After a rough patch that extended for the better part of two years, it looks like the blockchain ecosystem—and the crypto industry specifically—finally gets to see a market turnaround. The rosier outlook and positive momentum are certainly welcomed, but it’s important to look at what factors are driving this bullish swing and whether or not those factors are sustainable.
As with any market shift, you can trace the process to a few key players or developments across several sectors. These catalyzing forces are critical in driving attention, funds, and continued development in the space, so it’s important to know how they operate and what value they bring.
The Institutional Influence
This time, traditional institutions such as banks and asset managers are taking a more sure-footed entry into blockchain technology, granting the industry a markedly more professional image than during the last bull market. If the leaders of the last crypto upswing seemed unserious, unkempt, and unbound by regulations, that reputation has certainly been cleaned up.
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Institutions are now mainly entering crypto through one of two ways—ETFs or tokenizing real-world assets (RWAs). While Bitcoin ETFs have received much fanfare since their approval at the top of the year from the SEC and have led to billions pouring in thanks to investment vehicles from BlackRock, Fidelity, and other traditional finance giants, tokenized RWAs have been playing an equally important yet quieter role.
However, it’s difficult to call tokenizing RWAs a trend in the truest sense, as the concept has been around for years as a surefire use-case for blockchain technology. Furthermore, its consistent presence throughout the blockchain ecosystem’s popularity pendulum swings highlights the veracity of what tokenized RWAs can provide to institutions and their clients.
Tackling Tokenization Troubles
Of course, as traditional institutions enter any new territory, they must deal with the tension of how that entry is going to happen. Do they bring development in-house or go with a third-party service? How do they know that they’re on the right track? Leaders at innovative startups working tirelessly to provide tokenization solutions to institutions of all sizes offer up their perspectives.
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“The age-old question for institutions is whether to build a solution internally, buy it through acquisition, or partner with external stakeholders. The right strategy for most institutions at this point in time is a hybrid approach where internal capabilities are implemented but external partnerships are also developed with nimble, enterprise-ready technology providers who are already immersed in the digital asset space,” says Michael McCluskey, Head of Strategic Partnerships at Sologenic.
Powered by the XRP Ledger, Sologenic’s platform helps meet institutional by providing a wide range of asset tokenization services tailored especially for banks, brokerage firms, financial institutions, and asset managers. Its flagship tokenization platform, SOLONEX, utilizes a decentralized architecture to bring institutions a roster of enterprise-grade tools, including a bespoke CBDC (central bank digital currency) solution.
McCluskey adds, “Institutions should not underestimate the importance of intricately understanding the digital asset ecosystem. Rather than building a tokenization business from the ground up, guidance should be sought from experts and builders who understand the complexities and nuances of the various chains, smart contracts, and interoperability of each to ensure the success of a tokenization project.”
This sentiment is echoed by Lior Lamesh, CEO and Co-Founder of GK8, a leading provider wholly owned by Galaxy whose end-to-end platform brings financial institutions the tools to successfully and securely manage and monetize digital assets. Aside from tokenization, GK8 offers comprehensive support for DeFi, staking, NFTs, trading, and offline security through its patented Cold Vault.
As GK8 keeps top-notch security and self-custody at the forefront of its offering, Lamesh stresses that institutions must be wary of keeping the tokenization process fortified from start to finish—especially when smart contracts and admin keys are involved.
Lamesh states that “The token issuance process, if not executed correctly, carries substantial cyber risks. Deploying the smart contract from an internet-connected computer exposes it to the possibility of malicious code insertion by bad actors. Some notorious hacks have involved activating such code only two years after the token’s implementation, causing severe damage. Therefore, it’s imperative not only to thoroughly audit the smart contract but also to deploy it from an offline environment.”
Tokenization’s Trajectory
While it is critical for institutions entering the tokenization space to consider every step of the journey before diving in head-first, there are also other factors to take into account. However, these have to do more with how institutions can maximize their efforts—not only to boost their profits but also to bring their clientele the most well-rounded and robust crypto services possible.
“Institutions should concentrate on a single asset class and develop a comprehensive business case for it. We observe numerous institutions attempting multiple initiatives simultaneously, leading to a lack of progress,” says Lamesh regarding why a careful edit of what tokenization services institutions offer can make a difference in its success. “They must carefully strategize where tokenization can yield the most significant advantages and develop plans for market implementation. While tokenizing a single bond may generate some publicity, it lacks substantial commercial value. They should also consider factors like liquidity and other requirements specific to the tokenization process.”
Likewise, while tokenization does present a variety of new business opportunities, the technology does not work entirely in the same way across sectors. For instance, the business potential of tokenized gold doesn’t mirror the methodology behind tokenized real estate—each comes with its advantages, drawbacks, and most importantly, regulatory requirements.
“Institutions should consider doing a strategic analysis of their entire business to identify areas in which tokenization could improve their products, services, and internal operations. Not only are there innovative new revenue streams to consider, but there are also internal processes that can be streamlined with tokenization,” adds McCluskey, regarding the breadth of what tokenization has to offer institutions, both internally and externally. “Companies like BlackRock are exploring tokenized products for retail customers but are also deploying back-office solutions to improve institutional fund settlement. For institutions to maximize their tokenization efforts, reviewing all facets of their business will undoubtedly bring tokenization opportunities to light.”
That being said, just because institutions do have to carefully consider their entry into the tokenization space does not mean that they’re unsure about blockchain in the long run.
If anything, working alongside blockchain-native platforms like Sologenic and GK8 can help them cement themselves in the industry properly. By utilizing the guiding hand these platforms provide, institutions can live up to their full potential as leaders in finance and technology—with a boost from veteran projects that know the ins and outs of the sector.
When asked on what trajectory we can envision institutions taking with tokenization this year, McCluskey ends by saying: “The growing interest and excitement in digital assets among institutions, highlighted by the recent introduction of Bitcoin ETFs, takes us one step closer to the eventual large-scale institutional adoption of digital assets. However, tokenization represents the next phase of this digital asset evolution, and many institutions are still in the early stages of this journey. This year, many institutions that have not already been paying attention to digital assets will start exploring opportunities in the space, while the institutions that have already built digital asset infrastructures will begin to enhance their offerings with tokenization solutions.”
