Cryptocurrency

Real-world assets tokenization lacks infrastructure, not just regulation

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The merger between decentralized finance (DeFi) and traditional assets has been held back by a lack of infrastructure and regulatory standards worldwide, according to sources Cointelegraph recently spoke with. 

“There simply haven’t been good institutional-grade systems for these companies to get involved. Obviously, they’re not going to just run their whole system using a regular blockchain wallet and centralized exchanges,” said Colin Butler, global head of institutional capital at Polygon.

Tokenization is a path to fractionalization, allowing multiple people to own a portion of an asset that would previously have to have been sold as a whole with a higher value. Big Four firm PwC predicts global assets under management to reach $145.4 trillion by 2025, a massive market expected to welcome more investors and, thus, improve assets’ liquidity through tokenization.

Institutional investors — those managing this capital across the world — are seeking “services that work well with what they’re already doing, that are easy to implement, flexible and upgradeable,” said Butler.

Polygon said it has been 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 in assets under management on-chain. By tokenizing its flagship Equity Opportunities Fund, Hamilton Lane was able to lower the minimum required investment from an average of $5 million to $20,000.

Another example is JPMorgan. In November, the American 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. The trade was also performed on the Polygon network.

Despite recent progress in integrating DeFi into traditional markets, the lack of clarity regarding regulation continues to keep many from embracing emerging technologies. One major question about this topic is: What are securities? The United States Securities and Exchange Commission has been asserting through enforcement actions that the definition may apply to a broader range of assets and services than many crypto firms expected. As Butler asked:

“If you tokenize a security, does the digital token become a security itself, or just represent one?” 

Jez Mohideen, co-founder and CEO of Laser Digital — the crypto arm of Japanese banking giant Nomura — believes the lack of regulation is affecting digital asset risk management, as it prevents firms from effectively separating units and business models.

“More regulation is especially necessary in certain parts of businesses — for example, making sure capital is looked after by individuals with fiduciary responsibilities. As more and more regulatory enforcement of this nature comes into play, there will be an increasing amount of institutional interest,” he told Cointelegraph.