Here is the rewritten article with a creative re-expression while maintaining the general semantics and accuracy:
**Enhancing Financing for Small Issuers through Tokenization**
**Focus of Repurchase Agreements**
Repurchase agreements, commonly known as “repos,” serve as a tangible example of tokenization in action. Broadridge Financial Solutions, Goldman Sachs, and JPMorgan currently transact trillions of dollars in repos each month. Unlike some other tokenization use cases, repos achieve substantial benefits without requiring tokenization across the entire value chain.
Financial institutions leverage tokenized repos to enhance operational and capital efficiency. Operationally, smart contract-supported automation streamlines routine management tasks like collateral valuation and margin adjustments. This reduces errors and settlement failures, simplifies disclosures, and enhances capital efficiency through 24/7 instant settlement and enhanced collateral utilization for short-term borrowing liquidity.
Most repo terms span 24 hours or longer. Intraday liquidity minimizes counterparty risks, lowers borrowing costs, facilitates short-term lending of idle cash, and reduces liquidity buffers. Real-time, 24/7 cross-jurisdictional collateral liquidity provides access to higher-yield, high-quality liquid assets and optimizes their availability among market participants.
**Next Phases**
Many market participants view tokenized assets, such as alternative funds, as having significant potential to drive asset management growth and streamline fund administration. Smart contracts and interoperable networks make managing large-scale autonomous portfolios more efficient through automated portfolio rebalancing. They also offer new capital sources for private assets. Decentralization and secondary market liquidity may help private funds attract capital from smaller retail and high-net-worth individuals. Additionally, transparent data on a unified ledger and automation can enhance backend operational efficiency. Established firms like Apollo and JPMorgan are experimenting with blockchain-based portfolio management. However, realizing the full benefits of tokenization requires tokenizing underlying assets.
For some asset classes, tokenization adoption may proceed more slowly due to feasibility issues, compliance obligations, or lack of incentives for key market participants (see Figure 2). These asset classes include publicly traded and unlisted stocks, real estate, and precious metals.
**Overcoming Cold Start Issues**
Cold start issues are common challenges when adopting tokenization. In the world of tokenized financial assets, issuance is relatively easy and replicable, but achieving scale depends on capturing user demand: whether through cost savings, improved liquidity, compliance, or other factors.
Despite progress in proof-of-concept experiments and single-fund issuances, token issuers and investors still face cold start challenges. Limited liquidity due to insufficient trading volume impedes issuance processes; concerns about losing market share may lead early movers to incur additional costs by supporting parallel issuances using traditional technologies.
For instance, tokenized bonds see new issuances almost weekly. Despite billions of dollars in outstanding tokenized bonds today, yields are less significant compared to traditional bond issuances, and secondary trading volumes remain low. Overcoming cold start issues requires building a use case where digital representations of collateral bring substantial benefits, including enhanced liquidity, faster settlements, and higher fluidity. Achieving genuine, sustained long-term value requires coordination across multiple aspects of the value chain and broad participation from new digital asset categories.
Given the complexity of upgrading financial service infrastructure platforms, we argue for the need for Minimum Viable Value Chains (MVVCs) to support the scalable tokenization solutions and overcome some of these challenges. To fully realize the benefits outlined in this article, financial institutions and partner organizations must collaborate on shared or interoperable blockchain networks. This interconnected infrastructure represents a new paradigm, sparking regulatory concerns and feasibility challenges (see Figure 3).
**Current Developments**
Several projects are currently working towards establishing universal or interoperable blockchains for institutional financial services, including the Monetary Authority of Singapore’s “Project Ubin” and “Regulated Settlement Network.” In the first quarter of 2024, the Canton Network pilot project brought together 15 asset management firms, 13 banks, several custodians, exchanges, and a financial infrastructure provider for simulated transactions. This pilot demonstrated that traditionally isolated financial systems can successfully connect and synchronize using public permissioned blockchains while maintaining privacy controls.
While there are successful examples on both public and private blockchains, it remains unclear which blockchain will handle the most transaction volume. Currently, in the United States, most federally regulated institutions are discouraged from using public blockchains for tokenization. Globally, however, many institutions favor the Ethereum network for its liquidity and composability. The debate between public and private networks continues as unified ledgers are constructed and tested.
**Path Forward**
Comparing the current state of tokenizing financial assets with other disruptive technologies highlights that we are still in the early stages of adoption. Consumer technologies (e.g., the internet, smartphones, social media) and financial innovations (e.g., credit cards, ETFs) typically show the fastest growth within the first five years of emergence (with annual growth rates exceeding 100%). Subsequently, growth rates slow to around 50% before achieving moderate compound annual growth rates of 10% to 15% over a decade. Despite experiments dating back to 2017, widespread issuance of tokenized assets has only recently materialized. We estimate a compound annual growth rate of 75% across asset classes by 2030, led by the initial wave of tokenized assets.
While expecting tokenization to drive transformation in the financial industry is reasonable, early adopters may reap additional benefits from “riding the wave.” They can capture significant market share (especially in economies of scale markets), improve efficiency, set agendas for formats and standards, and benefit from the reputation of embracing emerging innovations like tokenized cash settlements and on-chain repos.
However, many institutions remain in a “wait-and-see” mode, awaiting clearer market signals. Tokenization appears to be at a tipping point, suggesting that institutions still on the sidelines may find themselves catching up once critical milestones are achieved, including:
– Infrastructure: Blockchain technology capable of supporting trillions of dollars in transactions.
– Integration: Seamless interoperability between different blockchains.
– Support Factors: Widespread availability of tokenized cash (e.g., CBDCs, stablecoins, tokenized deposits) for instant settlement of transactions.
– Demand: Buyer participants willing to invest significantly in on-chain capital products.
– Regulation: Providing certainty and supporting actions for a more fair, transparent, and efficient cross-jurisdictional financial system, ensuring data access and security.
While not all these milestones have been met, we anticipate a rapid adoption wave of tokenization. Adoption will be led by financial institutions and market infrastructure participants, rallying together to claim a leadership position. We refer to these collaborations as Minimum Viable Value Chains (MVVCs). Examples of MVVCs include Broadridge’s blockchain-based repo ecosystem and Onyx, a collaboration between JPMorgan, Goldman Sachs, and BNY Mellon.
In the coming years, we expect more MVVCs to emerge, capturing value from other use cases, such as enabling instant enterprise-to-enterprise payments through tokenized cash; dynamic “smart” management of funds by asset managers on-chain; or efficient lifecycle management of government and corporate bonds. These MVVCs may be supported by network platforms created by existing companies and fintech disruptors.
For pioneers, there are risks and rewards: early investments and risks associated with adopting new technologies can be significant. Early movers not only attract attention but also need to develop infrastructure and run parallel processes on traditional platforms, which is both time-consuming and resource-intensive. Additionally, regulatory and legal uncertainties exist in many jurisdictions regarding interactions with any form of digital assets, and key supporting factors like widely available wholesale tokenized cash and deposits for settlement remain unmet.
The history of blockchain applications is filled with such challenges leading to failures. This history may deter existing companies operating within conventional business operations on traditional platforms, feeling safer. However, this strategy carries risks, including significant market share losses. Given the current high-interest rate environment providing a clear use case for some tokenized products (like repos), market conditions could swiftly influence demand. As signs of tokenization adoption, such as regulatory clarity or matured infrastructure, emerge, trillions of dollars’ worth of value can transition onto chains, creating a sizable value pool for pioneers and disruptors (see Figure 4).
**Immediate Action Path**
In the short term, institutions including banks, asset management companies, and market infrastructure participants should assess their product portfolios and identify which assets are most likely to benefit from shifting towards tokenized products. We recommend considering whether tokenization can accelerate strategic priorities, such as entering new markets, launching new products, and/or attracting new clients. Are there use cases that can create value in the short term? And what internal capabilities or partnerships are needed to seize opportunities from market transformation?
By aligning pain points of both buyers and sellers with market conditions, stakeholders can assess where tokenization poses the greatest risk to their market share. However, realizing full benefits requires collaborative creation of a Minimum Viable Value Chain. Addressing these issues now can help existing participants avoid awkward situations when demand surges.
—
If this meets your requirements, or if you need any further adjustments, feel free to let me know!
