Tokenisation: the future for wealth management?

Tokenisation: the future for wealth management?

Three quarters of wealth managers and institutional investors are predicting that tokenisation will be increasingly adopted by fund managers over the next five years, according to new research.

The study, conducted by investment manager Nickel Digital Asset Management, found that 14% expected to see a “dramatic” growth in tokenisation over the next five years. Meanwhile, over four fifths expected decentralised finance solutions to have an impact on the way traditional finance firms do business.

What is tokenisation?

Tokenisation creates digital representations of financial assets, with ownership tracked on distributed ledgers or blockchains. These assets can be everything from equities and bonds to real estate and pieces of art. They can even represent intangible things like intellectual property.

Citigroup have forecast that $4 trillion to $5 trillion of tokenised digital securities could be issued by 2030. A report by Boston Consulting Group and ADDX, however, estimates that the tokenization market could be a $16 trillion business opportunity by the same year.

The technology remains in its infancy, however. Even digital bond issuance – the most common usage for tokenisation in mainstream financial assets – is small. Just $500 million of digital bonds were issued in the year to September 2023, according to S&P Global Ratings. Meanwhile, $6.3 trillion of US bonds were issued in the same period, according to the Securities Industry & Financial Markets Association.

What are the benefits?

One of tokenisation’s most touted benefits is its accessibility. Through tokenisation, an asset can be represented by millions of tokens, creating the ability for fractional ownership. These can then be listed on a variety of exchanges, expanding the potential buyer pool.

Transparency is another key benefit. Due to the public nature of many blockchains, an individual can track and audit all the records of the asset. This feature has the potential to reduce the risk of fraud and increase trust in the market.

Tokenisation can also potentially offer cost-efficiency benefits as the technology cuts out the need for middlemen in various transaction processes.

Lingering concerns

Despite the technology’s promise, over a third of those surveyed by Nickel Digital said more regulatory clarity was needed on decentralised finance in order to engage with it.

31% pointed to a lack of safe custody solutions and 18% admitted they do not have the specialised talent to engage with decentralised finance.

One of the most immediate challenges facing tokenisation is the current regulatory landscape. As the technology is still relatively new, many governments are yet to establish clear regulation. Regulation also varies significantly from country to country.

In the UK, the Financial Conduct Authority has said it was working with the industry to explore the potential uses of fund tokenisation.

It confirmed it would work closely with the government, firms, and other market participants to understand the emerging technologies, their commercial use cases and the potential issues with the UK’s legal and regulatory framework.