Source: McKinsey; Translated by: Baishui, Golden Finance

Tokenized financial assets are moving from pilots to large-scale deployment. Applications are not yet widespread, but financial institutions with blockchain capabilities will have a strategic advantage.

Tokenization, the process of creating unique digital representations of assets on blockchain networks, has reached a tipping point after years of promise and experimentation. The benefits—including programmability, composability, and enhanced transparency—can enable financial institutions to improve operational efficiencies, increase liquidity, and create new revenue opportunities through innovative use cases. These advantages are being realized today, with the first large-scale applications transforming trillions of dollars of assets on-chain each month. However, there have been many false starts and challenges to date. Further mainstreaming these technologies in a robust, secure, and compliant manner will require collaboration and coordination among all stakeholders. As infrastructure players move from proofs of concept to robust, scaled solutions, many opportunities and challenges remain to reimagine how the future of financial services will work (see sidebar, “What is tokenization?”).

If we were to design the future of financial services, we could say it would include many of the features of tokenized digital assets: 24/7 availability; instant global collateral liquidity; equitable access; composability, thanks to a common technology stack; and managed transparency. BlackRock Chairman and CEO Larry Fink highlighted the strategic future of this technology in January 2024, “We believe the next step will be the tokenization of financial assets, which means every stock, every bond will be tokenized,” and more and more institutions are launching and expanding tokenized products, from tokenized bonds and funds to private equity and cash.

As the technology matures and demonstrates measurable economic benefits, asset digitization now seems more inevitable. Despite clear momentum, widespread adoption of tokenization remains elusive. Modernizing existing infrastructure is challenging, especially in regulation-heavy industries such as financial services. Overcoming inertia requires coordination across the value chain. Given this, we expect tokenization adoption to occur in multiple waves: The first wave will be driven by use cases with proven ROI and existing scale. Next will be use cases in asset classes where current markets are smaller, benefits are less clear, or require solving tougher technical challenges.

Based on our analysis, we estimate that the total tokenized market capitalization could reach around $2 trillion by 2030 (excluding cryptocurrencies like Bitcoin and stablecoins like Tether), driven primarily by mutual funds, bonds and exchange-traded notes (ETNs), loans, and securitization and alternative funds. In an optimistic scenario, this value could double to around $4 trillion, but we are less optimistic than previously published estimates as we approach the middle of the decade.

In this article, we provide a perspective on how the adoption of tokenization might play out. We describe the current state of adoption, which focuses primarily on a limited set of assets, as well as the benefits and considerations of tokenization more broadly. We then examine current use cases that are targeting meaningful market share and make the case for waves of growth across different asset classes. For the remaining major financial asset classes, we examine the “cold start” problem and provide practical steps to overcome it. Finally, we consider the risks and benefits of first movers and consider a “call to action” for all participants in future financial market infrastructures.

Tokenization in the Wave

The rate and timing of tokenization adoption will vary by asset class due to differences in expected returns, considerations, timing of impact, and risk appetite among market participants. We expect these factors to characterize likely waves of activity and adoption. Asset classes with larger market values, greater friction along the value chain, less mature traditional infrastructure, or lower liquidity are more likely to benefit greatly from tokenization. For example, we believe tokenization considerations are highest for asset classes with lower technical complexity and regulatory considerations.

Investment interest in tokenization may be inversely proportional to the richness of fees earned from today’s less efficient processes, depending on whether the function is in-house or outsourced, and the concentration of major players and their fees. Outsourcing activities often creates economies of scale, which reduces the incentive to disrupt. Time to impact – how quickly a tokenization-related investment can pay off – can strengthen the business case and, therefore, the interest in pursuing tokenization.

Specific asset classes can lay the foundation for adoption in subsequent asset classes by introducing greater regulatory clarity, infrastructure maturity, interoperability, and accelerated investment. Adoption will also vary by geography, influenced by the dynamic and changing macro environment, including market conditions, regulatory frameworks, and buy-side demand. Finally, high-profile successes or failures can drive or constrain further adoption.

Asset Class with the Fastest Path to Adoption

Tokenization is gradually gaining momentum and is expected to accelerate as network effects strengthen. Given their characteristics, some asset classes may achieve meaningful adoption faster (defined as tokenized market capitalization exceeding $100 billion) by the end of the decade. We expect the most prominent leaders to include cash and deposits, bonds and ETNs, mutual funds and exchange-traded funds (ETFs), and loans and securitizations. For many of these projects, adoption rates are already significant, supported by the greater efficiency and value gains brought by blockchain and higher technical and regulatory considerations.

We estimate that tokenized market capitalization could reach about $2 trillion by 2030 across asset classes (excluding cryptocurrencies and stablecoins), driven primarily by the assets listed above (Exhibit 1). The pessimistic and optimistic scenarios range from about $1 trillion to about $4 trillion, respectively. Our estimates exclude stablecoins, including tokenized deposits, wholesale stablecoins, and central bank digital currencies (CBDCs), to avoid double counting, as these are often used as the corresponding cash backbone in the settlement of transactions involving tokenized assets.

Mutual Fund

Tokenized money market funds have attracted over $1 billion in assets under management, demonstrating demand from investors who want on-chain capital in a high-rate environment. Investors can choose from funds managed by established firms such as BlackRock, WisdomTree, and Franklin Templeton, as well as funds managed by Web3 native firms such as Ondo Finance, Superstate, and Maple Finance. Tokenized money market funds may see continued demand in a high-rate environment, which could offset the role of stablecoins as an on-chain store of value. Other types of mutual funds and ETFs can provide on-chain capital diversification to traditional financial instruments.

The transition to on-chain funds can significantly increase utility, including instant 24/7 settlement and the ability to use tokenized funds as a payment instrument. As tokenized funds continue to expand in scope and scale, additional product-related and operational benefits will be realized. For example, highly customized investment strategies will be possible through the composability of hundreds of tokenized assets. Storing data on a shared ledger reduces errors associated with manual reconciliation and increases transparency, thereby reducing operational and technology costs. While overall demand for tokenized money market funds depends in part on the interest rate environment, it is now an early green shoot for the appeal of other funds.

Loans and Guarantees

Blockchain lending is nascent, but disruptors are starting to succeed in this space: Figure Technologies is one of the largest non-bank home equity lines of credit (HELOC) lenders in the U.S., with billions of dollars in originations. Web3 native companies like Centrifuge and Maple Finance, and companies like Figure have facilitated over $10 billion in loan issuance involving blockchain.

We expect to see greater adoption of loan tokenization, particularly warehouse lending and on-chain loan securitization. Traditional lending is characterized by labor-intensive processes and high involvement of intermediaries. Blockchain-backed lending offers an alternative with many benefits: Real-time on-chain data is maintained in a unified master ledger that serves as a single source of truth, facilitating transparency and standardization across the entire loan lifecycle. Smart contract-enabled payout calculations and simplified reporting reduce the cost and labor required. Shortened settlement cycles and a wider pool of funds enable faster transaction processes and potentially lower borrowers’ cost of funds.

In the future, tokenizing a borrower’s financial metadata or monitoring their on-chain cash flows could enable fully automated, fairer, and more accurate underwriting. As more loans move to private credit channels, incremental cost savings and speed are attractive benefits for borrowers. As overall digital asset adoption grows, demand for Web3 native is expected to increase.

Bonds and Exchange Traded Notes

In the past 10 years, tokenized bonds with a total notional value of over $10 billion have been issued globally (out of $140 trillion in notional bonds outstanding globally). Recent notable issuers include Siemens, the City of Lugano, and the World Bank, among other companies, government-related entities, and international organizations. In addition, blockchain-based repurchase agreements (repos) have been adopted, resulting in trillions of dollars in monthly trading volumes in North America, creating value from the operational and capital performance of existing flows.

Digital bond issuance is likely to continue, as the potential gains once scaled are high and the barriers to entry are relatively low at present, in part due to an appetite to stimulate capital market development in certain regions. For example, in Thailand and the Philippines, tokenized bond issuance has enabled small investors to participate through tokenization. While the gains have been primarily on the issuance side so far, an end-to-end tokenized bond lifecycle could improve operational efficiency by at least 40% through data clarity, automation, embedded compliance (e.g., transferability rules encoded at the token level), and streamlined processes (e.g., asset servicing). In addition, lower cost, faster issuance or tokenization could improve financing for small issuers by enabling “just-in-time” financing (i.e., optimizing borrowing costs by raising a specific amount at a specific time) and tapping into global capital pools to expand the investor base.

Focus on repurchase

Repurchase agreements, or “repos,” are an example of where tokenization adoption and its benefits can be observed today. Broadridge Financial Solutions, Goldman Sachs, and JPMorgan Chase currently trade trillions of dollars in repos per month. Unlike some tokenization use cases, repos do not require value chain-wide tokenization to realize material benefits.

Financial institutions that tokenize repo primarily capture operational and capital performance. On the operational side, supporting smart contract execution automates daily lifecycle management (e.g., collateral valuation and margin top-ups). It reduces errors and settlement failures and simplifies reporting; 24/7 instant settlement and on-chain data also improve capital efficiency through intraday liquidity of short-term borrowings and enhanced collateral utilization.

Historically, most repo maturities have been 24 hours or longer. Intraday liquidity can reduce counterparty risk, lower borrowing costs, enable short-term incremental lending of inert cash, and reduce liquidity buffers. Real-time, 24/7, cross-jurisdictional collateral liquidity can provide higher-yielding, high-quality liquid assets and enable optimized movement of that collateral between market participants, maximizing its availability.

Subsequent asset waves

The first wave of assets described above already offer a somewhat independent path to adoption today and over the next two to three years. Conversely, tokenization of other asset classes is more likely to scale only when the foundation has been laid by previous asset classes or when there is a catalyst to spur progress despite limited evidence of short-term benefits.

One asset class that many market participants see as having great potential for tokenization is alternative funds, which could spark growth in assets under management and simplify fund accounting. Smart contracts and interoperable networks can more efficiently manage discretionary portfolios at scale by automating portfolio rebalancing. They can also provide new sources of capital for private assets. Unbundling and secondary market liquidity could help private funds source new capital from retail small and high net worth individuals. In addition, transparent data and automation on a unified master ledger could improve operational efficiency in middle and back office activities. Several incumbents, including Apollo and JPMorgan Chase, are conducting experiments testing what portfolio management on blockchains might look like. However, to fully realize the benefits of tokenization, the underlying assets must also be tokenized, and regulatory considerations could limit the assets that can be accessed.

For several other asset classes, adoption may be slower, either because the expected benefits are only incremental or because of compliance obligations or lack of incentives for key market participants to adopt (Exhibit 2). These asset classes include publicly traded and unlisted stocks, real estate, and precious metals.

Overcoming the cold start problem

The cold start problem is a common challenge to the adoption of innovation, where both the product and its users need to grow at a healthy pace, but neither can succeed alone. In the world of tokenized financial assets, issuance is relatively easy and replicable, but true scale is achieved only when network effects are achieved: when users (usually demand-side investors) capture real value, whether from cost savings, higher liquidity, or enhanced compliance.

In practice, while proof-of-concept experiments and single fund launches have made progress, token issuers and investors continue to encounter familiar cold-start problems: limited liquidity hinders issuance because trading volumes are insufficient to establish a strong market; fear of losing market share may cause first movers to incur additional expenses by supporting parallel issuance of legacy technologies; and incumbents may experience inertia due to the disruption of established processes (and the associated costs) despite considerable benefits.

One example is the tokenization of bonds. New tokenized bond issuances are announced almost every week. While there are billions of dollars of tokenized bonds currently in circulation, the benefits over traditional issuance are minimal and secondary trading remains scarce. Here, overcoming the cold start problem requires building a use case where digital representation of collateral can deliver material benefits, including greater liquidity, faster settlement, and more liquidity. Delivering real, sustained long-term value requires coordination across a multifaceted value chain and broad participation by participants in the new digital asset class.

Given the complexity of upgrading the underlying operating platforms of the financial services industry, we believe that a minimum viable value chain (MVVC) (by asset class) is needed to scale tokenization solutions and overcome some of these challenges. To fully realize the benefits described in this article, financial and cooperative institutions must collaborate on a universal or interoperable blockchain network. This interconnected infrastructure represents a new paradigm and raises regulatory concerns and considerations (Exhibit 3).

Efforts are underway to build universal or interoperable blockchains for institutional financial services, including the Monetary Authority of Singapore’s Project Guardian and regulated settlement networks. In the first quarter of 2024, the Canton Network pilot brought together 15 asset managers, 13 banks, as well as multiple custodians, exchanges, and a financial infrastructure provider to execute simulated transactions. The pilot validated that traditionally siloed financial systems can leverage public permissioned blockchains while maintaining privacy controls.

While there are successful examples of both public and private blockchains, it is not clear which one will carry the most transaction volume. Currently, in the United States, most federal regulators discourage the use of public blockchains for tokenization. But globally, many institutions are choosing Ethereum, a public network, for its liquidity and composability. As unified ledgers continue to be built and tested, the debate over public vs. private networks is far from over.

The way forward

Comparing the current state of tokenization of financial assets to the emergence of other paradigm-shifting technologies suggests that we are in the early stages of adoption. Consumer technologies (e.g., the internet, smartphones, and social media) and financial innovations (e.g., credit cards and ETFs) typically exhibit the fastest growth (over 100% annual growth) within the first five years of their inception. We then see growth slow to around 50% per year, ultimately achieving more modest CAGRs of 10% to 15% over a decade later. Although experiments began as early as 2017, large-scale issuance of tokenized assets has not occurred until recent years. Our estimate of market capitalization in 2030 assumes an average CAGR of 75% across asset classes, with first-wave assets leading the way.

While tokenization can reasonably be expected to spur this decades-spanning transformation of the financial industry, there may be particular benefits for first movers who are able to “catch the wave.” Pioneers can capture outsized market share (especially in markets that benefit from economies of scale), increase their own efficiencies, set the agenda for formats and standards, and benefit from the reputational halo of embracing emerging innovations. Early movers in tokenized cash payments and on-chain repo have already demonstrated this.

But more institutions are in a “wait and see” mode, waiting for clearer market signals. Our thesis is that tokenization is at a tipping point, suggesting that this model may be too slow once we see some important signs, including the following:

• Infrastructure: Blockchain technology has the capacity to support trillions of dollars in transaction volume;

• Integration: Blockchains of different applications show seamless interconnectivity;

• Drivers: Widespread use of tokenized cash (e.g., CBDCs, stablecoins, tokenized deposits) for instant transaction settlement;

• Demand: The willingness of buy-side participants to invest in on-chain capital products at scale;

• Regulation: Actions that provide certainty and support a fairer, more transparent and more efficient financial system across jurisdictions, and provide clarity on data access and security.

While we haven’t seen all of these tokens emerge yet, we expect a wave of adoption (widespread use) to follow the tokenization wave described earlier. This adoption will be led by financial institutions and market infrastructure players coming together to build leading positions in value capture. We call these collaborations minimum viable value chains. Examples of MVVCs include the blockchain-based repo ecosystem operated by Broadridge, and Onyx, a collaboration between JPMorgan Chase and Goldman Sachs and BNY Mellon.

In the next few years, we expect to see more MVVCs emerge to capture value from other use cases, such as instant business-to-business payments through tokenized cash; dynamic “smart” management of on-chain funds by asset managers; or efficient lifecycle management of government and corporate bonds. These MVVCs will likely be supported by network platforms created by incumbents and fintech disruptors.

For first movers, there are risks and rewards: the upfront investment and risk of investing in new technologies can be significant. Not only do first movers get noticed, but developing infrastructure and running parallel processes on legacy platforms is time and resource intensive. In addition, in many jurisdictions, regulatory and legal certainty for participation in any form of digital assets is lacking, and key enablers such as widespread use of wholesale tokenized cash and settlement deposits have yet to be provided.

The history of blockchain adoption is littered with such challenges. That history could deter incumbents who might feel safer with business as usual on traditional platforms. But such a strategy carries risks, including significant loss of market share. Because today’s high-interest rate environment has generated clear use cases for some tokenized products, such as repurchase agreements, market conditions have the potential to quickly impact demand. As tokenization adoption develops, such as with regulatory clarity or infrastructure maturation, trillions of dollars in value could be transferred on-chain, creating a sizable value pool for first movers and disruptors (Exhibit 4).

In the short term, institutions including banks, asset managers and market infrastructure players should evaluate their product suites and determine which assets would benefit most from transitioning to tokenized products. We recommend questioning whether tokenization can accelerate strategic priorities such as entering new markets, launching new products and/or attracting new customers. Are there potential use cases that can create value in the short term? What internal capabilities or partnerships are needed to take advantage of the opportunities created by the market shift?

By combining pain points (on both the buy and sell side) with buyer and market conditions, stakeholders can assess where tokenization poses the greatest risk to their market share. But realizing the full benefits requires convening counterparties to collaborate on creating a minimum viable value chain. Solving these growing pains now can help existing players avoid playing catch-up when demand inevitably surges.