Asset tokenization refers to implementations of the blockchain that create tokens for financial and real-world assets ranging from equity, bonds and funds to art, real estate, commodities and patents. According to a new report from Boston Consulting Group (BCG) and ADDX, asset tokenization will reach USD 16 trillion by 2030, or 10% of global GDP. To put that figure in context, the total assets under management for ETFs stood at USD 7 trillion in 2020 (source: BIS), while real estate investment trusts (REITs) were worth a total of USD 2.5 trillion in 2021 (source: Nareit).
BCG points to the crypto winter favoring blockchain tokenization. “Our analysis shows asset tokenization projects could emerge strongly,” said Sumit Kumar, Managing Director and Partner, BCG South East Asia. The difficulties faced by the crypto market since Bitcoin and other digital assets fell from all time highs in November 2021 are partly responsible for these innovations, with Web3 participants seeking innovative new applications for the blockchain. There are, however, a number of structural factors in the broader economy that make tokenized assets a highly attractive prospect. Commodities and large assets are often vulnerable to liquidity crises, and the price and supply shocks seen in the aftermath of COVID-19 and the ongoing geopolitical tensions mean that illiquidity is a pressing concern for market participants. The ability to easily fractionalize assets on the blockchain is a potential solution to this, along with comparatively lower regulation that allows Web3 companies to be more agile in adapting to difficult market conditions.
Use cases in commodity tokenization
One of the most promising areas for tokenization is trading in precious metals and other commodities. The last couple of years have seen a number of high-profile announcements in the Web3 space, often involving major legacy institutions.
Dubai Multi Commodities Centre (DMCC) has announced a partnership with Comtech Gold to digitize the trading of gold by tokenizing the precious metal backed by physical gold bars registered on Tradeflow, DMCC’s electronic warrant system. DMCC said that Comtech Gold tokens (CGO) will be created on the XinFin Digital Contract (XDC) blockchain network based on the deposit of physical gold bars located in DMCC-approved vaults. Each gold bar will be backed by a Tradeflow warrant, meaning that the increased ease of trading a tokenized asset is combined with the additional security, transparency, and real-asset allocation provided by the Tradeflow warrant.
The Easygold Token project takes it all a step further. The project not only lowers the entry requirements by creating a security token that can be purchased for as little as EUR 1 per unit, but also rewards its holders with passive income in the form of yearly dividends that can reach up to 50% for long-term holders. The project follows a simple process that has been optimized over a long period of time and relies on a vast network of suppliers and industry stakeholders. Raw gold is purchased from suppliers directly from the producers in large batches at discounted rates. The gold is then transformed into high-quality gold bars using a highly sensitive, yet environmentally sustainable process. The gold bars are sold at open precious metal markets such as the London Bullion Exchange with a net margin of 20% to 30%. The resulting revenue is then reinvested in the same process. This allows the business model to be scaled exponentially over time, essentially leading to self-reinforcing cycles with a higher purchase amount of raw gold every new cycle and increasing revenue.
Diamond Standard has raised USD 30 million in a Series A funding round led by Left Lane Capital and Horizon Kinetics, the company announced in a statement. Diamond Standard sells and redeems tokens and digital assets, providing retail and institutional investors with a diamond-backed digital currency that has standardized value and liquidity. Physical coins, which the company stores in a vault, hold eight to nine standardized diamonds. The diamond-embedded tokens are digitized through an Ethereum-based digital coin – Bitcarbon – which is tradeable on different exchanges. Diamond Standard Admin Trust, a Delaware statutory trust entity within the Diamond Standard Group, has also established a peer-to-peer marketplace to trade its token directly.
Atomyze, a Russian platform that specializes in the tokenization of commodities, and Rosbank, are launching transactions with digital financial assets (DFAs) based on precious metals. The first one is the issuance of a token for palladium, the holders of which will have the rights to a monetary claim equivalent to the market value of the metal. Palladium as the underlying asset is supplied by leading global miner Nornickel. Many existing tokenization platforms remain private. For example, there are some significant blockchain and tokenization projects targeted purely at trading, such as the separate repo platforms from Broadridge and JPMorgan Chase that transact tens of billions of trades weekly. Atomyze was the first to open up access to DFAs to a wide retail audience. On 29 November, the first Russian transaction involving individuals took place on the platform. Retail investors purchased palladium-based digital financial assets (DFAs) on the secondary market. Another transaction involved Nornickel’s payables, forming a financial instrument that is essentially a small digital bond.
VAKT, a blockchain post-trade solution for the oil sector, has announced that Argus Media and S&P Global Commodity Insights have invested in the platform, which previously raised USD 57 million. The two benchmark pricing firms join heavyweight shareholders, including energy firms BP and Shell, traders Gunvor, Koch and Mercuria, and major banks. The solution digitizes paperwork, including trade confirmations, contracts, logistics and invoicing. Most importantly, the data is cryptographically verifiable, which is critical given the numerous frauds in the commodities sector in recent years.
Flowcarbon and Watr have announced a partnership to bring the capital and technology of decentralized finance to voluntary carbon markets on Watr. The partnership will see Flowcarbon launch its carbon tokenization technology and infrastructure on Watr Protocol as a foundational building block of Watr’s decentralized carbon ecosystem. The aim is to support the exponential increase in carbon credits needed to service the net zero commitments made by industry for 2030 and beyond.
Tokenized real-world assets (RWA) could be the next big thing for DeFi, a report by Coinbase suggests. The idea of tokenizing RWA is not new, but has gained significant traction in recent months among financial institutions, according to Coinbase. These institutions view it as a way of dealing with “inefficiencies inherent in traditional securities settlement.”
Ethereum founder Vitalik Buterin recently urged developers to explore integrating real-world assets into DeFi applications. Buterin sees applications for stablecoins in real-world asset tokenization.
Executives at fund manager VanEck are bullish on security tokenization accelerating in 2023 and believe sovereign institutions could be a main driver of a projected Bitcoin price increase in the second half of next year. The New York-based investment group expects financial institutions to tokenize more than USD 25 billion in off-chain assets onto blockchains next year, Matthew Sigel, VanEck’s Head of Digital Assets Research, said.
Colin Cunningham, head of business development at Centrifuge, a DeFi platform for financing real-world assets, told The Defiant that Coinbase is “spot on” in its assessment that tokenizing RWAs and other off-chain assets is the next frontier for DeFi. “Given market conditions, it’s important to acknowledge the necessity of crypto providing real-world value and RWAs represent that,” Cunningham said. “I hope RWAs finally get their due in 2023: crypto liquidity is starving for yield.”