How tokenisation using blockchain technology is impacting private markets
Blockchain technology is radically transforming how investors buy and sell assets. According to the World Economic Forum, the equivalent of 10% of global GDP could be stored on blockchain tech by 2027 . That means tokenised markets could be worth as much as $24 trillion in the next five years, HSBC said . About 3% of global currency trading is already covered by tokenised assets, according to EY .
Tokenisation allows the ownership of real world assets to be split into smaller pieces and converted into digital tokens and stored on distributed ledger technology such as the blockchain. This enables fractional ownership of illiquid assets such as commercial real estate so they can be bought and sold as easily as publicly-traded shares in a company. This can potentially give a broader array of investors access to assets that were traditionally out of reach to all but the largest institutional players and wealthiest individuals because they can be purchased for a much lower minimum investment.
According to the Chartered Alternative Investment Analyst Association (CAIA), tokenised assets provider greater transparency of ownership, more inclusive access, faster and cheaper transactions and better liquidity .
Beyond real estate
While commercial real estate is one common example of the type of real asset that can be tokenised in this way, there is no limit to what assets can potentially back these digital tokens. For instance, they could be backed by natural resources including renewable energy assets such as wind or solar farms, infrastructure projects such as transport networks or hospitals, or even works of art and other collectibles.
Tokenisation also makes it possible to broaden access to the wider alternatives asset class. Take private equity. One of the challenges with private equity is that it mostly has a high barrier to entry with sizeable minimum investment requirements (typically at least $10 million if investing directly into a private equity fund). Investor cash is also locked up for extended periods of time (usually about 10 years). Tokenisation makes it possible to lower that barrier to entry while also potentially making it easier and cheaper to exit those investments at an earlier stage.
Likewise, tokenisation can make it possible for a more diverse range of investors to access venture capital investments, private debt and hedge fund assets.
A survey earlier this year by tokenisation platform Token City found that 73% of respondents believe that private equity assets will be the first to see significant levels of tokenisation, followed by 65% who believe that hedge funds will be targeted for tokenisation .
According to Brown Brothers Harriman, a US private investment bank, tokenisation offers the potential to open up private markets .
“By tokenising hard-to-access asset classes, the industry could potentially improve settlement efficiency, as well as enable new liquidity through tokenised and fractionalised trading in DLT-enabled [digital ledger technology-enabled] primary and secondary markets,” the bank said.
All of this means that private markets can potentially attract deeper and previously untapped pools of capital while also increasing access to asset classes that have historically been effectively closed to many investors.
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