Cryptocurrencies experienced severe price corrections in 2022, after reaching all-time market capitalisation highs in 2021. Reminiscent of the 2018 “crypto winter”, the crash has eroded over US$1 trillion ($1.4 trillion) in value and has led to a slide in investor confidence in cryptocurrencies and decentralised projects. Layoffs, hiring freezes and tempered growth aspirations have been witnessed across crypto-native firms, while the number of crypto enforcement actions is rising. The Terra Luna crash, Celsius debacle and FTX collapse have all played a role in these developments.
Developer activity, however, has continued to hold strong, and there is now an opportunity to channel capital and talent towards viable blockchain applications. In a recent report released by BCG and ADDX, we highlighted a US$16 trillion business opportunity in on-chain asset tokenisation by 2030, which would represent 10% of global GDP. Blockchain technology has potential to dramatically unlock liquidity, access, and choice for multiple investment instruments at scale, especially for assets that are traditionally illiquid such as real estate, high-value art, public infrastructure, and private equity.
To fully appreciate what these opportunities mean for regulators, financial institutions, and investors, it is worth examining how the sector is expanding, as well as the possible benefits and pitfalls we need to stay alert about.
The advantages and risks of on-chain asset tokenisation
Whether fungible (interchangeable and divisible) or non-fungible (unique and non-interchangeable), on-chain asset tokenisation presents an opportunity to overcome the barriers of asset illiquidity and to improve on what has been achieved so far by traditional fractionalisation in the public stock markets. This shift from traditional fractionalisation to on-chain tokenisation expands investor access to more asset classes and this has important regulatory implications, making it necessary to understand the advantages and risks involved.
Fractionalising assets on blockchain-based platforms makes alternative asset classes like hedge funds more affordable for investors, by offering these investments in fractional sizes. Fractionalisation can also facilitate the borderless accessibility of illiquid assets such as natural resources, land, or vintage paintings. It can unlock liquidity and enhance flexibility by enabling the trading of these assets before maturity — allowing, for example, the unlocking of future earnings from agricultural land.
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Another advantage is immutable transparency and accountability through a shared ledger on distributed network nodes. This innovation streamlines transaction efficiency through faster settlement times and the enabling of asset servicing over the life cycle of an asset, without the need for third parties. Tokenisation can also ensure better price discovery of illiquid assets, thereby reducing “rent-seeking” by intermediaries such as auction houses.
There are, however, certain risks that must be taken into account as asset tokenisation grows. Increasing regulatory scrutiny and geographical variance in governance standards could lengthen the runway for scaling tokenisation across borders. Unevenness in regulations from one jurisdiction to the next on issues such as money laundering, terrorism financing, illegal trades, and cyberattacks could require companies to make significant adjustments to their operating models as they expand, slowing down or even setting back the wider adoption of tokenisation.
Blockchain technology is still on a path towards maturity, and key pieces in the puzzle are being figured out by regulators, financial institutions, service providers and asset owners. More also needs to be done to improve investor awareness and education.
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The proliferation of on-chain asset tokenisation in Asia
Nevertheless, there are strong indicators to suggest the rising prominence of on-chain asset tokenisation. Global digital asset trading volume has risen sharply in recent years, surpassing US$2.3 billion in 2021 and forecast to reach US$5.6 billion by 2026. Stakeholder sentiment is strengthening, following successful tokenisation pilots in numerous markets. Many monetary authorities have also recognised on-chain tokenisation.
Amid these positive signs, we also see more asset classes being tokenised, including non-conventional illiquid assets such as crops and vintage wines. These developments are also undergirded by a growing talent pool. In 2020 alone, the decentralised finance (DeFi) space saw a 67% and 45% growth in monthly active developers and frequent contributors respectively.
In Asia, the potential of on-chain asset tokenisation is worth close to US$3 trillion when estimated in terms of the total market cap of private assets. Robust adoption is expected among individual investors in several countries including Japan, Thailand, and especially Singapore, where asset tokenisation is regulated.
The Monetary Authority of Singapore (MAS) was one of the first regulators globally to say in 2017 that tokenised securities would be regulated in the same way as traditional securities, which gave the nascent space much needed certainty so that investments and innovations could go ahead. In 2020, ADDX became the first tokenised securities exchange to be licensed by MAS.
MAS also recently launched Project Guardian, to explore the economic potential and feasibility of applications in asset tokenisation and DeFi, while managing risks to financial stability and integrity.
Transformative growth through partnerships between traditional and emerging players
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From tokenisers to issuers, developers and policy leaders, there is much that can be done to realise the full potential of on-chain asset tokenisation in Asia. Traditional asset stakeholders can pilot, deploy, and scale onchain tokenisation as an upgrade to existing business models, while leveraging their large capital and customer bases as well as their deep institutional knowledge of customer preferences and the financial markets. They should partner with emerging fintech companies and DeFi projects to accelerate go-to-market plans.
Tokenisation service providers should invest in compliance capabilities while working to enhance financial literacy and trust amongst individual investors.
Developers can design standard architectures to ensure the underlying blockchain is built for scale, performance, and functionality, while establishing standard protocols to improve adoption. They can build talent incubation programmes and can ensure coding quality by validating smart contracts via external, certified service providers.
In the regulatory space, building on the encouraging advances made so far, there is scope to set clear rules for all stakeholders. Regulators can also deepen their thinking on how tokenisation might impact anti-money laundering and terrorism financing, investor and consumer protection, financial system stability and market integrity.
Regulators can also drive innovation in controlled environments like regulatory sandboxes. MAS’ FinTech Regulatory Sandbox gives Singapore-based fintech companies a well-defined, live environment in which they can freely innovate during the sandbox period, with a limited licence and mandate. Through the sandbox, companies can safely test the viability of new fintech products using real money and clients.
Looking ahead, although the funding outlook for blockchain-based projects is expected to remain tight, there is significant potential for growth. Adopting appropriate tools and measures to encourage on-chain asset tokenisation can result in transformative change amidst the “crypto winter”.
Sumit Kumar is managing director and partner at Boston Consulting Group. Oi-Yee Choo is CEO of ADDX
