameworks. What is remarkable here is the choice of infrastructure: many opt for public blockchains. This decision underlines growing confidence in the security and potential of these decentralized networks, a stark contrast to the concerns of a few years ago.
In fact, a Bank of America research report published this year concluded that the tokenization of real-world assets such as commodities, currencies and stocks was a “major driver of digital asset adoption.” BofA analysts Alkesh Shah and Andrew Moss wrote in the report that “although we are only in the early innings of a major change in infrastructure and applications, tokenization could reshape the way value is transferred, settled and stored ” in all sectors.
This sector sentiment has been brewing for some time. In October last year, Hamilton Lane – an investment management firm with $824 billion in assets under management and supervision – announced plans to tokenize three of its funds under a partnership with digital asset securities firm Securitize.
Of course, we are still a long way from total adoption of digital assets. But we are witnessing a shift in the way global governments and regulators view real-world assets. Historically, real-world assets have been forced to stay within the constraints of current regulations. However, in recent months we have witnessed a shift as jurisdictions around the world have been forced to consider regulatory changes in order to take advantage of them and/or launch their own real-world assets for their own needs.
As the number of crypto enforcement actions has increased over the years, companies will need to demonstrate inherent value to withstand regulatory scrutiny. Tokenized real-world assets will also likely necessitate the creation of a robust, scalable infrastructure designed to merge with the traditional financial ecosystem, rather than attempt to replace it. As we progress in this direction, we need more governments to support building the missing pieces critical to connecting today’s Web2 to Web3.
Government as pioneers
Examples of this growing trend to support tokenization can be seen in Asia, where governments such as Hong Kong and Thailand are not only recognizing its potential for real assets – policymakers are actively shaping its use. By reforming regulations to better accommodate the tokenization of real-world assets, these governments are laying the foundation for innovation and growth that will serve as examples for other governments.
Take the example of Hong Kong. Historically, Hong Kong has limited the sale of new northern areas to developers within the country, but is now looking to open up the sale of land in the northern areas to further global partners, and not limited to Hong Kong’s own developers. This would have meant that the sale would have been classified as a collective investment scheme. However, the Hong Kong government aims to broaden participation with global partners and plans to test this through asset tokenization. This approach would not only expand the investor pool but also lower barriers to entry by enabling fractional ownership.
The Thai government is also considering integrating real-world assets with blockchain technology. Following a recent political shift, the Thai government is keen to distribute tokens to its citizens. Unlike Hong Kong, Thailand’s main hurdle is not regulatory, but technical. The government can expedite legal processes, but the challenge lies in executing the technical aspects of token drops. To do this, they are exploring pilot projects and working with layer-1 and layer-2 blockchain platforms to resolve these technical details.
We are now at a point in Web3’s evolution where we can confidently say that blockchain technology will be integrated into our daily lives at some point. Whether the average person is aware of this or not is somewhat irrelevant. We are currently witnessing a global trend where governments are seriously looking to blockchain integration to unlock new revenue streams and reduce costs, with a primary focus on the utility and applications of the technology itself.
Real estate, fine arts, commodities, and other real-world assets are a perfect example of a use case that can benefit from tokenization. Whether it’s the next year, the next five years or the next ten years, recognizing and seizing this enormous opportunity could be incredibly important for the future of finance itself.
