Investment bank Citi is betting on blockchain-based tokenization of real-world assets to become the next “killer use case” in crypto, with the company estimating the market will reach between $4 trillion and $5 trillion by 2030.
In its March “Money, Tokens and Games” report, Citi noted that this would represent an 80x increase over the current value of real-world assets locked on the blockchain.
“We forecast $4 trillion to $5 trillion in tokenized digital securities and $1 trillion in distributed ledger technology (DLT)-based trade finance volume by 2030,” said the firm’s analysts.
Of the up to $5 trillion in tokens, the bank estimates that $1.9 trillion will come in the form of loans, $1.5 trillion from real estate, $0.7 trillion from private equity and venture capital, and between $0.5 -1 trillion from securities.
Research shows that private equity and venture capital funds will become the most emblematic asset class, capturing 10% of the total addressable market, followed by real estate at 7.5%.
The bank explained that private equity markets are likely to see faster adoption rates due to their favorable liquidity, transparency and calibration characteristics.
KKR, Apollo and Hamilton Lane are three private equity firms that have already set up tokenized versions of their funds on platforms such as Securitize, Provenance Blockchain and ADDX.
Citi said that the blockchain token will replace traditional financial infrastructure as it is technologically superior and provides more opportunities for investment in private markets.
“Traditional financial assets are not broken, but sub-optimal because they are constrained by traditional systems and processes,” it said. “Some financial assets – such as fixed income, private equity and other alternatives – are relatively limited, while other markets – such as public equity – are more efficient.”
Citi argues that blockchain tokenization negates the need for costly reconciliation, prevents settlement errors, and makes tedious operations more efficient:
“What DLT and tokenization provide is an entirely new technology stack that allows all stakeholders to perform all activities on the same shared infrastructure as a gold data source – no costly reconciliation, mis- settlement, waiting for documents to be faxed or “track original” by mail, whether investment options are constrained by operational difficulty of access.
However, the investment bank acknowledged that there are currently shortcomings, such as a lack of legal and regulatory framework, challenges in building infrastructure and widely followed interoperability standards.
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Citi also noted that some industry players remain “sceptical” as well, especially in light of the Australian Securities Exchange (ASX) recently shelved its $165 million DLT project as of November.
Citi said there are many more “growing pains” to come. But the bank is confident that the ecosystem will mature as the technology develops:
“Once this intermediate, skeuomorphic ‘straddle’ state is crossed, the new disruptive technology diverges from the old and ideally oriented trends towards the intended final state.”
Citi optimizes this “end state” as a “digital infrastructure for financial assets, globally accessible, active 24x7x365 and optimized with smart contracts and DLT automation capabilities, enabling use cases impractical with traditional infrastructure” “
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