Tokenization of Financial Assets on the Rise

A recent research by Coinbase reveals that the tokenization of financial assets, including sovereign bonds, money market funds, and repurchase agreements, has been steadily gaining momentum since 2017. This evolution of digital financial assets is driven by high-yield environments, but it still faces significant infrastructural and legal obstacles.

Growth Potential in the Tokenization Market

The report, available here, states that this trend could become a vital use case for traditional financial players, potentially becoming a major part of the new crypto market cycle in the next 1-2 years. However, full implementation may take additional time due to complexities.

Coinbase research highlights a shift in opportunity costs, with nominal interest rates increasing from 1.0-1.5% in 2017 to above 5.0% currently. This emphasizes the capital efficiency of instant settlement compared to the traditional T+2 settlement cycle, particularly for financial institutions.

Over the past six years, misconceptions about tokenization have been debunked. The introduction of atomic settlements has significantly reduced counterparty risks. Additionally, the market has seen an increase in the adoption of protocols tapping into the tokenized U.S. Treasury market, indicating a departure from the landscape observed in 2017.

Coinbase predicts that this trend will continue to accelerate over the next 1-2 years. However, complete implementation may take additional time due to the complexities associated with integrating it into existing real-world systems.

It is important to note that the FED released a report indicating a surge in tokenized assets just a few weeks before the Coinbase report.

Potential and Obstacles in the Tokenization Market

Coinbase highlights various estimates regarding the size of tokenization opportunities. Citigroup predicts a $5 trillion market, while Boston Consulting Group predicts a $16 trillion market by 2030. Fortune Business Insights research projects growth of the tokenization market size from $2.81 billion in 2023 to $9.82 billion by 2030, inclusive of CBDC and stablecoin growth.

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Despite these great future estimates, Coinbase acknowledges that the tokenization market still faces obstacles. Legal challenges, including the need for legal clarity surrounding stablecoins within the U.S., are significant hurdles. Additionally, there are no legal precedents or clear legal frameworks for dealing with such investments. This has led many institutions to prefer private blockchains over public networks.

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By Team