Tokenisation of financial assets has been seen as a way of potentially improving the efficiency of the investment process for several years now.
This method of trading offers gains in terms of settlement speed, accuracy of data transfers between custody accounts and transparency of information related to a given asset. However, developments in this space have so far been predominantly limited to experimental ‘proof of concept’ tokenisation use cases, rather than done at scale with real portfolio assets.
New research shows that nearly half (40%) of buy-side investment institutions now have a digital asset tokenisation strategy in place, in expectations of major revenue gains and operating cost savings.
The State Street 2024 Digital Assets study, conducted earlier this year, surveyed 300 investment institutions, including asset managers, asset owners and insurance companies about a variety of digital asset topics, including tokenisation.
The survey found that institutions are particularly interested in seeing tokenisation applied to illiquid assets. Approximately two-thirds of respondents (64%) said private equity would be among the first asset classes to be routinely tokenised and traded via digital ledgers. Exactly half said the same of private debt and 44% pointed to real assets, such as real estate and infrastructure as ripe for tokenisation.
Conversely, just a third (33%) said the same of publicly traded fixed income, while only 28% expect tokenisation to be applied to public equities.
Respondents also saw significant benefits in terms of operating cost reductions and revenue increases potentially accruing from tokenisation (Figure 1).
Figure 1. Expected operational cost savings and revenue gains from tokenisation
% of respondents
Source: State Street 2024 Digital Assets study
Among the principal challenges to trading tokenised assets is moving them on and off chain between digital ledgers and traditional ones. This kind of interoperability requires a network of providers and partners to offer a combination of traditional financial services, such as custody and fund administration, as well as services related to new technologies that facilitate tokenised investment.
Interestingly, the Digital Assets study noted that smart contract generation as well as the creation and issuance of tokenised assets are one of the top service areas investment institutions are interested in. These institutions would like to see provisions in the marketplace to further enable interoperability between traditional finance and decentralised finance.
A substantial minority (41%) said tokenisation was a top priority for them, along with blockchain creation and maintenance (45%) and cybersecurity (43%). These services will be particularly important to more than half of respondents who plan to be issuers of tokenised assets.
Respondents were also divided on how long it would take before tokenisation becomes a mainstream form of capital markets security. However, more than half (58%) said they expected it to take at least a decade to become mainstream. Nearly half (47%) said they have already traded assets between digital and traditional custody arrangements or are ‘extremely prepared’ to do so.
It appears organisations may underestimate their peers’ preparedness for tokenisation, relative to their own. If so, their predictions for the time it will take to enter the mainstream across the industry could also be underrated, and we could be closer to a world of tokenised assets than the industry realises.
James Redgrave is Vice President of Global Thought Leadership at State Street.
