For a number of years now, the traditional financial world has been grappling with the issue of how it can integrate blockchain technology into its business activities. Until now, financial products have chiefly focussed on the trading and custody of crypto assets. But how can blockchain also be used for traditional investments?The answer lies in tokenisation, a term that is cropping up ever more frequently in financial circles. So what exactly does tokenisation mean? The term refers to the rights to a specific asset being represented digitally in the form of a token. This token, including the rights associated with the underlying asset, is saved on a blockchain on which it can be traded.A better means of securitisationTokenisation represents the further development of traditional securitisation. Jenny Johnson, CEO of the asset manager Franklin Templeton, described tokenisation as “securitisation on steroids”. By this, she means that tokenisation provides a means to optimise traditional securitisation processes via the blockchain.Larry Fink, CEO of BlackRock, also views the launch of Bitcoin and Ethereum ETFs as an intermediate step on the path towards tokenisation. A further 97% of institutional investors believe that tokenisation is set to fundamentally change the financial world.RWAs: what are they?The concept of “real world assets” (RWAs), which refers to tokenised real assets, is often used in connection with tokenisation. RWAs can take a variety of forms, such as financial assets (bonds), tangible assets (real estate) or intangible assets (patents).Examples of RWAs:What are the benefits of tokenisation?Tokenisation offers numerous advantages for financial and non-financial firms as well as investors of all kinds. The most important include the following:Faster processing: transactions can be processed almost in real time.Improved capital efficiency: digitisation allows for the more efficient use of capital.Better market access: a wider audience gains access to investment opportunities.Enhanced investment experience: investors benefit from greater transparency and security.One of the biggest challenges of traditional capital markets is that they largely exhibit an inadequate level of digitisation. The respective account books, referred to as ledgers, for securities and money are separate from each other. Ownership rights and the associated data are also isolated. Tokenisation has the potential to close these gaps by consolidating the various account books in a common blockchain.An incredible growth marketDue to its many advantages, tokenisation is considered a major growth market. Various estimates underline its potential: the crypto ETP provider 21Shares forecasts that the market value of tokenised assets will stand at between USD 10 trillion and USD 35 trillion come 2030. The management consultancy firm Roland Berger shares this outlook and expects growth to a level of at least USD 10 trillion. The Boston Consulting Group goes even further and predicts a 50-fold increase in the period between 2022 and 2030. According to this prediction, tokenised assets will reach a volume of USD 16.1 trillion by the end of the decade, accounting for 10% of global GDP.Projected growth of the RWA industry. Source: rwa.incAdoption is on the wayFinancial giants like Franklin Templeton and BlackRock have already launched tokenised bond funds on the market: FBOXX on the Stellar blockchain and BUILD on the Ethereum blockchain. BlackRock's tokenised money market fund already boasts a volume of in excess of USD 500 million, while Franklin Templeton's product stands at more than USD 400 million (as at mid-September).J.P. Morgan has likewise taken initial steps in this space with its Onyx tokenisation platform for funds and Goldman Sachs has plans in place to launch three tokenisation projects in the area of fund and debt issuance. There are also developments in Switzerland: the crypto bank Sygnum has already tokenised a private debt instrument in the form of the FLOAT investment token, which provides investors with access to a diversified portfolio of private SME loans to SaaS and technology firms. At Maerki Baumann, we are also examining various approaches, including the custody of tokenised assets such as equity tokens.Which obstacles still need to be overcome?For tokenisation to become established in the wider financial world, a few basic building blocks will first need to be put in place. In Switzerland, work is currently underway on the creation of liquid secondary markets. These require legal certainty, quality standards, transparent market data, market makers and payment tokens.However, there also needs to be a realisation that immediate processing and transparent ownership, which are both made possible by the blockchain, will not be enough on their own. Additional elements are required in order to allow for the full potential of blockchain technology to be tapped in the financial sector, including the following:A clear definition of payment rights and obligations: it needs to be clearly defined who has to pay and who receives the money.Automated processing: it needs to be possible to automatically process the information stored on the blockchain.Algorithmic presentation of cash flows: future cash flows have to be described mathematically so that the value of a financial instrument can be determined at any time.The programmability of the blockchain, an aspect that is often emphasised, is not enough on its own. Only when all payments, future cash flows and ownership structures are fully mapped on the assets and liabilities side will the crucial preconditions be met for the breakthrough of tokenisation in the financial sector. ConclusionThe tokenisation of assets could revolutionise the financial world by making trading in traditional assets more efficient, transparent and accessible. Thanks to blockchain technology, transactions can be processed almost in real time, while assets can be traded worldwide. Institutional investors and financial giants such as BlackRock and Franklin Templeton are already driving this change, and the forecasts in terms of market growth are promising. Nevertheless, there are still challenges, including legal certainty and technical standards, that need to be overcome if the full potential of tokenisation is to be tapped. Once these hurdles are cleared, tokenisation could fundamentally change the financial sector. Author: Pascal Hügli Pascal Hügli, Crypto Investment Manager at Maerki Baumann and founder of Insight DeFi, produces high-quality content on Bitcoin and crypto and contributes to Maerki Baumann's development in the area of blockchain and cryptocurrencies. As a lecturer in digital finance and crypto assets at the HWZ University of Applied Sciences in Business Administration Zurich, he has in-depth expertise in this field, which he is now also applying to the establishment of our new brand "ARCHIP by Maerki Baumann". Important legal informationThis publication is intended for information and marketing purposes only, and does not constitute investment advice or a specific individual investment recommendation. It is not a sales prospectus and does not constitute a request, an offer, or a recommendation to buy or sell investment instruments or investment services, or to engage in any other transaction. Maerki Baumann & Co. AG does not provide legal or tax advice. Investors are therefore advised to obtain independent legal or tax advice concerning the suitability of such investments, since their tax treatment depends on the personal circumstances of the investor in question and is subject to change at any time. Maerki Baumann & Co. AG holds a Swiss banking licence issued by the Financial Market Supervisory Authority (FINMA). This publication is expressly not intended for persons domiciled in Germany or so-called U.S. persons. Editorial deadline: 25 September 2024Maerki Baumann & Co. AGDreikönigstrasse 6, CH-8002 ZurichT +41 44 286 25 25, info@maerki-baumann.chwww.maerki-baumann.ch