Latest Developments in Digital Securities: Tokenization of Real-World Assets Continues Gaining Momentum

The tokenization of real-world assets (RWAs) has been the trend of 2023, with everyone from institutions to retail joining in. Asset tokenization, after all, offers a favorable combination of digital asset mechanics and legal clarity with professionally managed products.

According to VanEck Research, the total market cap for tokenized real-world assets (RWA) reached $342 billion in September despite the bear market. So, let's take a look at what has been driving this forward and what's the latest in the sector.

The Tokenization Trend

Tokenization involves converting assets like art, real estate, private equity or credit, and bonds into digital tokens. This offers cheaper operation, more transparency, and speedier settlements than traditional systems. It further enables fractional ownership, which significantly increases the liquidity of assets and makes them more accessible to a broader range of investors through blockchain technology.

RWA tokenization particularly has substantial potential in capital markets, with the Total Value Locked (TVL) in US Treasury Bill-related products surging about 600% to $784 million from $100 million at the beginning of 2023.

According to a report by regulated RWA exchange DigiFT and HashKey Capital, blockchain-based tokenization is reshaping RWAs. Here, the majority of investors are institutional, with around 29.1% of tokens held in multi-signature addresses.

This is not to say that RWA tokenization isn't without challenges, the main ones being navigating complex regulatory landscapes across jurisdictions and achieving widespread market adoption.

When it comes to regulation, Switzerland, Singapore, and Hong Kong provide a more favorable regulatory environment, but the US continues to enforce strict securities laws. Meanwhile, the Basel Committee, whose purpose is to strengthen the supervision and regulation of banks worldwide, sees digital securities as low-risk and must be issued on permissioned blockchains.

Regulators themselves have been taking a keen interest in tokenization, with authorities in Japan, Singapore, Switzerland, and the UK testing tokenization for fixed-income, foreign exchange, and asset management products. The BIS itself is also getting involved by helping build the Unified Ledger, covering digital securities, tokenized deposits, and CBDCs.

It is clearly hard to miss the benefits of RWA tokenization, which, by serving as a bridge between the digital assets sector and the TradFi world, creates a new generation of capital markets.

Development in the Tokenization Sector

Asset managers and issuers are increasingly utilizing tokenization for trialing money market and treasury products, which generate a yield that can be passed on to clients, fully on-chain.

Some of the most notable examples in the space include Hamilton Lane, whose digitally-native private equity share classes have accumulated almost $700 million in on-chain capital by the end of Q3 2023, up almost 520% YTD. JPMorgan is another one whose Onyx Digital Assets platform is projecting to save $20 million by the end of this year on about $1 trillion of tokenized repo volume. Meanwhile, the Digital Asset Platform of Goldman Sachs (GS DAP) achieved 15 basis points in savings for its €100M digital bond issuance.

Other big names from the traditional finance world include Citi, which is offering digital corporate bonds through Singapore's BondbloX to its Southeast Asia private banking and wealth management clients, and UBS is offering digital bonds to high-net-worth clients with an Ethereum-based money market fund.

Over the last few months, the sector saw a lot of development and advancement, with Ant Group Digital Technologies announcing its new brand, ZAN, to help institutions manage asset tokenization in a compliant manner. 

“Web3 is a technology sector bringing new opportunities as it cultivates more and more innovations.”

– said ZAN CEO Zhang Hui. 

However, the corporation found challenges with efficiency and security in the development process, which it aims to resolve via ZAN, which provides technical services such as KYC, AML, and KYT tools, smart contract review, and blockchain nodes to support the community. Hong Kong-based compliant digital asset exchange HashKey's decentralized identity solution is its first client to use the ZAN eKYC offering. 

Korean IT giant Kakao's EVM-compatible public blockchain Klaytn also collaborated with tokenization platform Tokeny to catalyze the widespread adoption of RWA tokenization. This will cover commodities, accounts receivables, and much more. 

This partnership will provide a seamless infrastructure for companies to effortlessly issue, distribute, and manage tokenized RWAs via Tokeny, which follows the industry standard ERC3643, which makes use of reusable digital identities and verifiable credentials to ensure participation from only qualified investors. Over $28 billion in assets have been tokenized through this platform.

In Q3 of 2023, the US-based clearinghouse Depository Trust & Clearing Corp. (DTCC), which processed $2,500 trillion worth of securities transactions last year, expanded its digital asset capabilities by acquiring institutional blockchain infrastructure provider Securrency to “unlock opportunities to reimagine compliance, liquidity, efficiency, and interoperability in trading real-world assets on the blockchain.”

In the crypto sphere, the Iota Foundation is the latest one to cater to institutional demand for asset tokenization. Last week, blockchain service providers Fireblocks and Iota started working together to custody tokenized assets on the Shimmer Ethereum Virtual Machine (EVM) blockchain. This will allow customers of Fireblocks, which claims to have 1,800 clients, including BNP Paribas and BNY Mellon, to run transactions on the chain directly from the Fireblocks API and console. 

Latest Moves by Prominent Companies

While everyone wants a piece of this hot trend, there are some big names that recently took initiatives towards asset tokenization.

Coinbase's Platform for Digitally-native Assets

The publicly-traded Coinbase (COIN), which is the largest crypto exchange in the US, has also jumped on the tokenization bandwagon as it announced this month its tokenization solution for native digital assets called Project Diamond. 

Built by Coinbase Asset Management, the company issued a short-term discount note denominated in USDC on this new platform last month to gain entry into the Abu Dhabi Global Market (ADGM) RegLab sandbox, for which it gained principal approval from the Financial Services Regulated Activity (FSRA).

In addition to using its own $24.57 billion market cap stablecoin USDC, Coinbase utilizes its layer-2 Ethereum scaling blockchain Base for this platform along with the Coinbase Prime custody solution and the Coinbase Web3 wallet. With its platform, the crypto exchange aims to comply with regulations and allow the creation, distribution, and management of a wide range of digitally-native assets directly on-chain with an automated lifecycle to “unlock institutional adoption.”

According to Coinbase, the platform's initial use cases will be for registered institutions outside the US, where the exchange is involved in a legal battle with the Securities and Exchange Commission (SEC). 

“Today, less than 0.25% of total global assets are represented on blockchain infrastructure, leaving massive efficiency gains uncaptured,” said Coinbase. “Our goal is to close this gap by enabling institutional use of next-generation financial technology.”

A couple of months ago, Coinbase noted in its research that tokenization efforts, which have been going on for many years, are gradually gaining momentum and can “become a major part of the new crypto market cycle within the next 1-2 years.” The exchange sees this as a “vital use case” for traditional financial players while acknowledging that obstacles remain in the form of complexities of integration into existing real-world systems.

HSBC Launches Custody Service for Digital Securities

Besides Coinbase, yet another major institution embraced digital assets. One of the world's largest banks, London-based HSBC, which holds about $3 trillion in assets globally, announced its plans to start a digital asset custody service for institutional clients with a focus on tokenized securities. This custody service, which will be offered in partnership with Swiss platform Metaco, will go live next year.

Metaco is a crypto safekeeping specialist that Ripple acquired in the first half of this year for $250 million. HSBC will be using Metaco's platform for institutions, Harmonize, for its custody service. Financial institutions embracing tokenization, according to Metaco CEO Adrien Treccani, will be “unlocking economic benefits and new revenue streams.”

The bank's custody plans currently do not cover stablecoins or cryptocurrencies but rather involve tokenized securities issued on private and/ or public blockchain-compatible tokenized bonds or tokenized structured products.

Once launched, the custody service will complement the bank's platform for issuing digital assets, HSBC Orion, and a recently launched offering for tokenized physical gold. This way, all the services together will create a comprehensive digital asset offering for institutional clients, underscoring the bank's “commitment to the overall development of digital asset markets,” HSBC said in a statement. 

As the markets evolve, the bank's chief digital, data, and innovation officer for securities services said:

“HSBC is seeing increasing demand for custody and fund administration of digital assets from asset managers and asset owners.”

Osaka Digital Exchange Launches Digital Securities Platform

Osaka Digital Exchange (ODX) is ready to launch its new digital securities trading platform dubbed ‘Start' before the year is over. This proprietary trading system for security tokens received regulatory approval last month from Japan's financial watchdog.

ODX is a relatively new exchange in the market, founded only during the recent bull market in 2021. However, it involves some of the biggest TradFi Japanese names, including Sumitomo Mitsui Financial Group (SMFG) and SBI Holdings. The goal is to set up a digital stock exchange.

The new digital securities trading platform, according to SBI Holdings, will see the issuing of about a billion yen ($20 million) worth of tokenized securities by real estate firm Ichigo Owners. 

The Ichigo Residence Token “is expected to be the largest issue price ever for an Ichigo Group security token,” the statement said. The token will be issued on Progmat and will invest in six rental residential properties that have access to the city center.

SocGen Green Bonds

Earlier this month, Societe Generale completed its first tokenized green bond issuance on the Ethereum network. This is yet another example of the growing appetite among traditional financial institutions for the tokenization of real-world assets.

According to Societe Generale, the motive behind the tokenization of its green bonds was the increased fluidity of transactions and settlement, along with elevated transparency and traceability.

The French banking giant issued $10.8 million worth of digital green bond tokens, which were registered by SocGen's crypto-focused arm Forge.

This marked the “first step towards using blockchain as a data repository and certification tool for issuers and investors to foster transparency on ESG and impact data on a global scale,” SocGen said.

The tokens were purchased by AXA Investment Managers (AXA IM), the asset management arm of French insurance giant AXA. AXA IM bought €5 million worth of bonds using the euro-pegged stablecoin EURCV. Generali Investments was the other institution to fully subscribe to the related security tokens through private placement. The bank will use the net proceeds of the sales to finance or refinance sustainable activities.

Companies Leading the Tokenization Trend

As the competition among global financial institutions and crypto-native companies heats up to bring TradFi assets on-chain, here are some platforms leading this tokenization wave. 

#1. Security Token Market

Security Token Market holds a special place in the digital securities space, as not only does it operate as a comprehensive platform for Security Token Offerings (STOs), but it also plays a pivotal role in spreading awareness about the potential and intricacies of asset tokenization. Active in over 200 countries, it impressively tracks over 170 tokens and has compiled more than 10 million data points, demonstrating its extensive reach and analytical depth in the digital securities sector.

One of Security Token Market's key initiatives is the Security Token Offering Summit, an influential event that brings together industry leaders to discuss and explore the latest trends and developments in the field. The company also actively engages in community building and education, evidenced by its popular “Security Token Show” podcast, which has become a trusted source of news and insights for industry insiders.

These efforts enable STM to drive the conversation and development in the sector, making it a prominent name among companies leading the charge in asset tokenization.

#2. Securitize

This comprehensive compliance platform specializes in issuing and managing tokenized securities on the blockchain. Having been in the market for several years, the platform provides services for issuance, communication tools, and compliance. 

For investors, it simplifies the investment process by creating a Securitize iD investor passport, completing verification, and funding the account to begin portfolio development. Securitize grants access to both primary and secondary markets.

Recognized for its commitment to regulatory compliance, Securitize Markets holds registration with the SEC and membership in FINRA and SIPC. It supports over a million investor accounts and serves thousands of clients.

#3. Tokensoft

Founded in 2017, Tokensoft is a chain-agnostic compliance platform that offers a range of services, including on-chain identity, token sales, airdrops, distributions, grants programs, hackathons, and bespoke KYC/AML solutions to help projects. 

For KYC/AML, the platform provides a Tokensoft Identity solution that uses automated tooling and an on-call compliance team for user compliance checks. And for funding, it enables fundraisers from both public and curated groups. 

Tokensoft's other features include support for Reg D, S-1, and Reg A, US investors, white-labeling & custom domain, custom blockchain integrations, documentation & ticketing support in-app, and institutional support.

The platform serves a wide range of assets, encompassing real estate, equities, and venture capital. It has a significant user base, boasting one million users, and has played a pivotal role in helping projects raise over $1 billion. Additionally, Tokensoft's experience extends to working with industry leaders such as Avalanche, Tezos, and The Graph.

#4. Polymath

This digital security platform allows companies to digitize real-world assets in a compliant manner. It provides tools to mint tokens, manage investors, and raise funds all in one place. 

Polymath provides open-source products and follows the ERC1400 standard to reduce the need for technical due diligence. The security token platform also offers an institutional-grade blockchain called Polymesh that solves the problem of identity, compliance, confidentiality, and governance on public infrastructure.

The platform offers self-serve token creation and management technology, well-suited for a large ecosystem of broker-dealers, custodians, token sale platforms, legal firms, and KYC/AML providers. In 2020, Red Swan, a commercial real estate marketplace, tokenized $2.2 billion in real estate using Polymath. The platform's partnership network includes BitGo, DWF, Genesis Block, Glyph, Cryptoworth, and Wachsman PR.

Other key players in this sector are Fireblocks, Treum, RealT, Harbor, Bitbond, Vertalo, Blockchain App Factory, Toko, PixelPlex, Konkrete, and Stobox.

Conclusion

RWA tokenization is growing at a fast pace, and as the space matures and gains traction, it will become more deeply integrated with TradFi systems. This leads to new forms of investment products that are more dynamic and accessible.

By utilizing blockchain and smart contracts, tokenization offers the benefit of traceability, reduced settlement times, and enhanced transparency. However, the sector still needs to address the issues present in the form of liquidity, interoperability, and regulatory landscape. 

Overall, the future of RWA tokenization is promising, which is projected to be $10 trillion by the end of the decade.

Click here to learn why 2023 is the year of tokenization.