By Alex Tapscott
Despite the recent crypto carnage, large enterprises and financial giants continue to press on with their investments in Web3 and blockchain. This week, lost in the headlines about the FTX fallout, was the announcement that Apollo Global Management and Hamilton Lane are launching funds “on chain” as tokenized securities. To do this, they are partnering with Figure, which provides tokenization services on its chain, Provenance. Combined, Apollo and Hamilton manage more than $1.3 trillion USD. Hamilton has already tokenized several funds with partner Securitize.
This kind of enterprise adoption of Web3 tools violates the narrative that the industry is reeling, and companies are losing confidence in the technology. Despite the ups and downs in the market, it’s possible that we even see accelerated growth in enterprise adoption. Why? First, the Ethereum Merge reduced the carbon footprint of the network by 99% removing any concerns about smart contracts and digital assets ‘boiling the ocean.’ Second, the drop in price is unlikely to impact adoption as most of the initiatives in the pipeline would have begun months ago and won’t be derailed by a bear market. Third, the lower profile of crypto now creates room to experiment and play around.
We should welcome these efforts as it is clear for crypto to succeed as a technology and an investible asset class, the industry must apply DeFi innovation to securities and other financial assets.
Of course, there are limits to using blockchains to conduct transactions in assets that still require physical delivery or occupancy, like houses. But this is not true for most financial assets, such as equities, bonds, futures and forwards contracts and others. A stock in a company is, after all, just a contract entitling the holder to a share of a common enterprise and a distribution of profits if the company pays dividends, plus other rights defined in the corporate charter. All of this ‘business logic’ can be programmed into a smart contract with several benefits. First, trades clear and settle instantly rather than in days. Second, voting takes place instantaneously and transparently on-chain so that everyone can see results. Third, theoretically anyone with Internet access can trade them and participate in wealth creation. Fourth, transactions are automatically recorded to a trusted and immutable record (a blockchain) which will reduce back-office expense and improve trust.
The opportunity is significant. Today, cryptoassets are worth around $850 billion down from a peak of nearly $3 trillion, which pales in comparison to the value of all other financial assets. U.S public equities alone are worth over $40 trillion, according to the World Bank. Tokenizing real assets would drive adoption and use of platforms like Ethereum and others which would be supporting these efforts.
Still, tokenizing real assets has its share of challenges. First, legacy attitudes make some industry participants skeptical and reluctant to change. Second, installed market infrastructure and technologies makes switching to a “crypto-native” format challenging. Third, customers are used to the old ways and may not want to switch over. Fourth, it is difficult to “tokenize” something that already exists in analog format. It’s much easier to start from scratch. DeFi was a staging ground to prove many concepts that we can now export to finance and the real economy more generally. Implementing a policy framework will also help to speed this along. But most of the growth will come from enterprises choosing to innovate. By the looks of it they are not slowing down.
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