Blockchain technology is already stirring a multitude of large establishments like BNY Mellon, JP Morgan, and BlackRock to look into tokenization projects due to the efficiencies they can bring especially in terms of settlements and payments. The icing on the cake, however, lies in tokenization’s potential to democratize finance by offering broader investment options to the masses through “fractionalized” investments.
You may be used to dealing with things like ETFs which have managed to democratize investments since around 1993 by offering access to a whole new world of investment strategies. However, when it comes to alternative investments like private equity, private debt, and real assets, there still exists a large portion of the investment universe that ETFs are yet to reach.
According to studies by Fidelity carried out in 2022, average allocation to alternative investments by institutions comes in at approximately 23% while advisors allocate a mere 6%. In a world where the traditional 60/40 portfolio gives little room for income and growth opportunities, alternative investments come in as invaluable elements in the enhancement of an investor’s portfolio.
Thus, having an ETF-like structure offering liquidity, transparency, and efficiency to these alternative investments would be a game-changer, and this is where the tokenization process offered by Blockchain technology can be of great help. The tokenization process can transform real-world assets like real estate, fine art, private equity, and others into digital tokens on a blockchain. The resulting state is a condition where these assets can be easily traded and divided even further thus creating new opportunities for liquidity and fractional ownership.
Towards this end, it appears that Blockchain technology is key in overcoming three major challenges facing alternative investing; transparency, which can help reduce fraud and increase trust among participants; liquidity, which makes it easy for investors to buy and sell smaller portions of assets without the need for substantial capital; and efficiency, through the automation of processes like settlement, compliance, and ownership verification.
Already, large institutions have begun testing tokenization with entities like KKR and Hamilton Lane launching tokenized private funds in 2022 in partnership with Securitize, a fintech firm specialized in tokenization. Others like Citigroup, are predicting a $4-5 trillion tokenized digital securities market by 2030.
Nonetheless, despite the many potential advantages of tokenization, its development is still in the early stages. The existing tokenized products are all traded and issued within certain parameters, a situation which deters wider adoption. There is a need for the legal status and classification of tokenized assets to be determined conclusively and for the right infrastructure to be put in place to facilitate trading across different platforms. As it is with ETFs, tokenization is capable of bouncing off the same success by democratizing alternative investments and providing new opportunities for investors to optimize their portfolios.