2022: The Year of Tokenization

“We see 2022 as possibly the year of the blockchain bridge…or the year of financial tokenization,” JPMorgan analysts recently predicted. That is to say, 2022 may be the year when blockchains take a noticeable role in bridging our traditional ‘paper-based’ system to a more efficient, truly digital future.

The tokenization and fractionalization of everything, including illiquid assets like private equity, is not just imaginable but coming into view, the JPMorgan analysts argue. We couldn’t agree more. Over the course of 2021, investors’ hearts sank as the popular Robinhood trading app encountered ‘processing delays’ for which it was later fined, and BuzzFeed’s transfer agent locked shareholders out of trading on listing day. Choosing blockchain-based issuance can prevent massive investor headaches like these from happening in the first place.

Though blockchain-related investments can have their own risk factors¹ such as price volatility, illiquidity, regulatory risk or other uncertainties, tokenizing securities with blockchain technology enables issuance to happen more quickly and less expensively. It also enables entirely new types of transactions and businesses to operate together.

As the only all-in-one digital asset solution onboarding investors, facilitating capital raises, issuing and servicing digital asset securities, powering secondary market trading, and launching tokenized funds, we can state from experience that the digitization (and democratization) of finance is no longer science fiction. It is a reality that’s growing by the day, and will be one of the major themes of 2022.

Past, Present, Future

2021 was undoubtedly the year when digital asset securities began to show traction across industries and markets. At Securitize alone, we launched a marketplace for trading shares in private businesses called Securitize Markets,² alongside the first credit-rated tokenized fund in Japan. We launched two cryptocurrency yield funds, launched the first funds tracking S&P Dow Jones indices,³ and became Morgan Stanley’s first significant blockchain-related investment through our $48 million Series B (with shares actually tokenized on the Securitize platform). We also powered Exodus' $75 million crowdfunded capital raise and Arca's tokenization of treasuries.

Clearly, the old, paper-based ways of finance are fast being replicated and improved upon digitally. Using smart contracts on Ethereum and other, scalable blockchains like Algorand and Avalanche to issue and manage digital asset securities will accelerate this shift. Applying identity verification to decentralized finance (DeFi) will help institutions operationalize new investment strategies that could not previously exist. In short, 2022 is ripe with opportunity.

2022 Predictions

Though by no means a complete or exhaustive list, here are some of the ways we expect this shift to continue and accelerate in the months ahead:

1. Institutional DeFi is coming. It will be noteworthy and powered by tokenization. It will be enabled by increased confidence and adoption as DeFi providers are able to comply with U.S. laws, such as by adopting identity verification technology like Securitize iD for DeFi. At the grassroots level, DeFi tokens accrued more than $100 billion in total value locked (TVL) in 2021. Given the exponential nature of this developer-rich technology and the influx of institutional interest, doubling DeFi’s TVL in 2022 is foreseeable.
2. The wave of tokenized funds started by S&P and Securitize will continue to grow. Tokenized treasuries and regulated stablecoins will have the potential to make lower-cost fixed interest rate instruments more attractive to institutional investors again. With the Fed tapering bond and asset-backed repurchases and planning multiple rate hikes in 2022 to curb inflation, treasury yields can be used as a counterbalance. Tokenized treasuries with low cost ratios will have more room to outperform than their paper-based counterparts. Compared to the industry average of 1% for actively managed investment accounts, tokenized treasuries give investors the potential to outperform by up to 25 basis points, which is substantial for a $23.42 trillion dollar asset class.
3. Tokenization takes root. The term “tokenization” will take root gradually over the course of 2022 before suddenly sprouting green shoots before the end of the year. Tokenization underlies the core value proposition of future financial services, and is the scaffolding atop which new financial instruments will be built. If Collins Dictionary’s coveted word of the year in 2021 was “NFT,” “tokenization,” “DeFi,” and “stablecoin” are all in the running for 2022.
4. Community funded capital raises will become more commonplace. We anticipate that 2022 will bring a fivefold increase in private businesses performing crowdfunded capital raises (known as a Mini-IPO), where funds are raised directly from their customers and fans. 2021 estimates for crowdfunded raises were in the neighborhood of $7.5 billion according to some. Raising capital from a community of customers and fans not only turns investors into ambassadors, it also kickstarts a virtuous cycle that supports the business and investors alike. Last year, we saw notable businesses raise significant capital this way, notably both Exodus and BrewDog smashed records. Community crowdfunding gives companies the opportunity to easily raise funds from fans and investors every 12 months, dramatically reducing the time and energy founders need to raise capital through traditional mechanisms. For instance, when BrewDog tapped its community to raise a final crowdfunded round 12 months after its previous round, it was able to raise more than $1 million in less than 48 hours. This is the power of community crowdfunding. Today, many more companies with this vision are in the pipeline, and the benefits of crowdfunded capital raises will only increase in attention as these communities grow together.
5. Share management will become digitized. Most investors and, in fact, businesses have given little (if any) thought to their stock transfer agent. That will increasingly change. Fiascoes arising from paper based transfer agency, such as recently occurred after BuzzFeed’s IPO, will continue and further accelerate the move towards digital transformation and tokenization. Investors will not tolerate week-long clearing periods between stock trades or being locked out of trading for clerical reasons. Investors will demand that the archaic, paper-based share transfer agents be replaced by the digitized experience to which they are increasingly accustomed everywhere else. The world’s largest paper-based settlement company, the Depository Trust & Clearing Corporation, recently estimated that cutting trading settlement times in half (from T+2 to T+1) would reduce clearing costs and increase operational efficiency. This is a good start. Digitizing shares to cut settlement times to zero, however, is the future. A digital transfer agency like Securitize offers a way forward.

Mirror, Mirror...

No industry is moving faster right now than blockchain, which makes forecasting accurate predictions difficult – who would have thought that Ray Dalio would prize bitcoin over gold? But we’re firm in our conviction that the tokenization of financial services is here to stay, and that it will grow faster than even JPMorgan anticipated. Moreover, tokenization is foundational to what comes next. Remember those green shoots from prediction #3 above, that we suggested would sprout in 2022? They’re already taking root.⁴