To date, the vast majority of institutional tokenization initiatives have used permissioned blockchains.

Real-world asset tokenization came to the fore in 2023. More than just a buzzword, banks, asset managers, and regulators have increasingly recognized the potential offered by representing funds and securities on-chain. The move promises greater financial democratization, liquidity in less private markets, and reduced costs. But for tokenization to take hold, the financial world must progress beyond proof-of-concept private blockchains and embrace public blockchains.

It's certainly possible for traditional financial institutions to innovate, but the level of disruption is unlikely to reach that of public blockchain companies.

The decision to begin with private blockchain is understandable. They offer control and implementation with limited regulatory considerations, ideal as a starting point as companies educate themselves on using blockchain technology. However, this approach is inherently limited, and centralization comes at a cost.

Public blockchain benefits

Public blockchains offer significantly more potential to scale. While private may allow for quick and easier tokenization, they remain in a private ecosystem, requiring investors to come directly to each provider. Not only does this create a greater administrative burden from a KYC perspective, but it also raises the hurdle for liquid secondary market trading of the asset as it can only be traded within that ecosystem.

With public blockchains, it is easier to transfer assets across multiple platforms. This means that investors can come to a centralized venue, covering KYC there while gaining access to products from a range of providers that have tokenized on public chains. When secondary market trading is introduced, you will have greater liquidity through a single venue and better price discovery. Liquidity can be further enhanced by connecting the centralized exchange to decentralized exchanges, and since the asset is on a public chain, investors can self-custody it.

With public blockchain means innovation

Perhaps most importantly, public blockchain brings innovation, with which private companies likely can’t compete. A key element of public blockchains is that they require payment in their native cryptocurrencies. While this may be a cause of concern for some considering public blockchains, they create an important incentive for blockchain entrepreneurs, giving them “skin in the game” as the value of the cryptocurrency could increase as the use of the blockchain increases. This further incentivizes blockchain developers, often paid in cryptocurrency, to innovate and create competitive advantages over other blockchains.

It's certainly possible for traditional financial institutions to innovate, but the level of disruption is unlikely to reach that of public blockchain companies. These companies offer a unique experience that both attracts leading developers and, increasingly, technology and financial services businesspeople.

Public permissioned blockchain

We believe a better solution for enterprises is public/permissioned blockchain.

In building on public/permissioned, providers get the scale benefit of a public blockchain, with the enterprise-level governance of a private blockchain. Cryptocurrencies are generally needed, which enterprises will need to accept to evolve, and solutions exist that allow users to avoid touching the crypto directly. Notably, public/permissioned blockchains are operated by select groups, often larger trusted organizations. This gives greater control over the capacity and speed of the network while providing comfort to large corporates over the decision-making at the blockchain company and creates an element of trust that is more familiar.

Final thoughts

For fans of real-world asset tokenization, the good news is that 2023 was just a precursor to what’s to come in on-chain finance. With many asset managers more progressed in their blockchain projects, 2024 promises to be an exciting year for tokenization.

This article originally appeared in Ledger Insights in December 2023.

Important information

Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security.

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.

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