Main Points:
- 65% of survey respondents believe bonds are the most likely assets to be tokenized.
- A significant tokenization wave is expected to occur in over three years, as revealed by an OMFIF survey.
- Various countries view blockchain and tokenization as promising technologies, with ongoing experiments by the UK and BIS.
- 42% of respondents think blockchain will become a major financial infrastructure.
- Major financial institutions in the UK are completing tokenization experiments.
- Central banks and financial institutions are exploring wholesale CBDC and other tokenized assets.
The Growing Interest in RWA Tokenization
The tokenization of real-world assets (RWA) continues to capture the interest of global financial institutions. According to a survey conducted by the Official Monetary and Financial Institutions Forum (OMFIF), over 90% of respondents foresee significant developments in asset tokenization within the next three years. This surge is expected to redefine the way financial markets operate, with bonds at the forefront of tokenization efforts.
Tokenization’s Timeline: Over Three Years to Reach Full Scale
OMFIF’s comprehensive survey, involving 26 institutions from Europe, Africa, Asia, and South America, uncovered that most respondents expect the full-scale tokenization of real-world assets to take over three years. While 92% of participants believe that the financial markets will undergo significant tokenization, they do not see it happening in the immediate future.
This prolonged timeline may be attributed to the complexities involved in transitioning existing financial systems into a tokenized world. As regulatory frameworks and technological infrastructure catch up, market participants expect this transformation to take time, though they remain optimistic about its eventual arrival.
Bonds Leading the Tokenization Movement
One of the key insights from the OMFIF report is that 65% of respondents believe bonds are the most likely financial instruments to be tokenized. This aligns with current trends in blockchain bond issuance, which has already reached significant milestones. By the end of July 2023, 14 blockchain-based bonds had been issued, valued at $1.2 billion. This marks significant progress compared to the 16 bonds worth $1.7 billion issued in 2023.
The tokenization of bonds offers several advantages, including increased transparency, efficiency in settlement, and accessibility for a broader range of investors. As financial markets continue to explore this avenue, bonds may pave the way for other assets, such as real estate or commodities, to follow suit.
Blockchain as a Pillar of Financial Infrastructure
Blockchain technology is gradually being recognized as a crucial component of future financial infrastructures. According to the OMFIF survey, 42% of respondents believe blockchain will become the primary technology supporting the financial market infrastructure. This belief is further supported by ongoing experiments in various countries, including the UK and international organizations like the Bank for International Settlements (BIS).
These experiments are not limited to tokenized bonds. Central banks and financial institutions are also exploring the potential of wholesale central bank digital currencies (CBDCs), which are digital tokens issued by central banks and intended for use by financial institutions. As blockchain technology continues to evolve, its role in reshaping the global financial system is becoming more apparent.
UK’s Leadership in Tokenization Experiments
In the UK, significant progress has been made in the exploration of tokenization and blockchain-based systems. On September 17, UK Finance announced that it had completed experiments involving tokenization, CBDCs, and distributed ledger technology (DLT) platforms. Major UK financial institutions, including Barclays, Citi UK, HSBC, and NatWest, participated in these experiments, signaling the growing interest in this technology within the financial sector.
These experiments aim to evaluate the practicality and benefits of tokenization and CBDCs, providing valuable insights for future developments. As the UK continues to lead in this area, it is likely that other countries will follow suit, further accelerating the adoption of blockchain in financial markets.
The Role of BIS in Tokenization Research
The Bank for International Settlements (BIS), often referred to as the central bank of central banks, has also taken a proactive role in studying the potential of tokenization. On September 16, BIS announced that it had invited 40 selected companies to participate in research related to tokenization. This research aims to explore how tokenized assets, including bonds and CBDCs, can be integrated into the broader financial ecosystem.
BIS’s involvement highlights the growing recognition of tokenization’s potential among global financial regulators. As more central banks and financial institutions engage in these experiments, the likelihood of a widespread tokenization revolution increases.
Wholesale CBDCs: The Preferred Tokenized Currency
In addition to tokenized bonds, the OMFIF survey revealed a strong preference for wholesale CBDCs over other forms of tokenized currency. Wholesale CBDCs are digital currencies issued by central banks and designed for use by financial institutions, offering a more efficient and secure method of transferring large sums of money between banks.
While the concept of retail CBDCs, which would be used by the general public, has gained attention, wholesale CBDCs appear to be the preferred option among financial institutions. However, the successful implementation of wholesale CBDCs will depend heavily on the development of strong regulatory frameworks, as noted by the OMFIF report.
The Future of Tokenization
The tokenization of real-world assets is poised to revolutionize financial markets, but its full potential may not be realized for another three years. Bonds are likely to lead the charge, with blockchain technology serving as the foundation for future financial infrastructure. As experiments in the UK and BIS continue, and with the growing interest in wholesale CBDCs, the stage is being set for a new era of tokenized finance. However, strong regulations and technological advancements will be crucial in ensuring the smooth transition to a tokenized world.
In the coming years, market participants will closely watch the progress of these initiatives, with many expecting significant advancements in the tokenization of bonds, CBDCs, and other real-world assets. While the road to full-scale tokenization may be long, the potential benefits make it a journey worth pursuing.
