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The tokenization of assets is picking up speed – faster than you might think.

In September 2022, a new report by global consulting firm BCG and private market exchange ADDX projects that as a business opportunity, asset tokenization will be worth $16 trillion by 2030. That figure will represent 10% of global GDP and is 50 times what the opportunity is worth today.

Tokenization refers to the use of blockchain and smart contracts to digitise the ownership of various assets. The innovative, emerging technology makes transactions more efficient and opens the way for a more active market in what we once considered illiquids, such as private equity, real estate and private credit, or even car fleets and patents.

To understand the significance of tokenization, think about what it means to own stock in a private company.

In the past, this might have been represented primarily by a paper certificate. This is the pre-digital world.

Some countries then digitised this physical proof in the form of a PDF file. That’s a useful step because it prevents wear and tear or the loss of the certificate, and the information becomes searchable to an extent. 

If the PDF version is Digitisation 1.0, then Digitisation 2.0 might be the storage of ownership information as data entries on a centralised ledger – possibly with the business registration authority of a country. This was a big step forward too, as many parts of the ownership transfer process could be digitalised and no longer needed to be manual.

But blockchain and smart contracts take things forward one step further – one might call it Digitisation 3.0. The power of blockchain allows for tokens to be traded near-instantly on an exchange, while smart contracts can be programmed to execute future corporate actions, such as dividend payments.

Already, the technology has allowed private market exchanges to reduce the minimum size of transactions for private equity funds from hundreds of thousands of dollars to $5,000, opening up unprecedented access for individual investors.

Lest one thinks private companies aren’t as big as public ones and that the impact of tokenization might therefore be small, consider this: nine in 10 companies globally with annual revenues of $100 million or more are private, not public.

The technology is gaining traction among regulators, issuers and investors, and tokenization platforms are growing their market shares. It is in this context that the report makes the $16 trillion forecast.

Impact Of The Tokenization Revolution Will Be Felt Far And Wide

If tokenization does indeed take off as predicted, what change should we expect to see in the world?

First, taking the point of view of investors, tokenization is likely to bring about a fairer investing landscape. It democratizes private markets. 

For decades, institutional investors have had exclusive access to private market opportunities, thanks to high investment thresholds and long lock-up periods. Tokenization creates transaction efficiency and therefore allows for fractionalization and secondary trading, making it possible to structure securities in a way that suits individual investors.

Studies have shown that the real returns from public markets are declining, including one by Credit Suisse estimating that real returns from a traditional 70-30 mix of public equities and bonds will decrease from 6% per annum for Baby Boomers to 2% per annum for Generation Z.

Diversifying into private markets is how institutional investors enhance resilience and long-term returns. Allowing individuals the same access is only fair. It also helps younger generations achieve the same retirement adequacy as their forebears, reducing the stress on public treasuries.

More broadly, for all investors, whether institutional or individual, tokenization helps assets to rise to their true valuation, by creating a market for those assets.

Assets that are non-tradeable or those that face high transaction costs suffer from an illiquidity discount. By making it fast, convenient and low-cost to carry out primary issuances and secondary trading, tokenization effectively expands economic possibilities for asset owners. For example, they could potentially borrow against the full value of their assets and put the additional capital to other uses.

For companies that are raising funds in the capital markets, tokenization causes the line between public and private markets to blur, because more capital can flow to firms in their pre-IPO phase thanks to lower barriers.

What this means is that companies will be able to stay private for longer – or, indeed, stay private indefinitely. In most cases, this will give firms the space to focus on long-term business goals, instead of being expected as publicly listed companies to declare profits every quarter. 

But the most far-reaching impact of tokenization may well be what it does for the economy as a whole.

Economies grow because there is capital that can be invested in companies. Capital markets are designed to match investor capital with projects that are worthy of financing. 

Whenever there are barriers to the free flow of capital, whether those barriers are tied to, say, a certain geography or a certain segment of investors, we get a sub-optimal outcome – because we are halting capital in its tracks and forcing it to be placed into less productive endeavours.

Conversely, when barriers come down, capital is able to find the worthiest projects to invest in, which in turn maximises economic growth, job creation and tax revenue for local governments. 

By making the capital markets more efficient, tokenisation ultimately supports the development of the real economy.

Biggest Revolution Since REITS And Electronic Trading

When the dust settles, it should become apparent that asset tokenization is the most significant revolution to take place in the capital markets since the advent of REITs and electronic trading for stock exchanges.

Like the two earlier transformations, this latest one helps society create wealth for individuals and distributes investment opportunities more equitably.

All market players should watch the tokenization space closely in order to learn about it and to eventually participate in it.