This growth comes as the crypto winter is prompting capital to focus on more viable blockchain use cases.

The projected growth in tokenization of assets is driven by demand from a wide range of investors for greater access to private markets.

Tokenization and fractionalization of assets lower barriers to investment in private markets by sharply reducing minimum lot sizes.

Assets being fractionalized and tokenized on platforms such as ADDX can reduce minimum investment sizes from millions of dollars to just thousands of dollars. Previously investments of this kind were only available to institutions.

Tokenized investments can also be effectively ‘borderless’, allowing investors around the world to invest in markets they were previously unable to access.

Asset tokenization refers to the creation of tokens on a blockchain to represent an asset, in order to facilitate more efficient transactions.

Historically, many of the world’s assets have been held in illiquid formats, with past studies estimating the share of illiquid assets at more than 50% of overall assets.

Illiquid assets face challenges such as imperfect price discovery and trading discounts compared to liquid assets, the report said.

Tokenization creates liquidity by making it easier for the assets to be distributed and traded among investors.

The report by BCG and ADDX lists five indications that asset tokenization may be on the cusp of wide global adoption:

• increased trading volume in tokenized assets
• strengthening stakeholder sentiment across many countries
• recognition among monetary authorities and regulators
• more asset classes being tokenized
• a growing pool of active developer talent in the blockchain space

Major institutions have already begun to tokenize private funds on ADDX’s platform. Partners Group listed its Global Value SICAV Fund on the platform in September 2021, while Hamilton Lane’s Global Private Assets Fund launched on the platform in March 2022.

Globally, growth in tokenized assets is expected in real estate, equities, bonds and investment funds, as well as less traditional assets such as car fleets and patents.

With a 50-fold increase predicted between 2022 and 2030, from US$310 billion to US$16.1 trillion, tokenized assets are expected to make up 10% of global GDP by the end of the decade.

While the concept of asset fractionalization has been around for some time, its impact has hitherto been felt mainly in the public markets, with structures such as fractional shares, ETFs and public REITs.

In recent years, there has been a significant pivot with the emergence of asset tokenization players that apply blockchain technology to private markets and alternative assets.

Titled “Relevance of on-chain asset tokenization in ‘crypto winter’”, the report published today was authored by Sumit Kumar, Rajaram Suresh, Bernhard Kronfellner, and Aaditya Kaul from global management consultancy firm BCG and Darius Liu from private market exchange ADDX.

Figure 1: Business Opportunity of Asset Tokenization (2022 to 2030):

In anticipation of a more widespread acceptance of asset tokenization, the report makes several recommendations to current and potential stakeholders. For example, financial institutions might consider finding ways to pilot and deploy asset tokenization projects by upgrading existing business models, rather than looking to replace them.

Developers could design standard architectures and protocols to ensure an easier, more seamless ‘on-ramp’ to the tokenization world.

Companies should also work to improve financial literacy among clients to help them understand tokenization as well as the underlying asset classes it provides access to.

Regulators could establish sandboxes to promote innovation and set clear rules around tokenization, while monitoring how tokenization might impact investor and consumer protection and market integrity, the report said.

Sumit Kumar, Managing Director and Partner, BCG South East Asia, said: “The crypto winter has tightened the purse strings for the overall blockchain sector. Some Web3 companies will be adversely impacted. But projects that can demonstrate inherent value, scalability and the potential to enhance the traditional financial ecosystem could actually benefit against this new backdrop.

“Our analysis shows asset tokenization projects could emerge strongly. They are more likely to demonstrate viability in this capital-constrained environment and are therefore better positioned to attract the attention of investors, who continue to have a significant store of dry powder to deploy.

“This report projects that even using a conservative methodology, asset tokenization would be a US$16.1 trillion business opportunity by 2030. In a best-case scenario, that estimate goes up to US$68 trillion.”

Oi-Yee Choo, CEO, ADDX, said: “Asset prices can only rise to their true economic value if the barriers to investor participation and ownership transfer can be lowered. For years, the technology for overcoming those barriers was expensive and therefore available only on public exchanges. Blockchain changes the game because it can be applied cost effectively to private markets and alternative assets, where investors are fewer in number, albeit wealthier, and products are more bespoke.

“The result should set our hearts racing: assets can be liquid for both public and private markets. The potential economic benefits are considerable. Recognizing assets for what they are truly worth should translate into more investments and better capital allocation, which will in turn generate economic growth and jobs. The real winner here is the real economy.”

The product line was curated to boost the returns of investors who have deposited money in their ADDX wallets, but have yet to decide on which private market product to take part in. Some of the idle capital may also have come from previous investment earnings on ADDX.

Target returns for products under ADDX Earn are designed to be higher than short-term bank deposit rates – which is where many investors otherwise store undeployed capital.

The first two funds to be launched under the ADDX Earn umbrella are by Lion Global Investors, a fund manager that is a part of the OCBC Group.

The LionGlobaI SGD Enhanced Liquidity Fund and LionGlobaI USD Enhanced Liquidity Fund are invested in high-quality portfolios of debt instruments, diversified across a wide range of issuers and tenors while maintaining weighted average credit ratings of “A”. The two funds have weighted average portfolio durations of less than a year, which gives Lion Global the flexibility to adjust portfolio allocations in response to changing interest rates and market conditions. Investors can redeem their investments through ADDX on a weekly basis. In addition, the funds target low-volatility assets, which are well-suited for the current market environment that has seen increased volatility in other asset classes.

For both funds, interest is accrued daily. As of 31 July 2022, the LionGlobaI SGD Enhanced Liquidity Fund had a weighted average yield to maturity of 2.22% p.a., while that of the LionGlobaI USD Enhanced Liquidity Fund was 2.38% p.a.

These rates change monthly depending on the prevailing interest rate environment and the underlying assets held by the funds.

Gerard Lee, Chief Executive Officer of Lion Global Investors, said: “Our liquidity funds are typically used by financial advisers and more recently by digital players.  We are therefore delighted to have a private market exchange use our liquidity funds to provide a solution for their investors’ excess cash.”

ADDX Chief Executive Officer Oi-Yee Choo said: “Cash should never sit idle. This is especially true at a time when investors are turning to cash cushions as they carefully weigh their investment options amid rising inflation, a volatile market and an uncertain global economic outlook. With ADDX Earn, we are presenting to investors low-risk, money market funds in a format that is liquid and reduces the likelihood of negative returns.”

She added: “ADDX Earn represents an expansion of our product range in our constant effort to improve as a private market exchange through observing and responding to investor behaviour and need. It is an important building block in the financial services ecosystem we are constructing that is designed for investors, and not just for large corporations. We want to offer investors a full shelf of products – ranging from those with a higher risk-return profile such as hedge funds and venture capital, to those with a lower risk-return profile, such as real estate funds, investment grade bonds, as well as cash management solutions at the tail end of the spectrum, such as these two Lion Global funds.”

Founded in 2017, the SGX-backed ADDX currently serves individual accredited investors from 39 countries spanning Asia Pacific, Europe and the Americas (except the US). Using blockchain and smart contract technology, ADDX reduces manual interventions in the issuance, custody and distribution of private market products.

The resulting efficiency from the use of digital securities allows the platform to fractionalise investments in a scalable and commercially viable manner, bringing minimum investment sizes down from US$1 million to US$10,000 and thereby widening investor access to the private markets. To date, ADDX has listed around 40 deals on its platform involving blue-chip names such as Hamilton Lane, Partners Group, Investcorp, Singtel, UOB, CGS-CIMB, as well as Temasek-owned entities Mapletree, Azalea, SeaTown and Fullerton Fund Management. Asset classes available on ADDX include private equity, hedge funds, venture capital, private credit, real estate, debt and structured products.