Tokenization of real-world assets lacks infrastructure, not just regulation
Mergers between decentralized finance (DeFi) and traditional assets have been held back due to a lack of infrastructure and regulatory standards around the world, according to sources Cointelegraph spoke to recently.
“There simply haven’t been good institutional-grade systems for these companies to be involved in. Obviously, they are not going to run their entire system using just a regular blockchain wallet and centralized exchanges,” said Global Head of Institutional Capital at Polygon. Chief Colin Butler said.
Tokenization is a route to fractionalization, allowing multiple people to own a portion of an asset that would previously have had to be sold as a whole with a higher price. Big Four firm PwC predicts global assets under management to reach $145.4 trillion by 2025, a larger market expected to welcome more investors and thus, improve the liquidity of assets through tokenization .
Institutional investors – who manage this capital around the world – are “demanding services that are easy to implement, flexible and upgradeable, similar to what they are already doing,” Butler said.
Polygon said it is working with many of those global players. In January, investment firm Hamilton Lane announced the first of three tokenized funds backed by Polygon, bringing part of its $824 billion assets under management on-chain. By tokenizing its flagship Equity Opportunities Fund, Hamilton Lane was able to reduce the minimum required investment from an average of $5 million to $20,000.
We are excited to share that a portion of our recently closed Equity Opportunities Fund V is now accessible to qualified investors through a new @Securitize token on feeder fund @0xPolygon, Learn more: https://t.co/ZxfaNJwgBx pic.twitter.com/4SOezI2Ma2
— hamilton lane (@hamilton_lane) January 31, 2023
Another example is JP Morgan. In November, the US giant executed its first cross-border DeFi transaction on a public blockchain. The initiative was part of a pilot program exploring DeFi potential for wholesale funding markets. Trading was also done on the Polygon network.
Despite recent progress in integrating DeFi into traditional markets, a lack of clarity regarding regulation is keeping many from adopting the emerging technology. A key question regarding this topic is: What are securities? The United States Securities and Exchange Commission is claiming through enforcement actions that the definition may apply to a wider range of assets and services than many crypto firms expect. As Butler asked:
“If you tokenize a security, does the digital token itself become a security, or merely represent one?”
Jez Mohideen, co-founder and CEO of Ledger Digital – the crypto arm of Japanese banking giant Nomura – believes that a lack of regulation is affecting digital asset risk management, as it forces firms to separate entities and business models. Effectively prevents stripping.
“More regulation is necessary, particularly in certain parts of businesses – for example, ensuring that capital is looked after by persons with fiduciary responsibilities. As more and more regulatory enforcement of this nature comes into play, institutional The volume of interest will increase,” he told Cointelegraph.