According to a recent Coinbase research, the tokenization of financial assets has been steadily gaining momentum since 2017, bringing the evolution of digital financial assets, including sovereign bonds, money market funds, and repurchase agreements.
As per the report, the growth has been dramatically buoyed by the existing high-yield environments but still faces huge infrastructural and legal obstacles.
Tokenization Market Primed for Growth
The report says in part:
“We believe this could be a vital use case for traditional financial players and become a major part of the new crypto market cycle, though full implementation may take another 1-2 years.”
Coinbase has identified a substantial shift in opportunity costs, increasing from approximately 1.0-1.5% in 2017 to the current nominal interest rates above 5.0%. This shift emphasizes the capital efficiency of instantaneous settlement compared to the traditional T+2 settlement cycle, particularly for financial institutions.
According to Coinbase research, many misconceptions about tokenization have been debunked in the past six years. The counterparty risks have significantly decreased with the introduction of atomic settlements.
The report also highlights an upsurge in front-end bond yields, leading to yield-seeking behavior among retail investors. As a result, there has been a significant increase in the adoption of protocols tapping into the tokenized U.S. Treasury market. This signifies a substantial departure from the landscape observed in 2017.
Coinbase predicts that this trend will continue to accelerate over the next 1-2 years, potentially becoming a substantial part of the upcoming crypto market cycle. However, the complete implementation of this concept may require an additional 1-2 years due to the complexities associated with integrating it into existing real-world systems.
The Coinbase report comes only a few weeks after the FED released a report indicating a surge in tokenized assets.
Great Future Estimates, but Obstacles to Overcome
Coinbase highlighted estimates about the size of tokenization opportunities. For instance, a Citigroup prediction caps the opportunity at a $5 trillion market. On the other hand, Boston Consulting Group predicts a $16 trillion market by 2030.
A Fortune Business Insights research projected growth of the tokenization market size from $2.81 billion in 2023 to $9.82 billion by 2030. Some of those figures are inclusive of CBDC and stablecoin growth.
However, Coinbase reiterated that the future will be challenging for the tokenization market as there are many hurdles to overcome. For instance, there are still significant Legal challenges with stablecoins still needing legal clarity within the U.S.
Furthermore, with the industry still fresh, there are no legal precedents or a clear legal framework for dealing with such investments. Due to the legal constraints, many institutions prefer private blockchains due to their apprehensions regarding public networks.
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