Coinbase, a prominent cryptocurrency player, has published a report on Monday, October 30, underscoring the increasing momentum behind the tokenization of financial assets in the current high-yield environment. This trend, Coinbase notes, is at multi-year highs and is poised for further growth.
Just this month, financial giants like JPMorgan have demonstrated their commitment to blockchain technology by utilizing the Tokenized Collateral Network (TCN) for collateral settlement, marking a significant step in the adoption of asset tokenization.
Rapid Acceleration Expected
According to Coinbase, this trend is expected to gather significant momentum over the next 1-2 years. Tokenization, initially gaining attention in 2017 for its potential to represent ownership of illiquid physical assets on a blockchain, has evolved into a powerful tool for digitizing financial assets such as sovereign bonds, money market funds, and repurchase agreements, particularly in today’s high-yield environment.
Coinbase sees this transformation as a pivotal use case for traditional financial institutions and anticipates its growing importance within the emerging cryptocurrency market cycle. However, full implementation of this concept may take another 1-2 years to materialize.
In contrast to 2017, when the opportunity cost was roughly 1.0-1.5%, the current environment, marked by nominal interest rates exceeding 5.0%, highlights the capital efficiency derived from instantaneous settlement compared to the traditional T+2 settlement cycle, especially for financial institutions. Additionally, the ability to operate 24/7 and maintain transparent audit records enhances the potential of on-chain payments and settlements.
Risk Mitigation
The recent increase in front-end bond yields has spurred a noticeable surge in yield-seeking activities among retail investors. This growing demand has driven investment into various protocols designed to access the tokenized US Treasuries market, a development that significantly diverges from the landscape of 2017. For example, tokenized US treasuries on public networks have witnessed a sixfold growth this year.
Over the past six years, numerous misconceptions surrounding tokenization have been dispelled, particularly among top executives at major financial institutions. Furthermore, the substantial drop in counterparty risk, thanks to the possibility of atomic settlements in delivery-vs-payment and delivery-vs-delivery scenarios, has contributed to this shift in perception.
Anticipated Expansion
Expectations concerning the scope of tokenization opportunities vary, with estimates ranging from Citigroup’s $5 trillion to Boston Consulting Group’s $16 trillion by the year 2030. It is important to note that these figures encompass forecasts for the expansion of central bank digital currencies (CBDCs) and stablecoins, making them appear substantial at first glance.
