Tokenisation of real-world assets: The next wave of innovation in traditional finance and crypto

The traditional finance world is beginning to embrace tokenisation – the process of turning real-world assets, such as shares of funds, into digital tokens that can be traded on blockchain platforms.

Traditional finance is embracing the tokenisation of real-world assets, such as shares of money-market funds, which can now be pledged as collateral in trading. A subcommittee of the CFTC voted to advance guidelines for using these tokenised assets in financial transactions.

The rise of tokenised money markets

A subcommittee of the CFTC’s Global Markets Advisory Committee recently voted to move forward with recommendations that would allow registered firms to use distributed ledger technology (DLT) for holding and transferring non-cash collateral.

This means that companies could begin to pledge blockchain-based, tokenised versions of real-world assets, such as shares of money-market funds, in financial transactions. The full CFTC committee, which includes major players like BlackRock and Citadel, is expected to vote on these guidelines later this year.

These recommendations aim to make it easier for businesses to pledge tokenised assets as collateral, aligning with existing regulatory policies. If approved, it could mark a major shift in how financial institutions use blockchain technology, integrating crypto-based innovations with traditional financial infrastructure.

How tokenisation could impact traditional finance and crypto

The adoption of tokenised collateral could be a significant boon for both traditional finance and the cryptocurrency sector. According to McKinsey, the total tokenised market, excluding stablecoins, could reach $2tn (£1.52tn) by 2030. This would put tokenised assets on par with the current size of the entire cryptocurrency market.

Traditional finance’s adoption of tokenisation could legitimise the use of blockchain technology in mainstream markets, increasing crypto’s role in everyday financial operations. The ability to pledge tokenised assets as collateral could also provide businesses with more capital efficiency, creating new opportunities for growth and investment.

BlackRock’s BUIDL token as a major case study

One notable example of asset tokenisation in action is BlackRock's BUIDL token, officially known as the BlackRock USD Institutional Digital Liquidity Fund. This tokenised fund operates on the ethereum blockchain, giving institutional investors access to US dollar yields. BUIDL represents a stable, tokenised fund with assets that include cash, US Treasury bills, and government-backed securities. Below is a list of some of the main features of BlackRock's tokenised money-market fund.

BUIDL token holders receive a daily dividend, which is paid monthly.

The value of each token remains stable at $1 (76p).

Tokens can be transferred between pre-approved institutional investors.

It operates fully on the Ethereum blockchain, leveraging smart contracts for transparency and efficiency.

BlackRock is the primary investment manager for this tokenised fund, but it also collaborates with key crypto firms like Coinbase (COIN) and Fireblocks. Since its launch, BUIDL has become the fastest-growing tokenised fund in history, reaching over $500m (£379m) in assets under management by September 2024.

This development is not just significant for BlackRock but also for the ethereum network, as it increases the demand for ethereum's infrastructure.

Democratising access to financial products through tokenisation

An aspect of tokenisation that is drawing considerable attention is its potential to democratise access to traditionally exclusive financial products. According to Zodia Markets Ireland chair Michael Walsh, tokenisation could open the door for everyday investors to participate in previously inaccessible markets, such as private equity or litigation finance pools. Tokenised assets could allow people to invest with increments as small as $100 (£75), broadening financial inclusion.

Furthermore, the security of blockchain-based transactions could enhance the transparency and traceability of investments. Unlike traditional cash transactions, which can be difficult to trace, blockchain technology records every transaction, providing a secure and transparent ledger.

However, when speaking to Yahoo Finance Future Focus, Walsh pointed out that regulatory frameworks need to evolve to accommodate the widespread adoption of tokenised assets. While tokenisation offers greater security and efficiency, it still needs the backing of regulatory institutions to achieve its full potential.

The benefits of tokenising real-world assets

Tokenisation involves converting the rights to real-world assets, like bonds, real estate, or shares of money-market funds, into digital tokens on a blockchain network. This process offers several potential benefits:

Increased liquidity: Tokenising illiquid assets, such as real estate or fine art, makes them more easily tradable. Instead of needing to sell an entire building, for example, an owner could sell fractional tokens representing ownership in the property.

Cost efficiency: Tokenisation can reduce costs associated with traditional asset management, such as legal fees, intermediaries, and clearing houses. This can be especially beneficial in bond markets, where tokenisation could simplify the complex issuance process.

Broader market access: Tokenisation could democratise markets that are traditionally reserved for institutional investors. Retail investors could gain access to high-barrier markets, such as private equity or high-value real estate, through fractional ownership enabled by tokens.

Transparency: Blockchain technology inherently