The estimated worth of asset tokenization today is as much as $3.5 billion. And with projections that it could reach $16 trillion by 2030, the tokenization market represents a massive opportunity. So, what’s holding the technology back from fully realizing its potential? That was the question posed during the London Tokenisation Policy Summit held earlier this year.
Hosted by Ripple and the Imperial College Business School’s Centre for Financial Technology, the Summit brought together top minds in academia, industry and politics to decode the future of digital assets. Dive into the key insights and recommendations summarized below for a glimpse into what’s next for the financial sector.
Tokenization Use Cases: The “Real Deal” of Digitization
With a promise to remove payment gateway intermediaries; improve payment processor efficiencies; ensure data protection, data privacy and transparency; and enable real-time settlement, tokenization is championed as the “real deal” function of blockchain technology. It's potential for significant impact across a broad range of sectors is massive.
Tokenized mortgages, consumer loans and microloans have all helped make private credit and debt the second fastest growing sector, while property purchases and treasury notes also stand to benefit. Additional tokenization use cases include enhanced capital flows for small- and medium-sized enterprises, improved efficiencies in carbon credit trading and better price discovery compared to traditional assets.
But despite tokenization’s potential as a new asset class, challenges to mainstream adoption persist. A lack of well-established Special Purpose Vehicles makes it difficult to tokenize real-world assets. Cross-chain protocols are needed to improve interoperability. Limited liquidity in secondary markets means an elevated risk on investment. And there is a clear need for providers that can simplify tokenization into a single offering to help break down silos between financial ecosystems.
To overcome these hurdles and scale tokenization, there are three key areas of emphasis: collateralization, valuation and passkeys. Ensuring that tokens are backed by sufficient reserves, hold the same value internationally and are protected through secure passkeys and proper key management will help to foster trust and—ultimately—adoption.
A New Financial Framework
Central to the topic of tokenization is the importance of a robust regulatory framework to underpin the tokenized economy. Once in place, this framework would provide the necessary structure, safeguards and confidence needed for sustainable growth and development.
The regulatory variance between countries regarding real-world assets versus more standardized rules for digital assets is one key challenge. This is especially problematic in Europe where a pan-EU approach is hindered by differing traditional ownership rights within each member nation.
Of course, gaps in digital asset governance exist as well. For example, Luxembourg boasts a digital security depository while the UK has none. The increasing use of distributed ledger technology in financial markets means these differences could lead to regulatory arbitrage.
Key to resolving these differences will be communication with policymakers. Public and private collaboration is crucial to produce government policy that can support regulatory development and innovation. But an understanding of the benefits of tokenization is needed first—especially among those outside the financial sector.
The UK, for example, is committed to boosting digital innovation through improved policy so it can better compete with larger markets like the U.S. and China. It aims to promote the use of digital assets by empowering financial regulators to create flexible rulebooks, supporting aligned risk management initiatives and addressing priority international opportunities and challenges. A new UK framework for crypto tokens and digital assets that sets out a plan for stablecoins is currently being developed as part of this initiative.
Looking Ahead
One thing is abundantly clear: tokenization is more than just a buzzword, it’s a rapidly growing movement that is poised to reshape the financial landscape. At the highest level, using the tokenization process to improve efficiencies and interoperability between countries could significantly cut into the 5–6% of global GDP lost every year to friction in the system, boosting overall long-term revenue for every market participant.
Banks, traditional finance players and regulators are all key to furthering this adoption of tokenization. Realizing its full potential will require a concerted effort incorporating policies that enable scaling, regulatory clarity and continuous education and collaboration.
Download Ripple's Scaling Tokenization whitepaper to learn more.
