Investment bank Citi is betting that blockchain-based tokenization of real-world assets will be the next "killer use case" in crypto, predicting a market size of $4 trillion to $5 trillion by 2030.
This would represent an 80-fold increase in the current value of real-world assets locked on a blockchain, Citi explained in its March “Currencies, Tokens, and Games” report. “We forecast $4 trillion to $5 trillion in tokenized digital securities and $1 trillion in distributed ledger technology (DLT)-based trade finance volumes by 2030,” said the firm’s analysts.
Of the whopping $5 trillion in tokenized assets, the bank estimates $1.9 trillion will be in the form of debt, $1.5 trillion in real estate, $0.7 trillion in private equity and venture capital, and $0.5-1 trillion from securities. Research shows that private equity and venture capital funds will be the most tokenized asset class, accounting for 10% of their total addressable market, followed by real estate at 7.5%.
Adoption in the private equity market is likely to be faster due to its favorable liquidity, transparency and decentralized characteristics, the bank said. KKR, Apollo and Hamilton Lane are three private equity firms that have established tokenized versions of their funds on platforms such as Securitize, Provenance Blockchain and ADDX. According to Citi, blockchain tokenization will replace traditional financial infrastructure because of its technological advantages and more investment opportunities in the private market.
"Traditional financial assets are not destroyed but suboptimal because they are constrained by legacy systems and processes," it said. "Certain financial assets - such as fixed income, private equity and other alternatives - are relatively constrained, while other markets - such as public equities - are more efficient."
According to Citi, blockchain tokenization eliminates the need for costly reconciliations, prevents settlement failures, and makes cumbersome operations more efficient: “What DLT and tokenization offer is a whole new technology stack that allows all stakeholders to conduct all activities on the same shared infrastructure as a golden source of data – no more expensive reconciliations, settlement failures, Waiting for faxed documents or 'originals' to come through the mail, or investment options limited by operational difficulties in access."
However, the investment bank did acknowledge that there are currently some shortcomings, such as a lack of legal and regulatory frameworks, challenges in building infrastructure and gaining a widely followed set of interoperability standards. Citi also noted that some industry players also remain “skeptical,” especially in light of the Australian Securities Exchange’s (ASX) recent cancellation of its failed $165 million DLT project in November.
More "growing pains" are ahead, Citi added. But the bank still believes the ecosystem will mature with the technology: "Once this intermediate, skeuomorphic state of 'crossover' is crossed, new disruptive technologies move away from old, idealized directional trends toward envisioned end states."
Citi envisions this "end state" as "a digitally native financial asset infrastructure that is globally accessible, operates 24x7x365, and is optimized through smart contracts and DLT-enabled automation to enable use cases where traditional infrastructure is impractical. "
