Jan 18
Why ‘Real World Assets’ issued using DLT will redefine and expand the world of Digital Assets
The digital asset markets have seen tremendous growth and volatility since the Bitcoin genesis block. What began as a weird, libertarian, nerd fever-dream turned — over an eventful decade — into an asset class worth over $3 trillion dollars at its all-time high in late 2021.
As big as it sounds, a $3T market value of crypto is only as big as the combined capitalization of Apple and Amazon — two public companies. And if we can assume that crypto investors hold small pools of assets and are actively trading and largely distrustful of centralized control, it’s unlikely that most crypto assets are going to be managed or traded by large custodians or investment banks.
So if ‘size’ is what drives profits and scale at large financial institutions, the crypto currency markets are not big enough to scale to accommodate the business plans of dozens of profit-seeking tradfi players.
Obviously the bigger players have done the math. Yet they still make regular announcements about new forays into ‘digital asset’ markets. Are they talking about the same market we think they are?
In this time when everything is an ‘asset’ and everything is ‘digital’, what exactly counts as a digital asset? Is it possible that large financial institutions have a broader definition of digital assets than mere currencies?
It’s possible, but to most ‘Digital Assets’ still largely means Bitcoin, Ethereum, and other crypto currencies like Dogecoin, Solana, and Ripple — what many refer to as ‘tokens’. Some might even add NFTs to this list and certainly stable coins. But for banks and large financial institutions, where IT investments for security and efficiency are the largest budget line items after human costs, where can we expect them to focus. How can such a small and fragmented digital assets market offer size and growth worthy of this much attention and investment? By expanding the definition of ‘digital assets’ to include blockchain-enabled equities, debt, and collateral. These are often referred to as ‘security tokens’, but perhaps best called ‘digital asset securities’, to better distinguish them from their crypto currency cousins.
There is ample evidence that this expansionist mindset — an evolution that includes digital asset securities — has found proponents in the boardrooms and C-suites of the world’s largest institutions. In December 2022 at the NYT Dealbook summit, while the crowd was hanging on every ill-advised admission from Sam Bankman Fried, Blackrock’s CEO Larry Fink, who runs the largest asset management firm in the world, clearly declared that his firm is taking a hard look at digital asset securities.
“the next generation for markets, the next generation for securities, will be tokenization of securities.”
Not surprisingly, given all the other things going on that week with FTX, this didn’t make news. But as the CEO of a company that tokenizes securities, I found this to benothing short of a revelation and confirmation of what many of us have thought was the logical application of distributed ledger technology within the largest asset managers and custodians. (the session can be found here)
Blackrock represents ‘size’, with more than $10T in assets under management. And they are the street name owner of more securities than any other firm in the world. In today’s parlance, these securities — often private held — are referred to as ‘Real World Assets’, as compared to crypto currencies, which, other than stablecoins, possess no underlying asset as basis for their value.
But as much as Larry Fink and BlackRock moves markets, he isn’t the only big banker thinking about the application of blockchain technology to markets beyond crypto currencies. Why is this important for the expansion of the crypto market beyond currencies and stablecoins?
It’s simple: large financial institutions need size to scale. Real World Assets represent trillions of dollars of ‘size’. After riding the wave of the last 6 years, big players gained an appreciation for the market beyond their prop desk. In retrospect, crypto was the beginning of something much bigger — the unlocking of much larger markets including the tokenization of private equities and debt, the largest and most illiquid asset classes. Like any startup, Big FIs couldn’t start at the destination: crypto was the warm up.
The evidence for the evolution of large financial institutions away from thinking about digital assets merely as currencies towards considering them as platforms for improving efficiencies in traditional financial markets. In a recent report called ‘Institutional Defi: The Next Generation of Finance?’, JPMorgan’s Onyx team asserted:
“The cost savings and new business opportunities of creating a “tokenized” version of real-world assets for transacting through DeFi protocols could be significant for issuers and investors, as well as for financial institutions that can adapt their technology and business models.”
BlackRock and JPMorgan are just two examples of the large players that are looking at the emerging digital asset securities market. As public markets wait for the dust — and valuations — to settle after a 10 year bull run in IPOs, and as crypto currencies continue to suffer from regulatory uncertainty and various scandals, the opportunity represented by the entrance of large players into the digital asset securities market should make builders optimistic that their investments over the last few years will pay off and finally fulfill their destiny. The inclusion of Tokenized Real World Assets will transform both the thinking about crypto and DLT, as well as the business opportunities available to the builders and buyers of this technology.
