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- 1 Tokenized assets remain a small part of the crypto economy despite the benefits.
- 2 Fractional ownership and secondary markets are yet to materialize.
- 3 Private equity and credit are already experimenting with tokenization.
While tokenized versions of real-world assets like real estate or art hold immense promise, they still account for less than 11% of crypto’s total valuation, according to optimistic projections.
If exchanges can instill greater investor confidence and liquidity, 2024 may finally see tokenization’s hype materialize.
Untapped Potential
Enthusiasts initially touted assets like company equity or property represented on blockchains for offering fractionalized ownership and simplified secondary trading.
Yet these perks have yet to translate into surging interest beyond niche crypto sectors.Despite the macro fundamentals seemingly in place for serious growth, skepticism remains around whether tokenization at scale is feasible.
Room for Expansion
On the other hand, the past year saw real-world asset tokenization expand steadily, albeit from a low base.
The share of such offerings in decentralized finance (DeFi) has doubled since 2022, according to an analysis by DeFi Llama and the Federal Reserve Bank of St. Louis.
Major institutions, like the European Investment Bank’s recent $100 million tokenized bond, continue trialing large token sales.As regulators grow more receptive to blending blockchain efficiencies with mainstream finance, conditions keep improving for tokenized markets to thrive.
Exchange Liquidity Lacking
Yet a key roadblock curbing more rapid advancement must be more liquidity and custody solutions to instill investor trust.Unlike stocks or commodities, secondary exchanges do not yet exist for efficiently trading most tokenized asset classes in a regulated environment.
This risks stranding token holders without venues for divesting holdings, especially for unique assets like fine art or exotic derivatives.Established crypto exchanges must fill this void to power tokenized finance forward.
Learning from TradFi Markets
While decentralized systems foster innovation, the decentralized finance (DeFi) movement overlooks key lessons from traditional finance in structuring markets that attract capital.
Look at the runaway growth of exchange-traded funds (ETFs), now commanding over 30% of all US equity trading. Or, examine how Fannie Mae and Freddie Mac securitization made homeownership accessible for millions.
In both cases, secondary markets created trading convenience and confidence for investors. It is what the tokenized landscape desperately needs.
Exchanges Step Up
Central custodians and avenues for asset repricing provide the rails for capital inflows that unproven tokenization ecosystems need to improve.
Cryptocurrency exchanges are perfectly positioned to offer these rails by bridging decentralized, trustless technology with the expectations of mainstream wealth managers.
Platforms like FTX or Binance command immense investor trust and integration with the existing financial rulebook. They must leverage this status to spur adoption by providing liquidity access and settlement finality for assets issued across blockchains.
Staking a Claim
Nascent experiments are already underway that exchanges can learn from. Private equity fund KKR began tokenizing shares in a recent capital raise to expand access. Multiple private banks now issue debt tokenized on Ethereum for better transparency.
If exchanges actively stake a dominant claim in these niches, they can mold early tokenization successes to drive exponential growth by attracting streams of fickle capital.
The tools to make this happen include groups like the International Swaps and Derivatives Association (ISDA) crafting digital asset governance guidance. The building blocks are there for exchange if they embrace the mantle.
Conclusion
Despite the promising perks of representing real assets on blockchains, tokenized markets remain an untouched fraction of broader crypto portfolios after years of hype.
However, growing regulatory clarity coupled with intensifying institutional crypto participation sets the stage for this to change if exchanges step up. By providing trusted custody solutions and secondary trading avenues, leading platforms can instill investor confidence to unlock trillions in fresh capital flows through tokenized channels.
The pieces align for tokenized finance to transform global markets in 2024 should exchanges leverage their stature to bring it to fruition.
Nancy J. Allen is a crypto enthusiast, with a major in macroeconomics and minor in business statistics. She believes that cryptocurrencies inspire people to be their own banks, and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning. She frequently researches, and posts content on the top altcoins, their theoretical working principles and technical price predictions.
