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Outrageous or Optimistic? Standard Chartered's tokenization forecast unpacked.

Hot on the heels of the McKinsey vs BCG debate on the future of tokenization, Standard Chartered waded into the battle with a paper that is either going to be the call of the decade or the embarrassment of a gigantic proportion. 

SC forecasts a tokenization market that is 15x of McKinsey’s base case. With this, Standard Chartered and McKinsey represent the top and bottom range of the forecast numbers. 

  • McKinsey - $2 trillion

  • EY - $14 trillion

  • BCG - $16 trillion

  • Standard Chartered - $30.1 trillion

Here are the 3 main pillars to SC’s forecast:

  1. $30.1 trillion - total asset tokenization market capitalization by 2034

  2. $5 trillion - total tokenized trade finance asset value

  3. Combining anchor buyer with programmable money will unlock deep-teer supplier finance

After reading through the 18 pages report, I am unconvinced about the first 2 points. Though I am quite a fan of the rationale behind point 3. 

Let’s unpack the paper and see why we agree/disagree with these key points.

$30.1 trillion - best call or giant fail

The total value of tokenized real-world assets, excluding stablecoins, standing at around USD 5 billion by early 2024, primarily across commodities, private credit, and US treasuries… With the current market trends, we expect demand for overall tokenized real-world assets to reach up to USD 30.1 trillion by 2034

It is not clear to me what exactly SC saw in the current market trends that led them to the $30.1 trillion number. 

In fact, if we dig into the current market trend, at $5 billion using SC’s own number, I am not sure what type of extrapolation assumptions are made to take tokenized commodities, private credit and US treasuries to that number. 

Tokenized Commodities (CTY)

The tokenized CTY is made almost entirely of tokenized gold. And the 2 biggest players, making up 99% of the market, are Tether Gold and Pax Gold. Below are their total market cap growth charts since inception.

It is not difficult to see that the combined market cap of these two biggest players have been stagnant since summer 2022. Perhaps it is because if someone really wants a limited supply of seizure-resistant store of value, the best asset is increasingly Bitcoin (digital gold) rather than an onchain representation of an offchain stored physical goods that is difficult to access and move?

It is not clear what SC thinks the market cap of tokenized CTY will be since they did not explicitly state in the paper, but any extrapolation based on market data wouldn’t be very helpful in arriving at that $30.1 trillion number.

US Treasuries

If you have been a long time reader of this newsletter, then you know I am a big fan of tokenized US Treasuries in terms of its potential to upgrade various aspects of the traditional financial markets.

Instead of regurgitating detailed analyses I have already done, below are a few articles that can further your understanding of tokenized TBills market traction and developments in various traditional markets.

If you would like a quick graph representation of my belief, here is the chart.

However, the US Treasuries market in its entirety is $25 trillion. Given the nascent plumbing and interconnectivity infrastructure between the onchain markets and offchain markets, along with legal and regulatory issues,  single or double-digits market penetration would be a huge success when it comes to tokenized US treasury market cap. This would measure in trillions. But still very far from that $30 trillion SC number.

Tokenized Private Credit (PC)

Let’s rewind the clock back to 2020. Centrifuge just launched its Tinlake pool and was working with MakerDAO to help Maker to diversify its crypto-asset reserves into more traditional assets with fixed coupon payments. A few months later Coinbase-backed Goldfinch launched with a focus on enabling small businesses in emerging markets to access financing via blockchain. If you want a thorough walkthrough of the tokenized PC space before 2023, you can read it here.

Things were good initially. But problems related to making loans to small businesses in far-away foreign countries soon caused defaults after defaults across the space. The space has not seen any significant capital inflow since 2022. 

Below is the graph of tokenized private credit leader Centrifuge’s AUM.

Notice the two biggest color blocks called BT3 and BT4? These are part of the $220 million BlockTower deal with MakerDAO. The coupon on these deployed capital sits around 4%. This single deal makes up close to 80% of the total capital on the platform. Excluding them, the total capital amounts to $40-$50 million. Not sure if any extrapolation can be done on this data. If anything, it shows tokenized private credit has not PMF so far.

And this brings us to the second point.

$5 trillion - 100% of the trade financing gap?

SC spent a lot of ink on the trade gap in the paper. 

“It’s also important to note that the USD 2.5 trillion global trade financing gap accounts for 10% of all trade exports. As current trade financing covers 80% of all exports today, another 10% could represent an additional undisclosed trade financing gap as enterprises have either not sought such financing or have no access to it. This means that the combined amount of current and undisclosed trade finance gaps could reach a potential total opportunity of USD 5 trillion instead.”

Assuming these numbers are correct, it is not clear how a $5 trillion trade finance gap translates into a $5 trillion market cap for tokenized trade finance assets.

Sure I assume a % of the gap will be filled via tokenization of various receivables or securitization of trade finance assets onchain. However, I am at a loss for how that number would be 100%.

Tokenizing trade finance assets such as receivables are not new concepts. Many tokenization startups have been trialing. Look at Defactor/Consol Freight, started off as one of the earliest borrowers on Centrifuge in 2021, has not been able to scale and the last time it was in the media it was facing defaults on its loans. Or look at Fluna on Atlendis. Its pool never suffered a default but it never was able to scale beyond $500k.

Historically speaking, the challenges with financing trade on blockchain have to do with 

  • Difficult to scale the lending operation while staying competitive in return offered to investors

  • Difficult to monitor the local borrowers without having significant local presence

  • Difficult to enforce in jurisdictions that are unfamiliar with the underwriters

A key reason that banks have been pulling back in trade finance is the difficulty of underwriting the risks involved while the loan size doesn’t make the earnings attractive enough. I mentioned in my prior post about the problem of negative selection. Just because someone needs financing, it doesn’t mean you should be the one to jump in. There is a reason why someone can’t get financing. 

Anchor Buyer and Programmable Money

Project Dynamo was a collaboration between Standard Chartered, BIS Innovation Hub Hong Kong, Hong Kong Monetary Authority.

 According to SC, “the collaborative effort saw the development of a prototype platform, where an anchor buyer uses tokens for programmable payments to the suppliers along its entire supply chain. Smart contract technology is used to automatically cash out these tokens in response to specific events, enabling efficient and transparent trade flows…

…Token holders also have multiple options to deal with the tokens. They can hold them, sell them for funding, or use them as collateral for loans. The transfer of ownership through tokenisation empowers deep-tier suppliers with greater flexibility in managing their finances. The benefits also extend further than just the individual players. The digital trade tokens are issued as ‘stablecoins’ and backed by ringfenced bank funds or by bank guarantees. Coupled with the programmability and transferability offered by the blockchain infrastructure, institutional investors are given the boost in confidence to invest in SMEs, supply chain financing, an area previously regarded as high-risk.

Whilst I am not sure to what extent an asset class that was previously deemed high-risk could suddenly be classified otherwise due to payments being in a programmable token format, I can totally get behind the idea that anchor buyer led receivable financing is a great way to manage risk of directly financing SMEs in the trade finance supply chain. 

Instead of underwriting the risk of a small company in EM, we can lower the risk profile by focusing on financing receivables from well-known companies such as Amazon or Walmart. The key unlock lies in the ability to monitor, track and enforce payments from reputable firms to firms deep in the supply chain.

However, there are several infrastructure build-outs that need to take place before. For example, we need to have a way triggering financial or legal logics while monitoring offchain as well as onchain financial health at the smaller suppliers. This is no small feat given the vast numbers of financial intermediaries currently holding relevant data.

We need to have legally recognized tokenized deposits that can travel across geographies and different banks. Here is a refresher on why that is a big challenge for interoperability.

Despite my enthusiasm for the anchor buyer centered trade financing solution proposal as described in the SC paper, I still am not sure why such development would necessitate a $5 trillion market cap for tokenized trade finance assets. Whilst I am a firm believe in a tokenized market structure in the future, based on the current market data, I tend to agree with McKinsey's bottom-up based research forecast. If you are interested in finding out more, you can read it here.

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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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