Tokenization does not automatically make hard-to-trade assets liquid, industry executives said at Paris Blockchain Week, pushing back on the idea that putting private credit, real estate or other illiquid products onchain will by itself create active secondary markets.
This is an excerpt from a recent Cointelegraph report on the tokenization of real world assets.
Generally speaking, I would agree with the point being made here, but other parts of the report triggered this article and that part is:
Francesco Ranieri Fabracci, head of tokenization expansion at Tether, made a similar point. “It’s not that if you put an asset onchain, it will be liquid,” he said, arguing that only a narrower set of instruments, including bonds, money market funds and stablecoins, are likely to achieve consistent liquidity in tokenized markets.
I would argue that this should be taken as a prediction that it is and not some factual statement.
The reason is simple: the entire report fails to emphasize on the whole point of tokenization and the is the fact it's meant to create "market opportunities" not build the markets themselves.
When people say that tokenizing an asset doesn't magically make it liquid, that is true, but when they argue for a few somewhat liquid known markets being made more liquid, it sounds more like advertising, not independent analysis or judgement.
It should be no surprise that "access" is the first "help" that comes from tokenization to illiquid assets because we are essentially dealing with crypto assets and decentralized blockchains, systems built around enabling global access through permissionless infrastructure solutions.
The alternative market discussed here is a reference to the illiquid assets market.
Tokenization solves the access barrier of this market because tokens function on permissionless systems where anyone in the world with a wallet they can acquire with full functionality without KYC or any other common traditional requirements, can access these tokens.
Report shows that capital allocations to alternative investments have surged from $4.8 trillion to $22 trillion over the past two decades, constituting 15% of global assets under management, despite their higher fees, illiquidity, and lack of transparency compared to traditional portfolios.
This shows the existence of real appetite, which makes the access solution a great importance.
This access solution layer, conveniently comes with other benefits including higher transparency, potentially much lower fees due to inherent cheap infrastructure layer and also, a chance at increased liquidity.
To address the elephant in the room: liquidity.
Tokenization might not magically make illiquid assets liquid, but it comes with solutions that creates the market opportunities for it.
People need to build the markets to achieve higher liquidity because that comes from more than just infrastructure solutions.
It comes with the right marketing.
It comes with presentable evidence of sustainable value generation.
It comes with building "trust" into the solutions.
Tokenization brings the tools that makes it easier to turn these illiquid assets into active markets.
Globally accessible = larger market to sell to.
Public transaction data = easier system to build trust.
Decentralized = more flexible governance, cheaper economic environment tool.
Permissionless = more opportunities to integrate with several markets and build the best product ever.
Tokenization is a pathway that many will take to build the best financial products of the next decades. Limiting one's perspective to the constraints of current financial systems and asset markets would be a terrible mistake.
