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Recent research from Coinbase indicates that the tokenization of financial assets has been progressively advancing since 2017, contributing to the development of digital financial assets such as sovereign bonds, money market funds, and repurchase agreements.
The report notes that this growth has been significantly supported by the prevailing high-yield environments, although it still encounters substantial infrastructural and legal challenges.
Tokenization Market Ready for Expansion
The report states in part:
“We believe this could serve as a crucial use case for traditional financial entities and evolve into a significant component of the new crypto market cycle, although full implementation may require an additional 1-2 years.”
Coinbase has observed a notable shift in opportunity costs, rising from roughly 1.0-1.5% in 2017 to current nominal interest rates exceeding 5.0%. This change highlights the capital efficiency of immediate settlement in contrast to the conventional T+2 settlement cycle, especially for financial institutions.
According to Coinbase research, numerous misconceptions surrounding tokenization have been clarified over the past six years. The risks associated with counterparties have considerably diminished with the advent of atomic settlements.
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The report also points out a rise in front-end bond yields, which has led to yield-seeking behavior among retail investors. Consequently, there has been a marked increase in the uptake of protocols engaging with the tokenized U.S. Treasury market, indicating a significant shift from the landscape seen in 2017.
Coinbase anticipates that this trend will continue to gain momentum over the next 1-2 years, potentially becoming a significant element of the forthcoming crypto market cycle. However, the full realization of this concept may necessitate an additional 1-2 years due to the complexities involved in integrating it into existing real-world systems.
The Coinbase report follows closely after the FED published a report highlighting a rise in tokenized assets.
Promising Future Projections, Yet Challenges Remain
Coinbase emphasized projections regarding the potential size of tokenization opportunities. For example, a prediction from Citigroup estimates the opportunity at a $5 trillion market. Conversely, the Boston Consulting Group forecasts a $16 trillion market by 2030.
A study by Fortune Business Insights projected the tokenization market size to grow from $2.81 billion in 2023 to $9.82 billion by 2030. Some of these figures include the growth of CBDCs and stablecoins.
Nonetheless, Coinbase reiterated that the future will pose challenges for the tokenization market as there are numerous obstacles to navigate. For instance, significant legal challenges persist, particularly with stablecoins still requiring legal clarity in the U.S.
Moreover, given the nascent state of the industry, there are no established legal precedents or a definitive legal framework for managing such investments. Due to these legal constraints, many institutions favor private blockchains due to their concerns regarding public networks.
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