By Lior Lamesh, CEO and Co-Founder of GK8
One of the least compelling, yet frustratingly persistent, arguments against crypto is that it’s “magic money” that’s not backed by anything. Anyone who knows anything about digital assets understands exactly why that talking point is a misconception, but it remains key to blinding normies to blockchain’s advantages.
That’s about to change, not least because the world’s largest asset manager—among other institutional players—has expressed interest in tokenizing securities in recent months. A Boston Consulting Group report suggests that by 2030, the tokenized real-world asset (RWA) market could surge to $16 trillion. Tokenization will drive blockchain adoption by traditional financial institutions in the coming months and years, and here’s what it means for the industry.
Capitalizing on growing demand
In simple terms, tokenizing real-world assets means putting their ownership on the blockchain, and in some cases fractionalizing that ownership with the use of smart contracts.
So, for example, if you tokenize ownership of an expensive NYC apartment, you’re enabling multiple people to own “shares” of that property in the form of tokens. All the other advantages of blockchain—fostering trust between multiple parties, transparency, security, efficiency, and immutability—apply on top of the ability to fractionalize ownership.
Converting the ownership of a physical asset into a digital token is gaining traction, not just because smart contracts reduce the need for paperwork, but also because they cut down on the costs, time, and effort typically required to buy assets. Fractional ownership offers investors exposure to high-value assets at a lower barrier of entry.
This concept can be applied to any form of asset: company equity, fine art, and even gold. Private equity firm Hamilton Lane, for example, partnered with Securitize, a digital asset issuance platform, to tokenize a part of its $2.1 billion flagship equity fund on the Polygon blockchain. Participation in the tokenized fund requires a minimum investment of $20,000, which is well below the traditional minimum buy-in of $5 million.
As it stands right now, it’s estimated that less than 1 percent of all wealth is digitized. And with the value of real estate estimated at around $327 trillion globally, that leaves an exorbitant amount of value up for grabs.
As the Hamilton Lane/Securitize partnership showcases, it’s not only crypto-native tokenization platforms that can benefit from this massive asset-class frontier. In fact, the tokenization of RWAs represents a rare opportunity in which crypto-native companies and TradFi institutions alike would greatly benefit.
The blockchain industry has developed the tools necessary to tokenize RWAs, a centerpiece of which is smart contracts, which actually issue the tokens that represent ownership of the RWAs. In that sense, blockchains can provide the backend infrastructure for RWAs, while traditional institutions seeking to offer innovative tokenized investment services could play the front-end role.
Traditional financial institutions bring to the table years of experience building strong risk management and diversified balance sheets. On other fronts, TradFi institutions would benefit from partnering with crypto-native tokenization innovators with experience developing the technology powering tokenization and working with regulators on the subject.
Crypto custody solutions can help major TradFi players secure these novel assets and their smart contracts. While blockchain networks themselves may be almost impossible to hack, the applications and smart contracts they host and facilitate do open the door to new kinds of exploitation with which TradFi has little experience protecting against.
Something as simple as faulty coding of the smart contract, or incorrect parameter definitions, can lead not only to the theft of funds but the possible destruction of the asset ecosystem, not to mention the risk to the institution’s reputation.
Furthermore, storing the private keys, which are required to transform traditional assets into digital ones, poses another attack vector for hackers. Financial institutions looking to explore tokenization need to embrace private key security. If bad actors get ahold of the institution’s private keys, they can wreak havoc on complete ecosystems. Once hackers have control of the issuer’s private keys, which are often afforded admin privileges (to enable changes after the smart contract goes live), they can funnel tokens directly into their own accounts, control minting, and burning, and lead to the loss of entire collections. This is dangerous for both the institution, as well as all asset holders.
To maximize the potential that RWAs offer, both traditional and crypto-native organizations must understand the security vulnerabilities and prioritize finding the safest solution for securing the issuer’s private keys and smart contract security.
With so much value up for grabs, maximizing this opportunity for both TradFi and blockchain infrastructure providers requires collaboration. The two sides joining forces can balance each other’s strengths while compensating for their weaknesses, enabling a more robust market where innovation can flourish and investor needs are met.
There is plenty of room for both traditional finance and blockchain infrastructure providers to coexist within this space, and by doing so, they can create better investment opportunities for a wider demographic of retail and institutional investors. Ultimately, traditional financial players will be able to offer a much more diversified pool of investment options, blockchain infrastructure providers will be able to expand their reach due to more available liquidity, and investors will have more convenient access to safe-haven assets.
About the author:
Lior Lamesh, is a cyber security expert specializing in cryptocurrencies. He is the co-founder and CEO of GK8, a Galaxy company. GK8 offers traditional and crypto-native institutions an end-to-end platform for managing blockchain-based assets. The company developed the world’s first true Cold Vault that enables its clients to create, sign, and send secure blockchain transactions without internet connectivity, eliminating all cyber attack vectors. The platform supports a wide range of revenue-generating blockchain-based services including custody, DeFi, staking, NFT, CBDC, and tokenization. Having honed his skills in Israel’s elite cyber team reporting directly to the Prime Minister’s Office, Lior led the company from its inception to acquisition. In 2022 Lior, alongside his co-founder Shahar Shamai, were selected by Forbes to be included in its prestigious ‘Forbes 30 under 30’ list.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.