On-Chain Financial Assets Set to Hit $5.2 Trillion by 2030

In its annual research report, Cathie Wood's New York-based investment management firm Ark Invest laid down its future projections that revealed that in the crypto sector, it is betting on tokenization. 

The company that specializes in disruptive innovation and has invested heavily in digital assets sees tokenization as a big trend for this decade that has the potential to revolutionize industries and economies.

In addition to the crypto sector, Ark Invest covered artificial intelligence (AI), precision therapies, multiomic tools & technology, electric vehicles, robotics, robotaxis, autonomous logistics, reusable rockets, and 3D printing extensively.

According to the firm, convergence among disruptive technologies is what will define this decade, with AI, public blockchains, multi-omic sequencing, energy storage, and robotics coalescing and transforming global economic activity. It expects technological convergence to create tectonic macroeconomic shifts that are more impactful than the first and second industrial revolutions. 

When it comes to crypto, Ark noted in its “Big Ideas 2024: Disrupting the Norm, Defining the Future” report that cryptocurrencies today account for about 10% of the total global money supply. However, little of this value accrual is attributable to the direct displacement of money except for some instances in emerging markets. 

Cryptocurrencies continue to displace gold as a flight-to-safety asset, taking a 40% share of the market. Here, Bitcoin is showing promise as it emerged as an independent asset class worthy of a strategic allocation in institutional portfolios. The crypto asset, whose correlation to traditional asset classes has averaged only 0.27, has been outperforming other major assets by a big margin.

With increasing macroeconomic uncertainty and less trust in traditional” flights to safety,” Bitcoin has become a viable alternative. Besides this, crypto's utility use cases, such as remittances and global settlements, account for ~10% and~ 5% of volumes, respectively.

But more importantly, digital wallets have been seeing wide adoption, with roughly 90% of smartphone users relying on digital wallets to some degree. 

Ark Invest dedicated a section to smart contracts, which are deployed on public blockchains to offer a global, automated, and auditable alternative to rent-seeking intermediaries and legacy financial infrastructure. These smart contracts have enabled the development of decentralized financial services such as stablecoins and tokenized treasury funds, which gained traction in the aftermath of the “crypto crisis” in 2022.

According to ARK's research, as the value of on-chain financial assets increases, the market value associated with decentralized applications (dApps) could scale 32% at an annual rate, from $775 billion in 2023 to $5.2 trillion in 2030.

With global financial assets as a percentage of GDP continuing to increase, smart contracting platforms are now securing about 5% of it. This, as per Ark, is consistent with the adoption curve of dial-up internet. It then points out how, at 1%, the gross take from tokenized assets on decentralized protocols is less than a third of the fees that traditional financial institutions (TradFi) extract. 

Traditional Financial Assets are Moving On-Chain

This movement of traditional financial assets on-chain is due to the growing tokenization trend, which converts these assets into digital tokens, making them easy to trade, transfer, and manage using distributed ledger technology. 

By allowing treasurers to track, trade, and collateralize funds more easily on public blockchains as compared to traditional financial markets, tokenization has gained much interest from mainstream giants like Fidelity, JPMorgan, Franklin Templeton, Hamilton Lane, Siemens, HSBC, BNY Mellon, Goldman Sachs, UBS, and many others.

While Ark Invest's projections seem lofty, they are in line with other predictions made by mainstream financial institutions. For instance, the global bank Citi Group has predicted that the market size of tokenized assets can be as much as $4 trillion by 2030. Moreover, it will increase liquidity and provide access to new asset classes.

A report by Boston Consulting Group also estimated the tokenization of assets to be a multi-trillion dollar market by the end of this decade. Given the size of the traditional securities market, the firm further estimates that tokenized security assets could represent about 10% of the global GDP by 2030.

While crypto's highly volatile nature is its feature, tokenized real-world assets have been gaining popularity as a hedge, especially during times of market turbulence. Besides retail, crypto firms and funds are particularly interested in these assets due to their ability to offer stability, allowing them to safeguard their portfolios.

Besides emerging as a hedge against market volatility, RWA tokenization is seeing growing adoption due to the current high-yield environment.

Hence, tokenization of treasuries, in particular, is leading this trend, with tokenized treasury funds jumping more than 7-fold to $850 million in 2023. While early funds were launched on the Stellar blockchain, the smart contract pioneer Ethereum soon became the largest market for tokenized treasuries last year, noted Ark in its report.

As a low-risk, well-known instrument, US Treasuries are a gateway for tokenization efforts where investors put in their excess on-chain cash to earn a stable yield without getting out of the crypto ecosystem.

As of writing, the tokenized Treasury market is sitting at $860.78 million, with the average yield to maturity being 5.24%. Asset management giant Franklin Templeton is currently the largest player with $330.6 mln in assets, followed by newcomers like Ondo Finance and Mountain Protocol, which are closing in with $151.2 mln and $107 mln, respectively. 

Developments around tokenization in the crypto space are ongoing, with Superstate recently debuting its first Ethereum-based tokenized US Treasury fund. The private fund holds short-duration Treasury bills and aims to offer returns in line with the federal funds rate. Under this fund, investors deposit USD or USDC on-chain and receive USTB as a stablecoin alternative to earn a yield. Users have the option to self-custody tokens or opt for custody services. The blockchain-based asset management firm is now looking at Nasdaq, S&P 500, and gold-targeting funds to tokenize next. 

A Growing Trend Among Leading Banks & TradFi 

Unlike the 2018 crypto winter, this time, the crypto market saw a lot of development in terms of technological advancement and regulatory clarity. As Ark Invest noted in its report, tokenization was among the biggest narratives during this time. And while the tokenization of financial assets has been happening since 2017, it was only in the last year that it finally took off like crazy. 

According to a research report by Bank of America, tokenization has the capability to “reshape how value is transferred, settled, and stored” across all industries.

This capability comes from transforming real-world assets such as cash, commodities, equities, bonds, credit, and intellectual property into digital tokens on an immutable and tamper-proof blockchain network. These digital tokens serve as digital certificates of ownership, where all the information and assignable digital rights are programmable and automated.

Stablecoins, a cryptocurrency pegged to the value of a stable RWA asset, and NFTs, a digital proof of ownership that can also be applied to certificates, collectibles, loyalty programs, concert tickets, sports teams, racehorses, and more, are the most popular form of tokenization that have been in use, up until now.

Over the past couple of years, this trend has been changing, with the market moving toward the tokenization of real-world financial assets, including commodities, securities, stocks, shares, and investment funds.

Now, tokenization is being hailed as a revolutionary breakthrough in the world of finance due to its many benefits, including efficiency, cost-effectiveness, streamlined transactions, interoperability, improved traceability, global accessibility, instant settlement, a higher degree of automation, replacing redundancies, fraud prevention, enhanced data privacy, and security. Moreover, tokenization offers the ability to operate 24/7 as well as round-the-clock data availability while eliminating intermediaries, offering increased liquidity, and empowering self-sovereign identity solutions.

By offering many benefits to institutions and governments, tokenization is expected to be a key driver of crypto adoption. Already, several established financial behemoths have embraced the tokenization of RWAs and continue to experiment with it. Banks and financial powerhouses are also exploring the use of tokenized financial instruments within the DeFi.

According to Bank of America, tokenization of real-world assets, such as currencies, commodities, and equities, was actually a “key driver of digital asset adoption” last year while noting that: 

“We are only in the first innings of a major change in infrastructure and applications.”

Most recently, Larry Fink, CEO of the world's biggest asset manager with about $9.5 trillion in AUM, sang praises of tokenization. According to him, the approval of the Bitcoin Spot ETF is the first step towards the broader tokenization of other assets, calling it:

“The stepping stones toward tokenization.”

He said in an interview:

“ETFs are step one in the technological revolution in the financial markets. Step two is going to be the tokenization of every financial asset.”

Further talking about tokenization, Fink noted that, in the case of a tokenized security, the moment one buys or sells such an instrument, it gets recorded on a general ledger that is all created together, eliminating all corruption. 

This isn't even the first time Fink applauded tokenization. This has been going on for some time now, as last year, he said: 

“I believe the next generation for markets and next generation for securities will be tokenization of securities.”

In his annual letter to shareholders last year, Fink highlighted the tokenization's potential to transform the financial industry by enhancing the information efficiency in capital markets by providing more data and insights as well as shortening value chains. Moreover, tokenization could improve cost and unlock new investment avenues for investors by enabling access to previously illiquid assets, wrote Fink.

Assets like real estate, fine art, and precious metals are among those that suffer from limited liquidity and high entry barriers, which makes them hard to access. Moreover, many of these assets have restrictions on divisibility and transferability. These assets, as Fink noted, can benefit significantly from tokenization. 

Even Governments Forced to Adapt & Adopt

Tokenization is being seen as an attractive option not only for traditional financial institutions but also for regulators. Also, for the first time, policymakers and governments are finding themselves at a place where they need to revise their regulations in order to leverage the nascent technology.

Governments around the world have been showing interest in tokenization as it allows them to explore the benefits of blockchain technology, such as global accessibility, fractional ownership, and enhanced liquidity, without being fully exposed to crypto's inherent volatility. Another reason for governments seeking blockchain integration is to reduce costs and unlock new revenue streams.

This trend is most prominent in Asia, where governments are acknowledging the potential of the technology and actively shaping its use. For instance, in Hong Kong, the government is aiming to broaden the participation of global partners through asset tokenization, which will lower entry barriers and widen the investor pool. Meanwhile, regulators in Switzerland and Japan are planning to utilize tokenization for asset management, foreign exchange, and fixed-income products.

Just last month, the Bank for International Settlements (BIS) Innovation Hub announced that it will launch a blockchain-based tokenization project this year. Tokenization is noted as a critical area by BIS in its work program for the year, where Promissa, a new project, will be followed by “more initiatives.”

Promissa is a collaboration between the BIS, the World Bank, and the Swiss National Bank. The project aims to create a platform for digital tokenized promissory notes, which are still paper-based. The proof-of-concept for the platform is expected to conclude by early next year.

Political parties are even using it as a way to lure in voters. This can be seen in the UK, where the opposition Labour Party presented its detailed plan to make the country a hub for securities tokenization if it comes to power after the election that's expected to take place this year. 

“Tokenization… presents a significant new opportunity for the UK,” the party said in the 28-page document titled “Financing Growth,” which was introduced by the shadow chancellor Rachel Reeves and shadow economic secretary to the Treasury, Tulip Siddiq. 

To make the UK a global leader in tokenization, the document said, the future Labour government will work on clarifying the law around tokenization and collaborate with regulators to “establish a proportionate, outcomes-based regulatory regime to oversee the technology.” Additionally, it will develop crypto regulatory sandboxes, tokenize government bonds, and enable cross-border trading of tokenized assets, noted the plan.

The Road Ahead

It is pretty clear that tokenization is the narrative that has gripped the crypto market and captured the interests of TradFi and policymakers alike. However, technical bottlenecks and limitations around the current infrastructure present challenges to the widespread global accessibility of tokenized RWAs. 

According to Jan van Eck, CEO of the asset management firm VanEck, which is among the nearly a dozen firms approved by the SEC to launch a Bitcoin Spot ETF, liquidity is the primary barrier to tokenizing real-world assets. While virtually any asset can be tokenized, van Eck argued that buyer and seller presence is not sufficient.

Besides the question of “who's providing the market structure around the liquidity,” the regulatory landscape is another huddle. While governments are embracing tokenization, the laws governing the space are still new, and regulatory ambiguity remains in a number of key jurisdictions. 

While the US has a complex regulatory environment for such ventures, Europe's combination of a large retail market and a more accommodating regulatory framework makes it a more viable candidate for these developments.

Overall, tokenization has the ability to bridge the virtual and the real financial world. And by shaping the future of investment, it can have a significant impact on the global economy. 

This has already started, and with on-chain financial assets to surge to multi-trillion dollar size, as predicted by Ark Invest, driven by the growing trend of tokenization, transforming real-world assets into digital tokens presents a great opportunity for investors, financial institutions, and the broad crypto sector to take the industry forward and help redefine the legitimacy of the blockchain industry in the global financial landscape.