At Security Token Market’s TokenizeThis 2024 conference in May, experts discussed the tokenization of traditional investment instruments and examined opportunities for growth as well as challenges to overcome.
Panelists included moderator Peter Gaffney, Head of Research, Security Token Advisors; Jason Emory, Head of Product Management, DTCC Digital Assets; Patrick B. Martinez, Digital Asset Strategy & Innovation, Northern Trust; Lorenzo Rigatti, CEO of Italy-based BlockInvest; and Mike Reed, SVP of Digital Assets Strategic Partnerships, Franklin Templeton.
Related: Building the Digital Asset Ecosystem
Traditional Investments on the Blockchain
The Franklin OnChain U.S. Government Money Fund is a traditional money fund, but available on blockchain using tokens called “BENJI” as the underlying asset. The fund pays interest in the form of additional Benji tokens, and, like other tokenized assets, tokens can be easily transferred directly to someone else.
Reed said the transfer process normally takes 3-5 business days, earning no yield during that time. But on the chain, he can transfer the funds directly using a yield-bearing instrument.
Other traditional investments are also already available on the chain. Examples of tokenized assets managed by Northern Trust include a private equity fund, fixed income instruments based in Singapore, and, carbon offset credits, among others.
Looking Toward 2030
Northern Trust estimates that 5-10% of its client assets will be digitized by 2030. Others project the total dollar value of all investments available on blockchain by then could be as high as $16 trillion.
Elsewhere, the Bank of Italy has already worked with BlockInvest to create and launch tokenized products for “minibonds” and distressed debt instruments.
“Creating a token is easy, but to enable them is the challenge. We have to tokenize the product, not just the process,” noted Rigatti.
Choosing the Right Blockchain
Each blockchain has very different characteristics, including different user bases, different cost structures, and different build capabilities. It’s important to understand these differences and ensure you choose the right one on which to build out your capabilities to reach the right user base with the features your customers want.
“As a global custodian, we have one primary responsibility, and that’s safety and security,” explained Martinez. “Customers rely on custodians for security. It’s one thing to put things on the chain, you have to ensure security.”
Breaking Down Barriers
There are still many challenges to achieving wider adoption of blockchain technology for traditional investment instruments. Three of the most crucial barriers include data standardization, liquidity and technology infrastructure.
Panelists shared how the fact that each new instrument has to build its own technology infrastructure adds to the challenge. A collective approach with common standards would help adoption of tokenization grow and really take off.
“People have been creating solutions that put tokens on one BC and solutions to move it from one to another. The reality is what do you do with that token?” Emery said. “We need to think about interoperability, for example, to move a token from one blockchain to another and leverage it in applications that take advantage of the fact that the asset has been tokenized.”
Emery noted that DTCC, as an infrastructure, is in a unique position to resolve key interoperability issues around liquidity, data and infrastructure. “The infrastructure layer is really important,” Emery continued. “By coming together as an industry, we can address and resolve those key pain points.”
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