The Transformative Impact of Tokenized Securities on Investment Portfolios

Why Over $40 Billion in Tokenized Securities Should Be Considered for Investment Portfolios

The emergence of digital assets, particularly through the tokenization of traditional financial instruments, is transforming the investment landscape. In this week’s edition, Herwig Konings from Security Token Market delves into the remarkable growth of this industry and elucidates the significance of tokenization in today’s financial ecosystem. Additionally, in our Ask an Expert segment, Carlos Domingo, CEO of Securitize, provides insights on investor interest in these innovative assets amid current market conditions.

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The Rise of Tokenized Assets

Tokenized assets, which encompass equities, bonds, funds, real estate, and asset-backed securities, have garnered unprecedented attention this year. Often referred to in the crypto space as “real-world assets” (RWAs), these instruments are being explored by major financial players, including BlackRock, Hamilton Lane, JP Morgan, DTCC, and Broadridge. The operational efficiencies and diverse return profiles of tokenized assets are driving this interest.

Understanding Tokenization

Tokenization involves leveraging blockchain technology to create digital representations of financial instruments. Unlike traditional cryptocurrencies, these digital assets comply with applicable securities laws globally. They operate on regulated platforms while also utilizing decentralized finance (DeFi) applications to enhance their performance and utility.

Examples of Tokenized Assets

Security Token Market has observed various innovative tokenized assets enter the market. These include:

• Pre-IPO company equity
• Resort investments
• Wine and diamond funds
• Securities backed by bitcoin mining or liquidity events from a portfolio of companies

On the more traditional side, offerings such as Hamilton Lane’s Secondary Fund VI available on Securitize and liquidity products like the BlackRock USD Institutional Liquidity Fund (BUIDL) and Franklin Templeton’s OnChain U.S. Government Money Fund (BENJI) have also emerged. For further insights on liquidity products, refer to our piece for CoinDesk Crypto Long & Short.

Bringing Traditional Funds On-Chain

Financial advisors are increasingly seeking higher-performing assets to enhance their clients’ portfolios. However, many traditional funds have substantial investment minimums, often exceeding $5 million. With tokenization, clients can invest at a fraction of that amount, such as $20,000. This accessibility allows more clients to benefit from attractive risk-adjusted returns, facilitates more granular portfolio rebalancing for advisors, and simplifies investor management for issuers due to the power of blockchain technology. This trend is especially relevant as wealth transfer exposes varying asset allocation preferences and risk profiles, particularly among younger generations eager to engage with crypto markets.

Comparing RWAs to Cryptocurrencies

A common query is how RWAs perform in comparison to cryptocurrencies and whether they yield extraordinary returns. The short answer is no; however, RWAs can stabilize portfolios that focus on digital assets, unlock access to previously inaccessible asset classes, and provide utility, thereby contributing to an evolving financial ecosystem.

According to STM’s RWA Securities Market Update – August 2024 report, a hypothetical bundle of all STM-tracked RWAs outperformed the CoinDesk 20 Index (CD20), with an increase of 3.03% in August, while the CD20 experienced a loss of 14.45%. This performance comparison highlights the fluctuations of the crypto market.

In August 2024, traditional markets faced a downturn due to various factors, including the Nikkei’s decline, rising unemployment, and recession fears in the U.S. Crypto markets mirrored this decline but attempted a recovery, ultimately succumbing to losses. While some security tokens also experienced downturns, others achieved notable growth, contributing to the overall positive performance of the security token basket. For more detailed information on RWAs, please consult our latest research report.

Ask an Expert

Q. The tokenized treasury market recently crossed $2B in total value locked (TVL). How do you see that market evolving?

The tokenized treasury market is poised for significant growth due to the untapped potential within this sector. In traditional finance, it is uncommon to post dollars as collateral, with a ratio of $2 in treasuries for every dollar. In contrast, the crypto landscape currently shows over $150B in stablecoins against only $2B in treasuries, a dynamic that is expected to reverse. As large crypto institutions begin to utilize tokenized short-dated treasuries as collateral instead of stablecoins, the adoption of tokenized treasuries for treasury management will increase, unlocking new functionalities and fostering growth within the market.

Q. If the Fed adjusts interest rates this month as expected, how will the demand for tokenizing different asset classes potentially shift?

When interest rates are elevated, investors typically prefer to keep their capital in treasuries, which offer a risk-free return of around 5%. This preference can deter investment in other, more illiquid assets that carry a higher risk. However, we anticipate a decline in interest rates over the next 12 to 18 months. It’s crucial to note that high interest rates coupled with inflation mean that investors are not truly earning the yields they perceive, as their dollars are losing value. As both rates and inflation decrease, treasuries will remain attractive, while demand for other fixed-income assets adjacent to treasuries on the risk curve—such as private credit—will likely rise, becoming the next significant trend in the tokenization wave.

– Carlos Domingo, CEO and co-founder, Securitize

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