Our Cohen & Co digital assets team recently attended the Real-World Asset Summit in Brooklyn, New York. If it wasn’t clear before the conference, it certainly is now: tokenized assets are here to stay. Some of the critical trends discussed include the overall growth of tokenizing traditional asset classes, investors moving up the risk/return curve, and an enhanced focus on the development of regulation and operational infrastructure for tokenized products.
Taking these trends into account, there are also certain items investment advisers and capital allocators should be considering when deciding if investing in tokenized assets is the right fit for their business. Below we look at tokenized asset trends as a whole and address key considerations.
U.S. Treasuries are currently the largest category of assets that have been tokenized. Even within the current year, the category has experienced year-to-date growth (YTD) of over 80%. Other categories, such as commodities, bonds and private credit, have experienced growth at a similar level. More notably, however, is the monstrous nearly 400% YTD growth in tokenized investment funds. This was partially due to the inherent frontrunning of private capital into funds that will ultimately be invested in tokenized assets.
As a result of this substantial interest in tokenized products over the past year, the largest asset managers in the world are making significant investment in the blockchain as a technology to replace legacy rails, which formerly sat between traditional assets and the investor. Tokenized assets are essentially new wrappers for existing financial instruments, but their impact reaches far beyond. By leveraging blockchain architecture, tokenized assets unlock entirely new distribution channels, making it easier to fractionalize, transfer and access assets globally. This innovation also paves the way for 24/7 trading across asset classes, breaking free from traditional market hours, and enabling a more fluid and less fragmented financial ecosystem.
If you ask most industry participants this question, they will usually mention lack of liquidity. That’s because to gain full benefits of a fractionalized asset, for example, there needs to be a seller, market and buyer for that asset. To date, a fair amount of the capital that has flowed into tokenized assets has been blockchain or crypto-native capital. To see the next wave of mass adoption in tokenization, the consensus is generally that we need to see non-crypto native capital coming onto the blockchain, with the intention to access off-blockchain assets that way. This means traditional investors, who have not historically invested in assets on the blockchain, must gain comfort with these systems and technology if they want to realize the benefits of fractionalized assets and the resulting 24/7 trading and access to capital markets worldwide.
For digital asset (crypto-native) advisers and allocators, many have already assessed the risks for investing in tokenized assets. Further investment into non-crypto tokenized assets provides a meaningful opportunity for these groups to use capital on the blockchain, gain access to traditional investments and diversify their portfolio into other asset classes. A great example is the recent launch of Apollo’s ACRED, which is a tokenized feeder fund that provides investors exposure to other private credit products. This example provides a crypto fund with diversified yield, on-chain, that can be leveraged throughout the blockchain ecosystem and is expected to have enhanced liquidity.
For traditional asset managers, tokenized assets carry not only the risk of traditional asset classes, such as real estate, private equity and private credit (credit risk, interest rate risk, etc.), they also carry risks unique to those assets that reside on a blockchain, including:
These elevated risks are often evidenced by the demand for higher yield in many of these products compared to their off-chain counterparts (think tokenized treasury funds, such as Blackrock’s BUIDL paying an average of 20 to 30 basis points greater yield compared to high-yield money market funds).
Due to the increased risk associated with investing in tokenized assets, advisers and allocators should consider a variety of due diligence procedures during the investment process, including the following:
The rise of tokenized assets is transforming the financial landscape by offering new distribution channels, enhanced liquidity and 24/7 trading capabilities. As the industry continues to evolve, investment advisers and capital allocators must carefully weigh the benefits and risks associated with tokenized assets. By conducting thorough due diligence, they can navigate this emerging market and capitalize on opportunities for growth and diversification.
Contact Mike Dellavalle or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.