Get our rundown of digital assets and tokenization, the key benefits for investors, why institutional adoption of digital assets is growing, and why financial institutions need to start exploring this new asset class.
Digital assets have become a popular asset class not just for retail investors, but also for institutional funds and large corporations. Tokenized illiquid assets alone, a subset of digital assets, are expected to reach $16 trillion by 2030, according to Boston Consulting Group.1
Given the recent crypto market slump, it’s understandable to question future opportunities in the space. However, there are a multitude of aspects surrounding digital assets, not just cryptocurrencies. And each aspect presents an opportunity for investors. Given the potential of digital assets and rising institutional adoption, it is beneficial for all market participants to at least familiarize themselves with the subject and plan for the future of capital markets.
What are digital assets and tokens?
When you think of a digital asset, you may picture cryptocurrencies like Bitcoin and Ethereum, or NFTs like those of Bored Ape Yacht Club. In reality, digital assets encompass much more. They are an emerging asset class that includes NFTs, crypto assets like digital currencies and stablecoins, and even central bank digital currencies (CBDCs). Real-world assets such as real estate, art, and precious metals can even become digital assets through the process of tokenization.
Tokenization simply means subdividing ownership of an asset, physical or digital, through digital tokens. These tokens can be traded and stored on a blockchain, and smart contracts help manage the fractionalized ownership rights.
Tokenized versions of traditional financial products like equities, bonds, derivatives, and ETFs are also included in this new asset class.
Types of Digital Assets
|Crypto assets||Used primarily as a form of payment or a store of value, these digital assets are stored on a blockchain and often feature a capped supply to help hold their value.|
|Stablecoins||These digital assets are designed to maintain a stable, 1:1 value relative to a specific asset. They are often pegged to fiat currencies, such as the US dollar.|
|Non-fungible tokens (NFTs)||These are digital records of ownership made possible by blockchain technology. NFTs can represent ownership of digital content as well as real-world assets.|
|Central bank digital currencies (CBDCs)||In addition to being a digital representation of a nation’s fiat currency, these assets are issued and backed by central banks.|
|Security tokens||These digital assets are tokenized versions of any asset that meets the definition of a security or financial investment, such as stocks or bonds.|
What are the benefits of tokenization and digital assets?
There are many features and benefits of tokenization and digital assets. One benefit institutions can take advantage of is getting the most out of illiquid assets by offering them to a new segment of investors. Just as the introduction of fractional shares was a boon to retail investors (and in turn, the financial institutions), fractional ownership of these illiquid assets could mean that investors who could not afford to buy the assets outright can now purchase fractions of these assets.
Tokenization also enables the removal of intermediaries from the settlement process, making the movement of securities easier. Thanks to smart contracts, these inefficiencies can be wiped away by providing real-time visibility into the movement of these securities, streamlining the processes through automation — and, as a result, reducing costs.
Institutional adoption of digital assets is growing
With 92% of investors expecting their financial advisors to give them advice about Bitcoin, it’s no wonder financial institutions are getting in on the action.2 In fact, $215 billion out of the $335 billion traded on Coinbase in Q1 of 2021 originated from institutional investors.3
To support the growing demand from clients, a host of financial institutions, including BlackRock, JP Morgan, Goldman Sachs, and Citigroup, are adopting blockchain technology to facilitate the movement of digital assets.
For example, Fidelity has been exploring digital assets for years. And in 2018, it launched a platform called Fidelity Digital Asset Services to serve the varying needs of institutional investors when it comes to digital assets.
BNY Mellon, too, has entered the ring with its Digital Asset Custody platform this year to support client demand. It’s the industry’s first multi-asset platform that bridges digital and traditional asset custody.4
JP Morgan was also in the news recently with plans to tokenize trillions of dollars of assets to potentially be used as collateral in DeFi pools.5
Regulations will increase institutional adoption of digital assets
In addition to investor demands and the benefits of tokenizing assets, there are many factors that could lead to increased adoption of digital assets in the future. A major factor is, of course, regulation. With digital assets still in their infancy, there hadn’t been regulations put in place until relatively recently. That means that there was no clarity for financial institutions — they didn’t know what they could or couldn’t do.
Starting in 2019 with Liechtenstein’s Token and Trusted Technology Service Provider Act, though, there have been great strides on the regulation front regarding digital assets.
In 2024, the Markets in Crypto Assets proposal (MiCA) is expected to take effect, providing a regulatory framework around digital assets like crypto and stablecoins for crypto asset issuers and crypto asset service providers in the European Union.
As for the US, in June 2022 the Lummis-Gillibrand Crypto Bill was introduced as a way to provide regulatory clarity for cryptocurrencies and other digital assets. The bill would give the Commodity Futures Trading Commission (CFTC) more authority as a regulatory body overseeing the trade of digital assets.
Furthermore, in 2022, President Biden issued an executive order to address the risks as well as harness the potential benefits of digital assets and their underlying technology. In addition to this, Jerome Powell, the Federal Reserve chairman, has conveyed that launching a digital dollar is an important potential innovation that needs to be explored and that the Fed will come to congress with a recommendation in due course.
Why financial institutions need to start exploring digital assets now
Competition from exchanges is growing. As cryptocurrency exchanges vie for market share, platforms like Coinbase have the financial resources to quickly develop and implement successful business models. As traditional assets continue to be digitized, these platforms will likely attract both institutional and retail investors by offering a wide range of services and assets, including digital stocks and tokenized real estate. As a result, legacy financial service providers may need to adapt to the growing world of digital assets in order to remain competitive.
Digital asset custody services will increase investor confidence. Similar to the custodianship of traditional financial assets, digital asset custody involves securely storing assets. Safety of assets has always been a concern for institutional investors. The unique characteristics of digital assets, however, make custody of them especially crucial. With news like the FTX scandal leaving a bad taste in many people’s mouths, it’s important that traditional financial service providers step up to offer digital asset custody services to increase investor confidence.
As a new asset class that leverages blockchain technology, digital assets offer investors the opportunity to diversify their portfolios while reaping benefits such as quicker settlement times and improved access to capital markets. As the infrastructure for digital assets improves and regulatory frameworks become more established, institutional investors will become more comfortable with investing in this new asset class.
Due to client demand, the widespread potential, and the benefits of digital assets, financial institutions and custodians are beginning to embrace digital assets as a part of their asset offerings. Factors such as platform updates, evolving technology, retail and institutional interest, and governmental acceptance will drive further user adoption. In the coming years, it’s likely that digital assets will become a mainstream form of investment.
What Relevantz Can Do for You
From creating payment solutions to developing applications for financial services organizations, we bring a vast amount of experience and knowledge in blockchain. Relevantz can help you explore use cases of digital assets, tokenization, and blockchain that will fit your needs and the growing needs of your customers.
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