Tokenization has been a FinTech buzzword for several years now. But, in practice, its effect on global securities markets has been limited.
Nevertheless, some of the world’s largest banks launched their own digital securities initiatives in 2023, setting the stage for wider adoption in the year ahead. Meanwhile, regulators across the globe are building out the legal frameworks needed to support trade in a variety of on-chain assets.
From 2021 onward, major financial institutions have increasingly thrown their weight behind securities tokenization, launching dedicated platforms like HSBC Orion, JPMorgan’s Onyx Digital Assets and UBS Tokenize.
In January 2023, the European Investment Bank (EIB) issued its first-ever tokenized bond on HSBC Orion, marking the first of many milestones for the technology in the last year.
With trading on HSBC Orion set to go live in 2024, the bank has spent the past 12 months growing its digital asset offering to include products and services covering custody, trading and issuance.
Not to be outdone, rival platform UBS Tokenize issued Bank of China International’s (BOCI) first tokenized securities offering of CNH 200 million in digital structured notes.
Looking beyond bonds, in October, UBS started piloting a new tokenized money market fund (MMFs) in partnership with the Monetary Authority of Singapore (MAS).
In 2023, tokenized MMFs have exploded in popularity. From just three at the beginning of the year, there are now more than a dozen such funds with a combined market capitalization of over $750 million.
Pioneered by the likes of Franklin Templeton and WisdomTree using public blockchains, digital treasury funds are primed for further adoption in 2024 as some of the largest asset managers in the world line up to enter the space.
For example, in October, JPMorgan and Barclays exchanged tokens representing shares in a BlackRock MMF on JPMorgan’s private blockchain, Onyx Digital Assets.
Yet, despite the multi-billion dollar opportunity presented by MMF tokenization, Ralf Kubli , board member for the Casper Association, said he thought “the much bigger use case is going to be private debt.”
According to Kubli, private debt presents one of the most compelling arguments for tokenizing securities. He said that “when you think about the cost of managing private debt”, adding that blockchains can significantly drive down the cost of securitization.
Discussing different types of tokenized security with CCN, Chairman of the International Securities Association for Institutional Trade Communication (ISITC) Rich Robinson said he wasn’t aware of any significant adoption in equities markets, “at least, not your IBM common stock kind of thing.”
Nevertheless, through the efforts of startups like Securitize and Tokeny, novel, blockchain-based private equity solutions are emerging that promise to transform the way businesses raise capital.
However, there is still one crucial piece of the puzzle missing: trading infrastructure to support the exchange of security tokens.
Robinson pointed to Switzerland’s SIX Digital Exchange (SDX) and the ongoing work of the Singapore Exchange as early pioneers in the space. But he also acknowledged tokenization isn’t a silver bullet that automatically leads to more efficient securities markets.
However, as the technology gains traction, the support of major exchange operators would be a significant boost. And major developments could be on the horizon.
According to reports, the London Stock Exchange Group (LSEG) is preparing to launch a new blockchain-powered trading venue in 2024.
For his part, Kubli said he expects that “in the future, everything will be tokenized.” He added the caveat that the pace of change will likely diverge between different markets and aspects of the securities settlement cycle.