Let’s start with the ultimate question: what is asset tokenization? It is the process of creating a token on the blockchain that represents a right to or ownership of a certain asset in the real world. It enables investors to store and trade these assets efficiently without having to involve unnecessary intermediaries in the process. From a market perspective, it creates liquidity, transparency, and security with fast settlement processes through the underlying blockchain technology.
Factors Driving Asset Tokenization in Europe
1. Technological Developments
In theory, blockchains are efficient at handling transactions. But as it turns out, public blockchains, such as Ethereum or Bitcoin are not the most suitable for this task, being able to handle about 30 and 7 transactions per second respectively. For that reason, scalability and other innovative solutions emerged to increase transaction throughput, like Layer 2 solutions, or sidechains. These tech stacks aim to manage a high number of transactions while trying to ensure the continued security of the main net they are connected to. As time goes on, these innovative solutions are getting increasingly efficient at processing substantial amounts of transactions, which may pave the way for traditional institutions to utilize the benefits that blockchain offers to them.
2. Regulatory Framework
With the publication of the DLT Pilot Regime, the EU aims to facilitate the development of DLT market infrastructures in the region. It is a regulatory sandbox that allows financial market participants to experiment with the technology in a regulated environment. As a result, more and more players are trying to use blockchain to facilitate efficient transaction settlements.
3. European Market Growth
The tokenization market is expected to grow at an 18,9% annual rate according to a forecast for the 2024-2032 period. The market’s current capitalization (not to be mixed with the capitalization of tokenized assets) stands at $789 million and is expected to reach $3,747 billion by the end of the forecast period. The interesting thing is, that Europe holds about one fourth of the whole tokenization market. With the emerging regulations, this rate could be even higher in a few years. And last, but not least the growing demand for crypto assets, and consequently a broader understanding of blockchain technology, may also facilitate the spread of tokenization solutions as market participants become more open to other blockchain-based instruments and accelerate further development of regulatory frameworks.
4. Benefits of tokenized assets
Tokenized assets are designed to be highly liquid, as they can be traded in miniscule fractions. When a digital token is issued on the blockchain, the smallest number of tradeable units can be defined in a smart contract, but the default value is 18 decimal places in the case of ERC-20 tokens. This makes even niche or high-entry asset classes (e.g., luxury watches, paintings, premium wines) available for basically any investor in the market.
In the traditional market, the settlement standard is T+2, (although the US DTCC recently switched to T+1 settlement), which means that trades are typically settled two days after trade execution, which can be a long time when it comes to trading. Blockchain, on the other hand, provides almost instant and low-cost settlements, which promotes market efficiency and liquidity.
Last, but not least, all the transactions can be traced and seen on the blockchain, which makes it easier for regulatory bodies and experts to oversee market processes. However, while on public blockchains traded amounts and wallet addresses are transparent, the traders cannot be identified. This puts an additional burden on the issuers of the tokenized asset, as some form of KYC process needs to be conducted. This can be done, for example, by an off-chain database that pairs IDs with wallet addresses, ensuring that only the right authorities have access to sensitive data. The other solution is to issue the tokens on permissioned or private blockchains which makes access control easier, but this way assets are available to only a limited number of investors.
Which are the most common use cases of asset tokenization?
- The most widespread application of asset tokenization is that of digital stocks, bonds or basically any financial instrument. One example here is the US treasury bill, which has multiple use cases already, such as the BENJI token by Franklin Templeton or JP Morgan’s tokenized treasury bills (BUIDL token). Additionally, Slovenia has arisen as the first country of the EMEA (Europe, Middle East, Africa) region to issue tokenized government bonds. The settlement of these bonds is carried through the Bank of France’s tokenized cash system as part of the European Central Bank’s money settlement experimentation program.
- Commodities, such as oil or gold, are also common tokenization subjects. Examples include PAXG, a gold tokenization project, or PTR, a Venezuelan government-backed cryptocurrency that represents the country’s oil reserves.
- Real estate is also a highly publicized, though less common object of real-world asset tokenization. Europe is leading the way, but there are also numerous projects in the US and other regions. For example, Brickblock is a German real estate tokenization platform built on the Ethereum blockchain, that enables investors to enter this market securely with lower capital investments.
- The tokenization of carbon credits is also a notable use case, which enables retail investors to participate in reducing carbon footprints. In this case, the carbon emission-related activities of large companies are recorded on the blockchain, hence, greenwashing and misleading activities can be traced and punished swiftly by regulators. Whenever a company verifiably helps protect the environment, they are issued tokens on the blockchain that represent the related carbon reduction. These tokens can subsequently which can be traded among corporations.
- Niche asset classes, such as luxury goods, art, vintage wines, and collectables can also be tokenized. This way, expensive paintings or yachts may be owned by many investors through the possibility of fractional ownership. Therefore, retail investors may also realize profits by being able to invest in these special asset classes with lower capital.
Challenges of Asset Tokenization
Wide adoption of tokenized assets requires regulatory support and openness from market participants, which varies among industries and players. Although openness is increasing thanks to the regulations, there is still a lot of skepticism towards digital assets.
The use of public blockchains raises data privacy concerns, as the byte code of smart contracts is available for everyone to see. Also, these chains might be targets of hacking and illegal activities. Private blockchains, on the other hand, may lack transparency, so neither solution is easily compliant with regulations.
Both investors and market players need to know more about tokenized assets so that they can be widely adopted on a global scale. The lack of expertise is a huge hindering factor, still, more and more players are bringing in expertise in this area.
However, at the moment there is an increasing number of tokenization platforms and companies that truly excel at tokenizing real-world assets. Yet, the work of integrating blockchain market infrastructures into existing systems is likely to prove a formidable task, which creates uncertainty among institutions.
Outlook for Europe
At Dorsum, we see an immense potential in real-world asset tokenization, as regulatory bodies and market participants show growing interest in this field. EU initiatives like Tokenise Europe 2025 are promoting blockchain and DLT adoption, while also safeguarding digital autonomy in the region. As regulatory frameworks solidify, tokenization will unlock new markets for investors and flexibility throughout the investment process.
Sources: Chainalysis, CoinDesk – 1 & 2, Astute Analytica
Author: Barnabás Horváth
