Citi, the investment bank, has predicted that the tokenisation of real-world assets via blockchain will become the next “killer use case” for cryptocurrencies. The bank forecasts that the market for such tokenised assets will reach between $4tn to $5tn by 2030, which would represent an 80-fold increase from the current value of real-world assets locked on blockchains.
Citi’s analysts forecast $4tn to $5tn of tokenised digital securities and $1tn of distributed ledger technology-based trade finance volumes by 2030. Of the up to $5tn of tokenised assets, the bank estimates $1.9tn will come in the form of debt, $1.5tn from real estate, $0.7tn from private equity and venture capital, and between $0.5tn and $1tn from securities.
Citi believes that private equity and venture capital funds will become the most tokenised asset class, accounting for 10% of its total addressable market. Real estate will be next at 7.5%, the bank said.
Private equity markets are expected to see faster adoption rates because of their liquidity, transparency, and fractionalisation properties, Citi added. Already, private equity firms such as KKR, Apollo and Hamilton Lane have set up tokenised versions of their funds on platforms like Securitize, Provenance Blockchain, and ADDX.
According to Citi, the use of blockchain tokenization will eventually replace the traditional financial infrastructure because it is technologically superior and provides more investment opportunities, particularly in private markets. The bank states that while traditional financial assets are not necessarily broken, they are suboptimal due to being limited by traditional systems and processes.
Certain financial assets, such as fixed income, private equity, and other alternatives, have been relatively constrained while other markets, such as public equities, are more efficient. Citi argues that blockchain tokenization eliminates the need for expensive reconciliation, prevents settlement failures, and improves efficiency by providing a shared infrastructure that serves as a golden source of data.
This removes the need for expensive reconciliation, waiting for documents to arrive by post, or being restricted by operational difficulties. Instead, stakeholders can carry out all activities on the same shared infrastructure.
Citi believes that the use of blockchain tokenization will be a game-changer for the financial industry, providing a more efficient way of doing things while simultaneously increasing access to investment opportunities.
The investment bank did, however, acknowledge that there are drawbacks at present, such as a lack of legal and regulatory framework, challenges with building the infrastructure and obtaining a widely followed set of interoperability standards.
Citi acknowledged that some industry players are skeptical about blockchain tokenization, citing the Australian Securities Exchange’s (ASX) decision to abandon its $165m distributed ledger technology (DLT) project last year.
However, the bank remains confident that the ecosystem will mature as the technology develops. Citi expects that the blockchain technology will reach an “end state” that involves a digitally native financial asset infrastructure that is globally accessible, operates 24x7x365 and is optimized with smart contract and DLT-enabled automation capabilities that can enable use cases that are impractical with traditional infrastructure. The bank believes that the industry has yet to overcome many of the growing pains associated with the technology.
Still, it is confident that blockchain tokenization will eventually break free from the old, straddle state and become a disruptive technology that provides a more efficient and accessible way of doing things in the financial industry.