The traditional finance world is beginning to embrace tokenisation – the process of turning real-world assets, such as shares of funds, into digital tokens that can be traded on blockchain platforms.
A significant development in this area involves the potential use of tokenised shares of money-market funds from major Wall Street firms like BlackRock (BLK) and Franklin Templeton as collateral in trading. This new frontier has the potential to reshape traditional finance and the burgeoning cryptocurrency sector, making transactions faster, more secure and potentially more cost-effective.
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According to a Bloomberg report, the move to the use of tokenised real-world assets took a significant step recently when a subcommittee of the US Commodity Futures Trading Commission (CFTC) voted to advance guidelines for using these tokenised assets in financial transactions.
Recently, a subcommittee of the CFTC’s Global Markets Advisory Committee voted to move forward with recommendations allowing registered firms to use distributed ledger technology (DLT) for holding and transferring non-cash collateral.
This means companies could begin to pledge blockchain-based, tokenised versions of real-world assets, such as shares of money-market funds, in financial transactions. The full CFTC committee, which includes major players like BlackRock and Citadel, is expected to vote on these guidelines later this year.
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These recommendations aim to make it easier for businesses to pledge tokenised assets as collateral, aligning with existing regulatory policies. If approved, it could mark a major shift in how financial institutions use blockchain technology, integrating crypto-based innovations with traditional financial infrastructure.
The adoption of tokenised collateral could be a significant boon for both traditional finance and the cryptocurrency sector. According to McKinsey, the total tokenised market, excluding stablecoins, could reach $2tn (£1.52tn) by 2030. This would put tokenised assets on par with the current size of the entire cryptocurrency market.
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Tokenisation’s adoption by traditional finance could legitimise the use of blockchain technology in mainstream markets, increasing crypto’s role in everyday financial operations. The ability to pledge tokenised assets as collateral could also provide businesses with more capital efficiency, creating new opportunities for growth and investment.
One notable example of asset tokenisation in action is BlackRock’s BUIDL token, officially known as the BlackRock USD Institutional Digital Liquidity Fund. This tokenised fund operates on the ethereum blockchain, giving institutional investors access to US dollar yields. BUIDL represents a stable, tokenised fund with assets that include cash, US Treasury bills, and government-backed securities. Below is a list of some of the main features of BlackRock’s tokenised money-market fund.
BUIDL token holders receive a daily dividend, which is paid monthly.
The value of each token remains stable at $1 (76p).
Tokens can be transferred between pre-approved institutional investors.
It operates fully on the Ethereum blockchain, leveraging smart contracts for transparency and efficiency.
BlackRock is the primary investment manager for this tokenised fund, but it also collaborates with key crypto firms like Coinbase (COIN) and Fireblocks. Since its launch, BUIDL has become the fastest-growing tokenised fund in history, reaching over $500m (£379m) in assets under management by September 2024.
This development is not just significant for BlackRock but also for the ethereum network, as it increases the demand for ethereum’s infrastructure.
An aspect of tokenisation that is drawing considerable attention is its potential to democratise access to traditionally exclusive financial products. According to Zodia Markets Ireland chair Michael Walsh, tokenisation could open the door for everyday investors to participate in previously inaccessible markets, such as private equity or litigation finance pools. Tokenised assets could allow people to invest with increments as small as $100 (£75), broadening financial inclusion.
Read more: BlackRock ‘leading tokenisation of real-world assets on blockchains’
Furthermore, the security of blockchain-based transactions could enhance the transparency and traceability of investments. Unlike traditional cash transactions, which can be difficult to trace, blockchain technology records every transaction, providing a secure and transparent ledger.
However, when speaking to Yahoo Finance Future Focus, Walsh pointed out that regulatory frameworks need to evolve to accommodate the widespread adoption of tokenised assets. While tokenisation offers greater security and efficiency, it still needs the backing of regulatory institutions to achieve its full potential.
Tokenisation involves converting the rights to real-world assets, like bonds, real estate, or shares of money-market funds, into digital tokens on a blockchain network. This process offers several potential benefits:
Increased liquidity: Tokenising illiquid assets, such as real estate or fine art, makes them more easily tradable. Instead of needing to sell an entire building, for example, an owner could sell fractional tokens representing ownership in the property.
Cost efficiency: Tokenisation can reduce costs associated with traditional asset management, such as legal fees, intermediaries, and clearing houses. This can be especially beneficial in bond markets, where tokenisation could simplify the complex issuance process.
Broader market access: Tokenisation could democratise markets that are traditionally reserved for institutional investors. Retail investors could gain access to high-barrier markets, such as private equity or high-value real estate, through fractional ownership enabled by tokens.
Transparency: Blockchain technology inherently offers transparency. Every transaction is recorded on a public ledger, which can reduce the risk of fraud and improve trust between parties.
BlackRock’s CEO Larry Fink commented that the approval of a spot bitcoin exchange traded fund (ETF) in January 2024 by the US Securities and Exchange Commission was only the beginning of traditional finance’s embrace of innovations from the cryptocurrency sector.
“I think ETFs are step one in the technological revolution in the financial markets. Step two is going to be the tokenisation of every financial asset. And to me, this is where we believe it’s going, so we’re looking at bitcoin, we’re looking at ETFs in the same manner, these are technological changes that can allow us to move forward with tokenisation,” Fink told CNBC news earlier this year.
Fink sees tokenisation as holding immense potential to reshape the financial landscape, making markets more accessible, transparent, and efficient. As more financial institutions and regulators embrace blockchain technology, the tokenisation of real-world assets could drive the next wave of innovation in both traditional finance and the cryptocurrency sector.
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