The world of traditional finance has begun to embrace tokenization, the process of converting real-world assets, such as shares in a fund, into digital tokens that can be traded on blockchain platforms.
Significant developments in this space include the possibility that tokenized shares of money market funds of major Wall Street firms such as BlackRock (BLK) and Franklin Templeton could be used as collateral for trades. . This new frontier has the potential to reshape traditional finance and the burgeoning crypto sector, making transactions faster, safer, and potentially more cost-effective.
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According to a report from Bloomberg, tokenized assets have recently become more popular as a subcommittee of the U.S. Commodity Futures Trading Commission (CFTC) voted to advance guidelines for the use of these tokenized assets in financial transactions. The move toward the use of real-world assets has taken an important step.
The rise of tokenized money markets
Recently, a subcommittee of the CFTC’s Global Markets Advisory Committee resolved to advance a recommendation that would allow registered companies to use distributed ledger technology (DLT) to hold and transfer non-cash collateral.
This means that companies could start collateralizing blockchain-based tokenized versions of real-world assets, such as shares in money market funds, in financial transactions. The full CFTC Commission, which includes major companies 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 companies to pledge tokenized assets as collateral, in line 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.
How tokenization could impact traditional finance and cryptocurrencies
The adoption of tokenized collateral could be a huge boon for both traditional finance and the crypto sector. According to McKinsey, the total value of the tokenization market, excluding stablecoins, could reach $2tn (£1.52tn) by 2030. This would make the tokenized asset equivalent to the current size of the entire cryptocurrency market.
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The adoption of tokenization by traditional finance could legitimize the use of blockchain technology in mainstream markets and increase the role of cryptocurrencies in everyday financial operations. The ability to pledge tokenized assets as collateral can improve capital efficiency for companies and create new growth and investment opportunities.
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BlackRock’s BUIDL token as a key case study
One notable example of asset tokenization in action is BlackRock’s BUIDL token, officially known as BlackRock USD Institutional Digital Liquidity Fund. This tokenized fund operates on the Ethereum blockchain and provides institutional investors with access to US dollar yields. BUIDL represents a stable of tokenized funds with assets including cash, U.S. Treasury bills, and government-backed securities. Below is a list of some of the key features of BlackRock’s tokenized money market funds.
BUIDL token holders receive daily dividends paid monthly.
The value of each token is stable at $1 (76 pence).
Tokens are transferable between pre-approved institutional investors.
It runs entirely on the Ethereum blockchain and leverages smart contracts for transparency and efficiency.
BlackRock is the primary investment manager of this tokenized fund, but it also works with major cryptocurrency companies like Coinbase (COIN) and Fireblocks. Since its inception, BUIDL has become the fastest growing tokenized fund in history, reaching over $500m (£379m) in assets under management by September 2024.
This development is important not only for BlackRock, but also for the Ethereum network as demand for Ethereum’s infrastructure increases.
Democratizing access to financial products through tokenization
An aspect of tokenization that has received much attention is its potential to democratize access to traditionally proprietary financial products. Tokenization could open the door for everyday investors to participate in previously inaccessible markets, such as private equity and litigation finance pools, according to Michael Walsh, chairman of Zodia Markets Ireland. . Tokenized assets allow people to invest in increments of as little as $100 (£75), increasing financial inclusion.
Read more: BlackRock “Leading the Tokenization of Real-World Assets on Blockchain”
Additionally, the security of blockchain-based transactions could improve the transparency and traceability of investments. Unlike traditional cash transactions, which are difficult to track, blockchain technology records all transactions and provides a secure and transparent ledger.
However, in a conversation with Yahoo Finance Future Focus, Walsh pointed out that the regulatory framework needs to evolve to accommodate the widespread adoption of tokenized assets. While tokenization improves security and efficiency, it still requires support from regulators to reach its full potential.
Advantages of tokenizing real-world assets
Tokenization involves converting rights to real-world assets such as bonds, real estate, or shares in money market funds into digital tokens on a blockchain network. This process has several potential benefits.
Increased liquidity: Tokenizing illiquid assets like real estate or art makes them easier to trade. For example, instead of having to sell the entire building, an owner can sell fractional tokens representing ownership of the property.
Cost efficiency: Tokenization can reduce costs associated with traditional asset management, such as legal fees, intermediaries, and clearinghouses. This is particularly beneficial in the fixed income market where tokenization can simplify complex issuance processes.
Broader market access: Tokenization has the potential to democratize markets traditionally reserved for institutional investors. Individual investors could gain access to high-barrier markets such as private equity and high-value real estate through fractional ownership enabled by tokens.
Transparency: Blockchain technology inherently provides transparency. All transactions are recorded on a public ledger, reducing the risk of fraud and increasing trust between parties.
The future of tokenization
BlackRock CEO Larry Fink said that the U.S. Securities and Exchange Commission’s approval of the Spot Bitcoin exchange-traded fund (ETF) in January 2024 means that traditional finance is moving away from the crypto sector. He commented that this is just the beginning of embracing innovation.
“I think ETFs are the first step in a technological revolution in financial markets. Step two is the tokenization of all financial assets. And for me, I believe this is the direction we need to go. , we’re equally focused on Bitcoin and ETFs. These are the technological changes that will allow us to move forward with tokenization,” Fink told CNBC News. earlier this year.
Fink believes that tokenization has immense potential to reshape the financial landscape and make markets more accessible, transparent, and efficient. As more financial institutions and regulators adopt blockchain technology, the tokenization of real-world assets has the potential to drive the next wave of innovation in both traditional finance and the crypto space.
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