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From $16 trillion to $2 trillion, is tokenization on a downward path?

Remember that BCG’s prediction that tokenized asset value will reach $16 trillion by 2030? Well McKinsey just came out with its own projection: $2 trillion (excl. stablecoins and cryptocurrencies) by 2030. Leading us to the most interesting chart of the week below.


Why $2 trillion? Was McKinsey selling the industry short? 


If anything, I would argue McKinsey’s approach is more bottom up and reflective of today’s reality on the ground. 


Let’s break down McKinsey’s full report and see:


  1. What does the tokenization adoption rate depend on?

  2. What is meaningful adoption?

  3. What are the assets likely to achieve this?


We will match this with on-the-ground observation to see how grounded McKinsey's approach is.


Let's dive in.


Tokenization comes in waves, NOT in a straight-line


Tokenization’s rate and timing of adoption will vary across asset classes resulting from differences in expected benefits, feasibility, time to impact, and market participants’ risk appetite.


The growth of tokenized assets will be uneven and differentiated. According to McKinsey, there are several variable at play when it comes to an asset class’ adoption rate:


  1. existing players’ incentive structure 

  2. time to impact 

  3. value chain efficiency and maturity level

  4. technical and regulatory complexity


So which asset classes are likely to meet these criteria in the immediate future?

Meaningful Adoption = $100 billion+


McKinsey defined meaningful adoption as asset class with $100 billion+ in market cap. By this measure, tokenized cash aka stablecoins are the only asset class that has definitively reached meaning adoption status. You can read a detailed analysis of its usage here.


Here are the most prominent front-runners:


  1. Cash and deposit

  2. ETNs, mutual funds and exchange-traded funds

  3. Loans and securitization

  4. Bonds


What do they have in common? One word: size 


Each of these four asset classes is trillion+ in size. Loans and securitization being the smallest with approx $10 trillion in size.


Let’s look at these front runners and see their traction record in the market.


Cash and deposit 

Excluding stablecoins, the best example of this is the JPM Coin, the tokenized deposit/payment solution from JPMorgan. Unlike conventional payments that are being constrained by time differences and operating hours, tokenized cash/deposit provides an instant and always on payment infrastructure for corporates.


We are already seeing a few billions in daily transaction volume. With distribution strategy targeting many of the smaller banks who need USD payment solutions and programmability being turned on recently, we are likely to see further growth in its usage. 


You can read more on JPMorgan’s digital asset product and GTM here


Other competitor products include: SG Forge’s EURO and Citi’s own USD solution.

Mutual Funds and ETNs

The best example of this is the tokenized money market fund market headed by BlackRock’s BUIDL and Ondo’s USDY. 


With 1000% growth since 2023, the space is seeing rapid adoption. The economics behind a high-rate environment makes this a no-brainer cash management solution for the $160 billion onchain stablecoin. 


With additional utilities such as collateral assets being unlocked and central banks supporting the initiative, the asset class is likely to be the first break-out success since tokenized cash.


Loans and Securitization

Figure Technology single-handedly brought over $9 billion of the $300 billion US HELOC (home equity line of credit) market onchain since 2023.


Unlike other attempts at bringing credit assets onchain, Figure Technology managed to bring a significant portion of the HELOC value chain onchain. 


Its vertically integrated approach, from investors to asset register, stands in contrast to others’ cold start problem when it comes to bringing private credit onchain. A closer look at more digital native private credit platforms reveals a stagnant market. 


Bonds

There have been many examples of governments and corporates using blockchain to distribute their bond issuances. The total exceeds $10 billion. The biggest to date has been HKMA’s $750 million green bond.


It is very likely that the string of issuance announcements continues and thus brings us close to the $300 billion figure in McKinsey’s chart. 


However there is a distinct lack of secondary market liquidity for these billions of tokenized bonds.


Given the global bond market size of $140 trillion, I would argue reaching $300 billion in cumulative issuance volume by 2023 is a failure for the asset class.


Conclusion

If I have to refine McKinsey’s adoption rate factors down to a single line, I would argue the asset classes with the most liquidity and size are likely to be successfully brought onchain first. 


Why? 


Because combining size and liquidity with blockchain’s 24/7/365 transaction and instant settlement capabilities, we can unlock more additional benefits much easier. 


Tokenized MMF is a prime example of this. It not only brings access to risk-free rate to onchain capital (distribution), because of its liquidity, it is being further leveraged as collateral asset and even payment option. 


By comparison, real estate and private credit are examples validating the inverse of that observation. 


I am not a fan of applying a % to an asset class’s overall market cap as an estimate for its future market size. A more nuanced approach based on grounded observation gives more clarity and validity to one’s projection. 


Lastly, let's put this more “conservative” estimate into perspective. Even with these much lower numbers, we are still looking at 30x+ growth for all front runner asset classes, implying non-trivial growth trajectories ahead. 


Want to stay up to date on who will take the bulk market share of that growth? Subscribe and stay tuned.


Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.


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