Bernstein sees a $5 trillion opportunity in blockchains for financial markets

Published Wed, Jun 21 20233:26 PM EDTUpdated Wed, Jun 21 20235:06 PM EDT

If financial incumbents want to be part of the modernization of financial markets, they need to adopt blockchains, according to Bernstein. Cryptocurrencies are rallying this week due to a sentiment boost from institutional efforts to secure their place in the future of finance. Beyond tradeable assets such as bitcoin, however, there's an opportunity over the next five years for financial firms in tokenizing real-world assets on blockchains, the firm said in a note this week. "Tokenization, we believe, will transform financial markets over the next decade," analyst Gautam Chhugani said in the Tuesday note. "We forecast ~$5 trillion of real-world financial assets will be tokenized on blockchains over the next 5 years." Specifically, tokenization using blockchains refers to the process of converting something with value, such as gold or real estate, into a digital token that can be digitally represented and traded on a blockchain. The benefits of it are "simple," he said, citing lower costs, instant settlement, liquidity, digital programmability, reduced counterparty risks and global accessibility. "We forecast a ~1-5% adoption of tokenization for assets that benefit the most" from it, including corporate bonds, commercial real estate and private market funds, "with lower penetration in other asset classes (0.1-0.3%) such as government bonds, equities and residential real estate," Chhugani said. "We project a ~2% penetration for currency and bank deposits (i.e. broad money)," he added. "This translates to a ~$2 Tn opportunity over the next five years, excluding currency (~0.4% of the total ~$560 Tn assets) and ~$3 Tn in stablecoins/CBDC tokens — taking the total to ~$5 Tn in assets to be tokenized over the next five years." There is also a big opportunity for new business verticals in custody, trading, trade finance and enterprise consulting, Chhugani said. Institutions have always been much more comfortable discussing the benefits of blockchain technology than the prospects for crypto trading and many have been quietly experimenting with it for years. Investment manager Hamilton Lane has launched three tokenized funds . Meanwhile, KKR has tokenized a part of an equity fund through a partnership with Securitize. Franklin Templeton launched a mutual fund that settles transactions and records ownership data over different blockchains. Additionally, JPMorgan Chase has a bank-led blockchain platform called Onyx that focuses on international trade. — CNBC's Michael Bloom contributed to this report.