Tokenized financial assets have had a “cold start” but they are tracking to reach a market size of about $2 trillion by 2030, say analysts at consulting firm McKinsey & Company.

“In a bullish scenario, this value could double to around $4 trillion,” the analysts wrote on June 20, despite being “less optimistic than previously.”

McKinsey’s analysts said there’s been “visible momentum” on tokenization, but broad adoption is still far away as modernizing existing financial infrastructure is “challenging, especially in a regulation-heavy industry such as financial services.”

The analysts expected cash and deposits, bonds and exchange-traded notes (ETNs), mutual funds and exchange-traded funds (ETFs), loans and securitization to reach “meaningful adoption” first — meaning a $100 billion of tokenized market capitalization by 2030.

The analysts estimate excluded stablecoins, tokenized deposits and central bank digital currencies (CBDCs).

Better use cases would thaw cold start

McKinsey’s analysts pointed out that tokenization faces the typical "cold start problem," where tokenized assets require users to have value.

The technology has issues with limited liquidity, which deters a tokenized issuance. Fear of losing market share can also lead to tokenized assets with a “parallel issuance on legacy technology.”

The analysts added tokenization needs a use case where it offers a benefit over traditional finance systems.

“One such example is the tokenization of bonds. Barely a week goes by without the announcement of a new tokenized bond issuance,” McKinsey’s analysts wrote.

“While there are billions of dollars of tokenized bonds outstanding today, benefits over traditional issuance are marginal, and secondary trading remains scarce.”

In their example, the analysts said the slow start could be fixed by providing “greater mobility, faster settlement, and more liquidity.”

McKinsey’s analysts added early movers who “catch the wave” of tokenization could see an outsized market share and could set the agenda on standards, along with getting a reputation bump.

“But many more institutions are in ‘wait and see’ mode,” they said.

The analysts noted that there are indicators suggesting when tokenization has reached a tipping point. These include blockchains capable of handling trillions of dollars in volume, seamless connectivity among blockchains, and regulatory advancements providing clear guidelines on data access and security.

Source : Cointelegraph - Jun 24, 2024