In a recent report, HSBC and Northern Trust predict that 5%-10% of all assets will be tokenized by 2030. While they didn’t provide a dollar figure, our estimates equate this to $19.5 trillion, compared to the $16 trillion predicted by BCG last year. BCG’s forecast also anticipated that tokenization would reach 10% during the same time period.
According to McKinsey, the total assets under management in 2021 amounted to $126 trillion, compared to BCG’s figure of $112 trillion. Using McKinsey’s figure and a 5% compound growth rate gives AUM of around $195 trillion by 2030, with tokenization of five to ten percent of that figure.
However, tokenization could drive the growth in assets under management. One of the touted benefits of DLT is fractionalization. If an illiquid asset class previously required a $1 million minimum investment and that is reduced to $10,000, then the range of interested investors expands massively. And likely the assets under management as well.
The role of banks in a tokenized world
In a recent paper, HSBC and Northern Trust explore the impact of tokenization on asset servicing.
While the concept that underpins blockchain is that it requires zero trust, the two banks believe trust will continue to play a critical role in financial markets. And none more so than custodians and digital asset custody. Both banks are amongst the world’s top ten custodians in terms of assets under custody. They see an important role for asset servicers in the transition to atomic settlement.
The document has a couple of interesting case studies, particularly in wealth management. Today’s most popular ETFs track stock market indexes. With tokenization and fractionalization, it is theoretically possible for a user to directly hold the individual stocks in the index without an ETF. Any rebalancing can be done with smart contracts. The paper highlights some potential tax benefits because the losses of individual stocks can be offset against other gains.
The publication also highlights the potential for customized portfolios and for smaller portfolio sizes to become more viable for asset managers enabling them to provide more thematic investment options.
Both banks are progressing with digital asset initiatives. Northern Trust merged its digital asset team with its securities innovation team in mid-2022. It is also a minority shareholder in Zodia Custody, the UK-regulated custodian it co-founded with Standard Chartered.
Last month HSBC launched its bond issuance platform, HSBC Orion, debuting with a GBP bond issuance for the European Investment Bank. This follows involvement in the issuance of several digital bonds in conjunction with Marketnode in Singapore.