Mathew McDermott, global head of digital assets at Goldman Sachs, said collateral mobility is one of the most powerful use cases for tokenization. Tokenized assets are digital tokens on a chain that represent physical or traditional financial assets which are programmable and so can allow atomic settlement, instantaneous delivery versus payment.

McDermott spoke on a panel, Can tokenisation become mainstream ?, on 9 May at the FT Crypto and Digital Assets Summit in London. The panel noted that a study from Boston Consulting Group estimated that distributed ledger technology could free up $100bn of collateral, and save the industry $20bn a year in costs by improving efficiency.

“There are a lot of efficiencies you gain from derisking and being more efficient with capital and liquidity,” added McDermott. “You can then redeploy that capital for more interesting revenue opportunities and that is an area that really excites me.”

For example, collateral can be allocated with more precision if it is on-chain and also posted intra-day.

He continued that over the last six to 12 months, more adventurous project initiatives have been launched that are “starting to show the embers of where you can really see scale.” In addition, the market has been galvanised by institutional investments.

For example, BlackRock led a $47m funding round in Securitize, which  tokenizes real-world assets in May 2024. Other investors included Hamilton Lane, ParaFi Capital, and Tradeweb Markets.

“There is a very different landscape today from even 12 months ago,” added McDermott. “However, it takes time to change financial markets so nothing is going to happen overnight.”

BlackRock has launched its USD institutional digital liquidity fund (BUIDL) on the ethereum public blockchain and provides qualified investors with the opportunity to earn U.S. dollar yields by subscribing through Securitize Markets.

Franklin Templeton also introduced the first U.S.-registered mutual fund to process transactions and record share ownership on a public blockchain in 2021 and in April 2024 allowed shareholders to complete peer-to-peer transfers on chain. Each share of the Franklin OnChain U.S. Government Money Fund is represented by a BENJI token and the fund’s transfer agent maintains the ledger of share ownership using blockchain technology to record transaction activity.

Robert Crossley, vice president, industry advisory services, EMEA/APAC at Franklin Templeton, said on the panel that over the last 12 months traditional financial (TradFi)  and decentralized finance (DeFI) have been coming together and established players are starting to take the technology and its benefits seriously.

“We’ve seen a number of tokenized money market funds starting to come to the market because it’s solving for a problem,” Crossley added.

Crossley continued that regulatory clarity is increasing a critical mass of infrastructure is being built, especially in custody.

David Mercer, chief executive of LMAX Group, was also interviewed at the FT Crypto and Digital Assets Summit on May 9 and predicted that all the assets traded today will be tokenized within 20 years. LMAX Group operates institutional execution venues for foreign currency and cryptocurrency trading.

Mercer said we are living through the fifth industrial revolution.

“In 2000 if you didn’t have an internet strategy, you didn’t have a  future,” Mercer added. “Today, if you haven’t got a tokenization strategy, you will not have a future.”

He agreed that efficient use of collateral will be the great accelerant of capital markets.

“For example, If I give you a tokenized Apple stock that is approved  by Apple, then you can accept that and we can trade immediately,” he added.

He also predicted that a non-US G10 bank will start trading, settling and storing spot crypto by the end of this year.

“That’s just one brick in the wall,” Mercer added. “Everyone will follow and then you will have adoption.”

UK regulation

Mercer said Europe and the UK are fortunate because regulators devise rules for activities, rather than asset classes.

In March this year the technology working group of the UK government’s asset management taskforce published its second report, which sets out the UK regulators’ support for investment management firms tokenizing funds.

John Allan, head of innovation and operations unit at The Investment Association (IA) told Markets Media that the body, which represents UK-based fund managers, had been asked by the government to lease with the task force to lay out the barriers that were stopping investment firms modernising their infrastructure.

Allan said investment funds are now able to issue tokens and use DLT for the shareholder register and their transactions, and the UK tax authority has recently confirmed that investors can hold tokenized funds in ISAs, UK savings vehicles which provide tax benefits.

“These are significant points which provide regulatory clarity and confidence for firms to innovate and take their strategies forward“ he added.

He highlighted that IA is aiming to try to galvanise that work, for example, by helping investment firms partner with technology providers.

In the US Franklin Templeton and BlackRock have been able to use public blockchains. UK funds are not currently permitted to use public blockchains and Allan explained that the real benefits of tokenization are only fully realised on public chains. However, he also stressed the importance of interoperability to avoid fragmented markets, with siloed pockets of liquidity.

“There is a very big market for tokenized money market funds  across Europe,” he added. “In addition to the funds that are already public, I’m familiar with other initiatives so you can expect to see more.”

In addition, fund managers are recognising that more assets are being tokenized, for example, digital bonds have been issued. .

“Funds need to remain relevant in an ecosystem where tokenization becomes the norm,” Allan said. “The question is how much time it will take to get there.

The UK Financial Conduct Authority has also announced that it is partnering with regulators across the world as part of the Monetary Authority of Singapore’s Project Guardian to explore fund and asset tokenization use cases, and DeFi.

“That’s a really positive move because it means that we are going to have some international collaboration at the regulatory level that can help facilitate standards,” said Allan.