McKinsey Report: Widespread Tokenization Still Far Away
Blockchain technology has brought about a profound transformation in today’s financial markets, with tokenized asset technology attracting the attention of global investors and financial institutions. The Taiwan Financial Supervisory Commission recently announced the establishment of the “RWA Tokenization Working Group” in collaboration with the Taiwan Depository & Clearing Corporation and six interested financial institutions to jointly study related promotion matters. However, according to the latest report from McKinsey & Company, a globally renowned consulting firm, widespread adoption of tokenization is still a long way off, with the market size possibly reaching a minimum of only $1 trillion.
The so-called “Real-World Asset Tokenization” (RWA) refers to the tokenization of tangible and intangible assets in the real world, such as watches, real estate, wine, trading cards, and bonds, and creating a virtual counterpart on the blockchain that is linked to the value of the original asset.
For example, in June 2023, a century-old Rolex watch was first “tokenized” and successfully used as collateral to secure a loan of over NT$400,000 for its owner. Not only watches, but even a painting or a luxury mansion can be divided into multiple tokens through tokenization, allowing multiple individuals to “co-own” them.
Binance, the world’s largest cryptocurrency exchange, stated in its report on “Tokenization of Real-World Assets” that while RWA development is still in its early stages, the adoption rate and Total Value Locked (TVL) are continuously growing. It is expected that by 2030, the market size will reach $16 trillion, equivalent to around NT$480 trillion, accounting for 10% of global GDP.
However, according to McKinsey’s latest report, even in an optimistic scenario, the tokenized asset market is projected to only reach $4 trillion by the 2030s, significantly lower than optimistic predictions in the market.
Current Market Situation and Challenges
As one of the hottest applications of blockchain technology, tokenization has already attracted the attention of global asset management companies and banks, such as BlackRock, Citigroup, and HSBC. These companies are introducing traditional assets like U.S. Treasury bonds and commodities into the blockchain to achieve operational efficiency and broader market access.
However, despite the enormous potential of tokenization, the future of financial services will face many opportunities and challenges as infrastructure providers transition from proof-of-concept to robust scalable solutions.
In the current market environment, the actual scope of tokenized assets is relatively limited. McKinsey’s report shows that the tokenized asset market is currently in a “cold start” phase, with an estimated market size of around $2 trillion by 2030, doubling at most to $4 trillion in an optimistic scenario.
Challenge 1: Regulatory Compliance and Modernization
Firstly, modernizing existing financial infrastructure itself is challenging, especially in heavily regulated industries such as financial services.
McKinsey’s report points out that, currently, cash and deposits, bonds and exchange-traded notes (ETNs), mutual funds and exchange-traded funds (ETFs), loans, and securitizations are the asset categories that are most likely to be tokenized first. On the other hand, tokenizing assets like real estate, commodities, and stocks is less likely due to reasons such as marginal returns, feasibility concerns, complex compliance requirements, or a lack of incentives for industry participants to pursue tokenization.
Challenge 2: Limited Liquidity
One of the main issues faced by tokenization technology is limited liquidity, which also hampers the attractiveness of tokenized issuance. McKinsey analysts believe that tokenization needs to find use cases that offer greater advantages than the traditional financial system.
For example, in the case of tokenized bonds, new issuances are announced almost every week, and there are currently billions of dollars’ worth of tokenized bonds outstanding. However, compared to traditional issuances, the returns are almost negligible, and transactions in the secondary market are still scarce.
In the example of bond tokenization, analysts suggest that the slow start issue can be addressed by providing “greater liquidity, faster settlement, and more access to liquidity.”
Blockchain technology is still in its early stages, and integrating existing processes and standards requires significant investment. Therefore, many institutions are currently in a “wait-and-see” mode, waiting for clearer signals to implement tokenization.
The McKinsey report also emphasizes the need for clearer regulations and industry collaboration for the widespread application of tokenization.
References:
Cointelegraph
Coindesk