McKinsey: From Ripple to Wave: The Transformative Power of Asset Tokenization

Source: McKinsey; Compiled 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 critical mass after years of promise and experimentation. These benefits, including programmability, composability, and enhanced transparency, can enable financial institutions to improve operational efficiency, increase liquidity, and create new revenue opportunities through innovative use cases. These advantages are being realized today, with the first large-scale applications converting 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 cooperation and coordination among all stakeholders. As infrastructure players move from proof-of-concepts to robust, scaled solutions, there are still many opportunities and challenges to reimagine how the future of financial services will work.

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; fair access; composability, thanks to a common technology stack; and managed transparency. BlackRock Chairman and CEO Larry Fink highlighted the strategic future of the 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, the digitization of assets now seems more inevitable. Despite the clear momentum, widespread adoption of tokenization remains a long way off. Modernizing existing infrastructure is challenging, especially in heavily regulated industries such as financial services. Overcoming inertia requires coordination across the value chain. Given this, we expect multiple waves of tokenization adoption: The first wave will be driven by use cases with proven investment returns and existing scale. Next will be use cases for asset classes where the current market is smaller, the benefits are less obvious, or there are more severe technical challenges to solve.

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 securitized 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 perspective on how tokenization adoption could play out. We describe the current state of adoption, which is primarily focused 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 offer 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 Waves

The rate and timing of tokenization adoption will vary across asset classes due to differences in expected returns, considerations, timing of impact, and risk appetite among market participants. We expect these factors to characterize the waves of activity and adoption that are likely to emerge. Asset classes with larger market values, greater friction along the value chain, less mature traditional infrastructure, or lower liquidity are more likely to gain outsized benefits from tokenization. For example, we believe that considerations for tokenization 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 key players and their fees. Outsourcing activities often yields economies of scale, which reduces the incentive to disrupt. Time to impact – how quickly tokenization-related investments can pay off – can strengthen the business case and, therefore, interest in pursuing tokenization.

Specific asset classes can set the stage 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 Classes with the Fastest Path to Adoption

Tokenization is advancing incrementally, 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 across asset classes could reach approximately $2 trillion by 2030 (excluding cryptocurrencies and stablecoins), driven primarily by the assets listed above (Exhibit 1). The pessimistic and optimistic scenarios range from approximately $1 trillion to approximately $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 Funds

Tokenized money market funds have attracted more than $1 billion in assets under management, demonstrating demand from investors with on-chain capital in a high-interest environment. Investors can choose from funds managed by established firms such as BlackRock, WisdomTree, and Franklin Templeton, as well as those managed by Web3 native firms such as Ondo Finance, Superstate, and Maple Finance. Tokenized money market funds may see continued demand in a high-interest 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 the scope and scale of tokenized funds continue to increase, additional product-related and operational benefits will be realized. For example, highly customized investment strategies will become possible through the composability of hundreds of tokenized assets. Storing data on a shared ledger can reduce errors associated with manual reconciliation and improve transparency, thereby reducing operational and technology costs. While the 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 Security

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, as well as 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 levels of intermediary involvement. Blockchain-backed lending offers an alternative with many benefits: Real-time on-chain data is kept in a unified master ledger as a single source of truth, promoting transparency and standardization throughout the loan lifecycle. Smart contract-enabled payout calculations and streamlined reporting reduce the cost and labor required. Shortened settlement cycles and wider pools 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 lending moves 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

Tokenized bonds with a total notional value of over $10 billion have been issued globally over the past 10 years (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. Additionally, blockchain-based repurchase agreements (repos) have been adopted, resulting in trillions of dollars in monthly trading volume in North America and 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 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 fractionalization. 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 fractionalization could improve funding for small issuers by enabling “just-in-time” funding (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 repo

Repurchase agreements, or “repos,” are one example where tokenization adoption and its benefits can be observed today. Broadridge Financial Solutions, Goldman Sachs, and JPMorgan Chase currently trade trillions of dollars in repo per month. Unlike some tokenization use cases, repo does 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, enabling smart contract execution automates day-to-day 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 for short-term borrowing and enhanced use of collateral.

Historically, most repo maturities have been 24 hours or longer. Intraday liquidity reduces counterparty risk, lowers borrowing costs, enables short-term incremental borrowing of inert cash, and reduces 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 earlier already offer somewhat independent paths 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 in previous asset classes or when there is a catalyst to spur progress despite limited evidence of short-term benefits.

One asset class where tokenization has great potential in the eyes of many market participants is alternative funds, where it could spark growth in assets under management and simplify fund accounting.Smart contracts and interoperable networks could make it more efficient to manage discretionary portfolios at scale by automating portfolio rebalancing. They could 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 might look like on blockchains. However, to fully realize the benefits of tokenization, the underlying assets must also be tokenized, and regulatory considerations may limit the assets that can be accessed.

For several other asset classes, adoption may be slower, either because the expected returns are only incremental or due to considerations such as meeting 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 the product and its users need to grow at a healthy rate, but neither can succeed alone. In the world of tokenized financial assets, issuance is relatively easy and replicable, but true scale can only be achieved when network effects are realized: when users (typically demand-side investors) capture real value, whether from cost savings or higher liquidity, or enhanced compliance.

In practice, while proof-of-concept experiments and single fund launches have made progress, token issuers and investors still 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 issuances with traditional technologies; and incumbents may experience inertia due to the disruption of established processes (and associated costs) despite considerable benefits.

One example is the tokenization of bonds. New tokenized bond issuances are announced almost every week. Although there are billions of dollars of tokenized bonds currently in circulation, the benefits relative to traditional issuance are minimal and secondary trading remains scarce. Here, overcoming the cold start problem requires building a use case where the 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 new digital asset classes.

Given the complexity of upgrading the underlying operating platforms of the financial services industry, we believe that minimum viable value chains (MVVCs) are needed (by asset class) to scale tokenization solutions and overcome some of these challenges. To fully realize the benefits described in this paper, financial and cooperative institutions must collaborate on universal or interoperable blockchain networks. This interconnected infrastructure represents a new paradigm and raises regulatory concerns and several 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 isolated financial systems can leverage public permissioned blockchains while maintaining privacy controls.

While there are successful examples of both public and private blockchains, it is unclear which one will carry the most transaction volume. Currently, in the U.S., 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 public vs. private network debate is far from over.

The Road Ahead

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 show the fastest growth (over 100% annual growth) within the first five years of their existence. 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, only in recent years has there been a large-scale issuance of tokenized assets. Our estimates of market capitalization in 2030 assume an average CAGR of 75% across asset classes, with first-wave assets leading the way.

While it is reasonable to expect tokenization to spur this decades-spanning transformation of the financial industry, there may be particular benefits for first movers who can “catch the wave.” Pioneers can capture outsized market share (especially in markets that benefit from economies of scale), improve 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 demonstrated this.

But more institutions are in a “wait and see” mode, awaiting clearer market signals. Our thesis is that tokenization is at a tipping point, suggesting that this model may be too slow once we see a number of important signs, including: Infrastructure: Blockchain technology has the capacity to support trillions of dollars in transaction volume; Integration: Blockchains for different applications demonstrate seamless interconnectivity; Enablers: Tokenized cash for instant transaction settlement (e.g. CBDCs, stablecoins, tokenized deposits);

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 participants 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.

Over the next few years, we expect more MVVCs to 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 are likely to 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. Furthermore, 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 fraught with such challenges. This history may deter incumbents who may 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 adoption of tokenization develops, such as regulatory clarity or infrastructure maturation, trillions of dollars of 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 participants, 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 could create value in the near term? What internal capabilities or partnerships are needed to capitalize on the opportunities created by the market shift?

By aligning pain points (on both the buy and sell sides) with buyer and market conditions, stakeholders can assess where tokenization poses the greatest risk to their market share. But realizing the full benefits will require 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.