Executive Summary and Key Conclusions

 Tokenization - the transformation of global markets

 Tokenization refers to the process of creating digital programmable representations of traditional financial and non-financial assets that can be exchanged and tracked on distributed ledgers or blockchains. We expect the tokenization of traditional assets to transform financial and non-financial infrastructure and public and private financial markets over the next 5-15 years. As we wrote in our Primer (see our 10/4 report), we are only in the first innings of a major change in infrastructure and applications that may reshape how value is transferred, settled and stored.

Our view is that the tokenization of traditional assets and issuance of assets in tokenized form have the potential to increase efficiencies and reduce costs across an asset's lifecycle, improve the efficient allocation of capital, optimize global supply chains, catalyze a new generation of software-as-a-service (SaaS) companies and ultimately drive mainstream adoption. Disruptive innovations like the radio, television and email took 30 years to reach mainstream adoption, but we expect a far shorter road for digital assets.

 DLT and tokenized traditional assets aren't "crypto"

 Although some blockchains support the exchange and transfer of tokenized traditional assets, our view is that decentralization and lack of customization, data privacy and permissioned access to the network limit current financial institution and corporate use cases that require expanded scalability and regulatory compliance.

Blockchains are public, permissionless and require tokens

Blockchains are a type of distributed ledger that remove the need for some intermediaries, support trustless transactions, record network activity and token ownership data transparently (public) and allow open access to join the network (permissionless). Blockchains record ownership of the 26k+ tokens that exist within the digital asset ecosystem, but we expect 99% of those in existence today to essentially disappear over the next 10 years. Memecoins like Shiba Inu (SHIB) and Pepe (PEPE) receive outsized attention, despite having no utility or intrinsic value, but other tokens are different. Public permissionless blockchains like Bitcoin, Ethereum (see our 4/6 report) and third-generation blockchains (see our 3/21 report) are decentralized and require tokens to reward network participants for processing transactions, but also to secure the network by requiring participants to have "skin in the game" that disincentivizes malicious behavior.

Distributed ledger customization expands FI and corporate use cases

In contrast, distributed ledgers provide customizable infrastructure for financial institution and corporate use cases that ensure regulatory compliance by restricting access to network activity and token ownership data (private) and preventing unknown entities from joining the network (permissioned). Distributed ledgers still remove the need for some intermediaries, but also the need for tokens to reward network participants and secure the network. Network participants, which may be a consortium of financial institutions or corporates, are centralized and don't require tokens to align incentives because they already have "skin in the game" - their reputations.

Disruption potential should not be ignored

 Just as there was an explosion of simple to complex websites in the 1990s that altered how we shop and interact, in the coming years, we could see the tokenization and decentralization of many aspects of the economy.   Distributed ledgers and blockchains provide back-end infrastructure, but some investors may underappreciate how this disruptive technology is powering an infrastructure evolution that may touch every industry. We believe the lack of user-friendly front-end interfaces and a disproportionate focus on bitcoin, memecoins, regulatory headwinds and illicit activity are overshadowing the rapid development of real-world use cases that are in active production today.

We expect the tokenization of assets and funds within markets that are the least efficient and most intermediated to be tokenized first, and assets and funds within markets where the reverse is true to be tokenized last. Consultants expect the value of tokenized assets to reach 10% of global GDP ($16.1tn) by 2030.¹ However, our view is that forecasting the value of tokenized assets over the next 10 years may signal tokenization's disruption potential, but ultimately distracts from the largest transformation of infrastructure and markets in over 50 years, efficiencies that DLT/BCT enables and new products and applications that become economically viable.

    Efficiencies and reduced costs drive accelerating adoption

  Institutional investors and banks are increasingly leveraging DLT/BCT, smart (self-executing) contracts, tokenization and fractionalization to enable customizable settlement times; reduce credit risk; lower settlement, financing and operational costs; increase liquidity for previously illiquid assets; and more efficiently reallocate funds previously held as collateral to yield-bearing assets or rebalance portfolios with illiquid assets. DLT/BCT may also facilitate increased retail accessibility to alternative assets, as well as the creation of improved financial assets and applications, some of which were not economically viable previously (Exhibit 1).

See Appendix I: The Tokenization Process for a deep dive

Our view is that corporate DLT/BCT and tokenization use cases are potentially more diverse and expansive than financial institution use cases. In fact, over half of Fortune 100 companies have launched projects leveraging DLT/BCT since the beginning of 2020.² Corporates across every industry are increasingly leveraging the same underlying technology as financial institutions to generate incremental revenues, lower costs by automating manual processes, optimize supply chains, broaden potential customer pools, increase customer loyalty, offset contributions to climate change, combat counterfeiting and appeal to Enviromental, Social and Governance (ESG)-focused customers and investors. Many companies with the greatest risk of disruption, or that fear a loss of market share, are proactively exploring how to enter the digital asset ecosystem and leverage its many use cases.

Welcome to the token economy

 Tokenization is just one of many DLT/BCT applications, but we expect this one application to lead to new and more efficient primary and secondary markets for financial and non-financial products. In the not-too-distant future, institutional and retail investors may open an iPhone app to check the real-time market value of their portfolio holdings, which include tokenized dollars, Apple (AAPL) stock, corporate bonds and interests in a private equity fund and commercial building that's located on a different continent. Portfolio holdings may also include carbon credits, rights to royalties generated from Rihanna and Diplo songs, interest in a diversified blue-chip art fund, bitcoin (BTC) and other tokens that provide holders with a call on cash flows and power smart contract-enabled blockchain operating systems.

Ownership of these (tokenized) assets will be immutably recorded on one of the 5-15 distributed ledgers or blockchains that survive consolidation, some of which are public (full data transparency for transactions since inception) and permissionless (anyone can join the network) and some of which are private and permissioned. Within the same app, you may fractionalize and sell 47.62765% of your interest in a private equity fund at 5:15pm EST to 20 different institutional or retail buyers (with whom you've never interacted) in a liquid secondary market with 24/7 real-time settlement and smart contracts performing anti-money laundering/know your client (AML/KYC) requirements. It's difficult to overstate how transformative DLT/BCT, tokenization and the thousands of decentralized apps that have yet to be created could be.

The more things change, the more they stay the same

  The digitization of financial assets began in 1971 when Nasdaq introduced infrastructure enabling the world's first electronic stock exchange, but it wasn't until 2001 that US stock markets fully transitioned to decimalization of asset prices, which drove smaller order sizes and heightened liquidity.³ However, 27% of settlement systems today still leverage legacy infrastructure that is over 20 years old.⁴ Today's financial systems continue to be built on centralized (company-owned) and fragmented infrastructure that requires third-party intermediaries, which limits efficiencies, interoperability, innovation and functionality; increases time to settlement and costs; and prevents the efficient allocation of capital (Exhibit 2).

 Why now for tokenization? Pilots reach maturity

 Despite last year's digital asset market correction (see our 12/2 report), financial institution, central bank and corporate interest remained, and industry development accelerated for private permissioned distributed ledgers and blockchains. Our view is that customizable distributed ledgers, blockchain subnetworks (subnets) and smart contracts have reached maturity and production after years of development.

In contrast to public permissionless blockchains, private permissioned distributed ledgers and blockchain subnets integrate separate systems into one and enable the efficiencies provided by distributed (shared) ledgers, but with enhanced functionality and reduced regulatory and reputational risk. We expect DLT/BCT implementation to accelerate as the opportunity costs of uncaptured efficiencies and reduced costs increase.

The next evolution of software has only just begun

Bitcoin's blockchain launched 14 years ago, Ethereum's launched eight years ago and the first decentralized applications launched seven years ago, but many of the newest blockchains and applications are less than three years old and remain early in their development roadmaps. However, distributed ledgers and blockchain subnets intended for institutional and corporate use cases are even more nascent than the newest blockchains and require time to mature, despite numerous use cases already executed and ongoing.

  Blurred lines - tokenized assets vs blockchain-native

 Tokens will likely become so ubiquitous that "tokenized assets" and "token portfolios" will simply be referred to as "assets" and "portfolios" over the longer term. Our view is that there is limited reason to distinguish between tokens that represent ownership of Treasuries and physical gold, tokens representing ownership of a corporate bond issued in tokenized form and tokens powering blockchain operating systems and decentralized storage protocols. We expect the lines to blur between tokenized pre-existing traditional assets, assets issued in tokenized form and blockchain-native assets (Exhibit 3).

 Beneficiaries & Ecosystem Synergies

  TradFi is leveraging the technology to fill a void

A digital asset company which collapsed last year likely slowed institutional crypto trading as institutional investors reevaluated counterparty risk and assured themselves that custody, exchange and broker-dealers were separate entities or siloed. However, the collapses created a void that is currently being filled by trusted and experienced TradFi firms, as well as regulatory-focused digital asset companies, offering institutional-grade distributed ledgers, trading platforms and products. Although we appreciate the "decentralized-everything" ethos at the heart of the digital asset ecosystem, digital asset trading platforms like Coinbase and FTX were never decentralized and decentralized exchanges like Uniswap (see our 6/13 report) are unlikely to provide the privacy and regulatory rigor required for institutional use cases.

 Private sector expertise needed to implement DLT/BCT

  Commercial, investment and central banks; institutional investors; corporates; and governments are leveraging the private sector to build new financial and non-financial systems and integrate the underlying technology into their processes. We expect private sector beneficiaries to include both traditional and digital asset companies. However, the largest and stickiest revenue opportunities are likely to exist for infrastructure providers that offer customizable distributed ledger platforms and blockchain subnets, mature and audited smart contracts, cybersecurity (see our 1/26 report), digital asset custody/wallets (see our 12/21 report), oracle networks (see our 2/16 report), management systems and cloud storage.

Infrastructure providers offering distributed ledger and blockchain platforms are likely to adopt SaaS revenue models, in our view, potentially forming a new generation of SaaS companies. Many of the digital asset companies listed below are developing distributed ledgers to support tokenized currencies, but these same ledgers are also likely to support tokenized assets more broadly.

 Traditional and digital asset companies both included

Tokenized currencies (CBDCs) produce beneficiaries

We expect DLT/BCT and tokenization beneficiaries to include traditional and digital asset companies, the majority of which are currently private. For example, the New York Innovation Center (NYIC), a unit of the Federal Reserve Bank of New York, launched a wholesale CBDC pilot (see our 11/17 report) to research and develop CBDCs (see our 1/17 report) and partnered with Amazon Web Services (AWS), BNY Mellon, Citi, Deloitte, HSBC, PNC Bank, Sullivan & Cromwell LLP, SWIFT, TD Bank, Truist, U.S. Bank and Wells Fargo. The People's Bank of China partnered with Alibaba, JD.com and Tencent, among others, to research, develop and distribute its CBDC.

Central banks and governments are also leveraging the distributed ledger platforms offered by digital asset companies. The NYIC partnered with SETL; Bank of Canada partnered with R3; Monetary Authority of Singapore partnered with ConsenSys; Norges Bank partnered with Nahmii; Royal Monetary Authority of Bhutan partnered with Ripple; Bank of Jamaica and Central Bank of the Philippines partnered with eCurrency Mint; Central Bank of Nigeria and Eastern Caribbean Central Bank (ECCB) partnered with Bitt; and Bank of the Lao and National Bank of Cambodia partnered with Soramitsu.

Tokenized traditional and alternative assets produce beneficiaries

Banks like Goldman Sachs, HSBC, JP Morgan and Société Générale are building in-house digital asset trading platforms through partnerships with distributed ledger and blockchain platforms like Digital Asset's Canton Network, Ethereum, Linux Foundation's Hyperledger and Tezos. Banks and asset managers, such as Citi, Cumberland, Franklin Templeton, Société Générale, T. Rowe, UBS, Wellington and WisdomTree are also leveraging external platforms like ADDX; Avalanche (see our 12/10 report); Broadridge's Distributed Ledger Repo (DLR) (see our 2/14 report), powered by VMWare Blockchain and Digital Asset's Daml smart contracts; Contour Network, powered by R3 Corda's distributed ledger; Figure Technologies' Provenance Blockchain; Ethereum; HQLAx, also powered by R3 Corda's distributed ledger; Polygon; and Stellar.

Private equity firms like KKR, Hamilton Lane, Partners Group and Apollo are tokenizing, or planning to tokenize, portions of funds by partnering with distributed ledger and blockchain platforms like ADDX, Avalanche, Figure Technologies' Provenance Blockchain and Digital Fund Services, Polygon and Securitize.

Decentralized applications for tokenized assets produce beneficiaries

Digital asset companies like Gauntlet (see our 2/8 report) and Skolem (see our 2/10 report) are catalyzing the institutionalization of decentralized Web3 applications (see our 5/4 report) by leveraging data transparency to provide financial modeling and simulation platforms that offer similar services to an investment bank's risk desk, as well as execution services and analytics. Over the longer term, we expect the development of decentralized applications, specifically decentralized finance (DeFi) applications, with real-world functionality to increase the efficiency of traditional products and services.

 Ecosystem synergies make accelerated development likely

Accelerating ecosystem adoption to drive development and growth

We expect the digital asset ecosystem's adoption and development to accelerate, despite last year's risk asset correction and the digital asset ecosystem's self-inflicted wounds related to FTX's high-profile bankruptcy (see our 12/2 report). Next-generation blockchains (see our 3/21 report) that have emerged since the Ethereum blockchain launched 8 years ago (see our 4/6 report) have implemented innovative and differentiated approaches to improving the trade-off between scalability, decentralization and security.

 A nascent industry requires time to mature

Distributed ledgers and blockchains are not competing in a zero-sum game. Technological advancement at one of the ecosystem's three layers (distributed ledgers/blockchains, scaling solutions/oracle networks, applications) produces synergies that benefit the digital asset ecosystem as a whole by enabling the creation and development of new decentralized applications that were not possible on the Bitcoin or Ethereum blockchains due to lower scalability. Despite rapid growth and development, we remind readers that this is a nascent industry that needs time to mature.

Decentralized oracles, identity, storage, analytics, insurance are all needed

Adoption and usage of tokenized assets are likely to drive development throughout the ecosystem as developers build applications and ancillary services to support what we expect to be significant growth in tokenized asset market values and trading volumes over the next 5 to 10 years. New and more efficient financial products will require an expanding quantity of real-world data provided by decentralized oracle networks (see our 2/16 report), compliance with Ant Money Laundering (AML) / Know your Customer (KYC) requirements and undercollateralized lending will require decentralized identity NFTs and advanced analytics (see our 1/26), increased usage of distributed ledgers and blockchains will require decentralized storage protocols to house exponential data growth and customer acquisition strategies will require decentralized insurance protocols to mitigate security risks.

Our view is that digital asset adoption by banks, financial institutions and corporates is likely to drive ecosystem synergies, leading to the accelerated development of decentralized Web3 applications that may gradually capture market share across most industries (see our 7/21 report) over time (Exhibit 4).

See Appendix II: Decentralized Web3 Apps for a deep dive

 Challenges & Risks to Adoption

We summarize the key challenges and risks that could slow the adoption of DLT/BCT and tokenized assets. We categorize primary risks as regulatory and legal - the risk that regulatory and legal frameworks inhibit broad adoption of tokenized assets - and secondary risks as security, lack of global coordination and inadequate liquidity.

 Drivers of Adoption

 Digitization and the infrastructure evolution

The digitization of financial assets originated when Nasdaq introduced infrastructure in 1971 that enabled the world's first electronic stock exchange, which facilitated the future decimalization of asset prices, smaller order sizes and heightened liquidity. Similarly, we expect the underlying DLT/BCT infrastructure to facilitate the disruptive transformation of tokenized (digital) assets by enabling efficiencies and decreased costs.

We provide the catalysts driving financial institutions, central banks and corporates to incorporate DLT/BCT-powered infrastructure and tokenized assets below.

 Operational efficiencies and lower costs

DLT/BCT-powered infrastructure results in efficiencies and lower costs

 Distributed ledgers and blockchains provide decentralized infrastructure that removes fragmentation and the need for intermediaries to process and execute transactions, which increases efficiencies, interoperability, innovation and functionality; facilitates 24/7 real-time settlement and cost reductions; and enables the efficient allocation of capital (Exhibit 6).

Potential to transform markets at a rapid rate

 We expect DLT/BCT-powered infrastructure to reduce the time to settlement and cost by removing the need for intermediaries and enabling the automation of administrative and operational processes through the implementation of smart contracts. For example, cross-border payments and transfers can take 7 days to settle, involve 5 or more intermediaries and cost 10x more than domestic payments. Cross-border payments cost corporates $120bn in transaction fees in 2020 and are heavily reliant on manual processes. Over one-third of payment data was validated manually in 2020.^{5, 6, 7} But tokenized demand deposits and currencies remove the need for intermediaries, which eliminates the reliance on manual processes, enabling real time settlement and lowered costs. Potential disintermediation may also allow banks to unlock $4tn of funds held in accounts at correspondent banks, which could be reallocated to yield-bearing assets.⁸

Liquidity, accessibility and improved capital allocation

Efficiencies and cost reductions that enable lower minimum investments, broader investor pools and heighted secondary market liquidity may also facilitate increased institutional and retail exposure to alternative investments, as well as enable institutional investors to reallocate funds previously pledged as collateral to investments in yield-bearing assets and private equity firms to reallocate capital invested in illiquid assets to investments that may provide higher expected risk-adjusted returns.

Efficiencies decrease manual processes and corporate expenses

Corporates may also incorporate DLT/BCT, smart contracts and tokenization to automate manual processes related to supply chain management and to decrease the time required to trace the provenance of goods. In the future, DLT/BCT may also enable the automation of corporate actions, such as coupon and dividend payments and voting, enabling reduced operational costs. Payments may be linked to the delivery or GPS location of tokenized goods, restocking of inventory automatically using Internet of Things (IoT) devices and events that trigger insurance payouts. Indirect taxes like sales tax may be sent directly to governments at the point of sale.

 New and improved products and applications have emerged

DLT/BCT-powered infrastructure may also enable the creation of new and more efficient products and applications that were too expensive or impractical to create on today's financial systems. DLT/BCT transforms the below into economically viable products and applications:

• financial products and applications for low-income individuals;
• retail investor exposure to alternative assets like private equity, commercial real estate and blue-chip art;
• government tracking of consumer behavior and central bank tracking of inflation in real time while preserving privacy;
• corporates purchasing carbon credits in a liquid secondary market to offset contributions to climate change;
• intra-day settlement for repurchase agreements (repos) and new products like perpetual futures and prediction market (binary future) contracts;
• a way for artists to create royalty streams (see our 3/18 report) from the resale of their work;
• the ability for subsistence farmers to obtain parametric insurance to protect their crops (see our 2/16 report) from extreme weather events in developing countries without ever meeting with an insurance agent;
• manufacturers of luxury goods and pharmaceuticals issuing NFTs alongside an article of clothing, timepiece or drug shipment that acts as a certificate of authenticity to combat counterfeiting;
• or food retailers tokenizing supply chains to increase the traceability of goods and to identify the origin of a food-borne illness if an outbreak occurs.

 Private permissioned distributed ledgers & blockchains

Highly decentralized, public and permissionless blockchains have trade-offs

Distributed ledgers and blockchains may optimize the trade-offs between scalability, decentralization and security, known as the blockchain trilemma, for different end users and use cases (Exhibit 7). We view decentralized, public and permissionless blockchains that enable trustless transactions and reduced reliance on intermediaries like Ethereum (see our 4/6 report), Cardano, TRON, Solana (see our 1/11 report), Polygon (see our 2/28 report) and Avalanche (see our 12/10 report) as critical for the digital asset ecosystem's development and growth. However, decentralized, public permissionless blockchains, including third-generation blockchains (see our 3/21 report), provide data transparency and reduce security risks at the expense of data privacy and scalability, which inhibits institutional and corporate adoption and use cases that require data privacy and high scalability.

See Appendix III: Blockchain Trilemma Components for a deep dive

Financial institution and corporate use cases require privacy

Decentralization isn't the end-all-be-all. Our view is that decentralization is beneficial, but scalability and security are likely more important than decentralization for TradFi and corporate use cases, which may not require truly trustless transactions or the level of decentralization that public blockchains rely on to securely function. Instead, TradFi and corporate adoption of DLT/BCT-powered use cases rely on private permissioned and customizable distributed ledgers and blockchains that are appropriately regulated and can facilitate AML/KYC compliance procedures, token transfer restrictions and order flow/data privacy. We expect distributed ledgers and blockchains that enable the creation of private permissioned and customizable distributed ledgers and blockchain subnets to provide an institutional and corporate on-ramp to the digital asset ecosystem.

 Real-time (or customizable) settlement

DLT/BCT, smart contracts, tokenization and fractionalization are all required

As speculative trading of memecoins with limited to no intrinsic value fades, we expect focus to shift to the technological benefits that DLT/BCT, smart contracts, tokenization and fractionalization facilitate by enabling traditional assets to be traded on distributed ledgers and blockchains with 24/7 real-time settlement.

Tokenization and smart contracts enable atomic (simultaneous) settlement for tokenized assets by automating much of the clearing and settlement process, including financial institutions' payment messages, which provide routing information and payer/payee identification, compliance with AML/KYC requirements and the crediting and debiting of customer accounts. We expect real-time settlement to drive lower credit risk; decreased financing, settlement and operational costs; capital allocation efficiencies and retail accessibility.

Customizable Settlement > Real-Time Settlement

Decreasing time to settlement or enabling real-time settlement by transitioning to a real-time gross settlement (RTGS) process from a deferred net settlement (DNS) process provides counterparties with benefits like decreased credit risk, but at the cost of increased liquidity risk. Although we view 24/7 real-time settlement as a significant technological accomplishment, we expect financial institutions to prefer customizable settlement times that optimize the tradeoff between credit and liquidity risk. We also note that settlement costs are rising ~14% each year and 5-10% of trades fail each day, driven largely by human error and the seven non-interoperable systems for which the average trade is routed, indicating the significant implications that a distributed (shared) ledger enabling real-time, or customizable, settlement provides.⁹

 Fractionalization

Transforming Illiquid assets drives efficient secondary markets

Electronic trading and decimalization have driven lower average order sizes over the last five decades, resulting in heightened liquidity. We expect tokenization, which enables fractionalization up to 18 decimal places, to transform illiquid assets into liquid ones, increase retail and institutional exposure to alternative investments like private equity, real estate, and blue-chip art and carbon credits, as well as drive the formation of more efficient and liquid primary and secondary markets. Fractionalization may also enable banks and investors to reallocate capital and rebalance portfolios more quickly.

New functionality - transfer of illiquid (physical) asset ownership and value

The market value of tokenized gold surpassed $1bn in mid-Mar, but prior to the emergence of tokenized gold, investors seeking exposure to gold's price could purchase ETFs and futures and those seeking exposure to physical gold could purchase it through dealers. However, these investment vehicles come with drawbacks related to cost, settlement and liquidity. In contrast, tokenized gold provides exposure to physical gold, 24/7 real-time settlement, no management fees and no storage or insurance costs, while fractionalization enables the transfer of physical gold ownership and value that was not previously possible (Exhibit 8).

 Accessibility

Lowering the barriers to entry for retail investment in alternatives

High barriers to entry create headwinds to investment in alternative assets, which are out of reach to all but the wealthiest retail investors. For example, retail investors seeking exposure to gold's price or physical gold can buy a share of a gold ETF or a physical gold bar, but not for less than ~$180 a share or $1,900+ for a gold bar.

Private equity exposure for retail investors, even wealthy ones, has even higher barriers to entry and inhibits exposure to the 99%+ of companies globally and in the US that are private, which results in client concentration risk for private equity funds, secondary market illiquidity and the inefficient allocation of capital (Exhibit 9). However, we expect tokenization and fractionalization to drive lower minimum investments and increased retail exposure to alternative investments like physical gold and private equity, which benefit both limited partners (LPs) and general partners (GPs).

Accessible to all - new financial assets and products to emerge

Tokenization, fractionalization and heightened secondary market liquidity may also increase exposure by retail investors, as well as institutional investors, to previously illiquid or inefficiently priced alternative assets like commercial real estate, blue-chip art, carbon credits and royalty streams. Tokenization of these assets lowers the barriers to entry, enhancing liquidity and enabling the efficient reallocation of capital if an investor wishes to diversify or exit an investment. It can take years to fully exit investments in private funds. Tokenization may also enable offshore individuals and companies to access previously unavailable markets and products.

The centralized, fragmented and non-interoperable financial systems of today also create high barriers to entry for companies planning to build financial applications. However, interoperable applications can be built on top of distributed ledgers and blockchains, enabling the development of applications that would be too expensive or impractical to create on today's financial systems.

Smart contracts and tokenization also enable the creation of innovative products, some of which were not previously available in traditional or digital asset markets, like perpetual futures and prediction market (binary future) contracts.

   Transparency

Reduced information asymmetries and more efficient price discovery

Blockchain transactions are immutably recorded and transparent to those with the proper data science and quant tools, which enables the analysis of millions of transactions between millions of addresses and across dozens of blockchains. We expect data transparency to drive reduced information asymmetries and, combined with heightened liquidity, to lead to more efficient price discovery, particularly for previously illiquid assets.

Enabling deeper analysis of tokenized assets in real time

Data transparency allows for deeper analysis of tokenized and blockchain-native assets in real time. We expect fundamental analysts to cover the tokens powering tokens blockchains and applications as they would equities over the longer term, but models will likely transition from updating forecasts and price objectives on a periodic, or quarterly, basis to integrating real-time data feeds as adoption, development, usage and resulting cash flows become transparent (Exhibit 10).

 Data transparency benefits law enforcement, governments and central banks

The transparency provided by blockchains may also provide law enforcement agencies with the ability to effectively track stolen tokens and illicit fund flows years after the crime occurred (see our 1/26 report). The transparency provided by distributed ledgers may also provide governments and central banks with the ability to track consumer behavior and inflation in real time, instead of using lagged data, as well as enable corporates to tokenize their supply chains, producing efficiencies and decreased costs.

Holistic analysis for structured finance products

Securitization enables the transformation of illiquid, long-duration, assets into liquid assets, but includes drawbacks. Lack of transparency into the securitized asset's underlying collateral reduces an investor's ability to analyze the creditworthiness of borrowers. Analysis of the thousands of mortgages that are packaged into mortgage-backed securities (MBSs) or thousands of auto loans packaged into asset-backed securities (ABSs) would be time-consuming and unlikely to enable a holistic analysis of mortgage owners' creditworthiness.

Data transparency may have mitigated the GFC of '07/'08

 Our view is that risks related to the Global Financial Crisis (GFC) of '07/'08 may have been mitigated if the individual mortgages used as collateral for MBSs had been tokenized and analyzed. Data transparency enabled by tokenization provides insight into the creditworthiness of MBSs at the individual mortgage level, which may have prevented the lowering of lending standards and the ability for credit rating agencies to issue investment-grade ratings for MBSs filled with subprime mortgages. Tokenized MBSs may have also made it more difficult for mortgage originators to pass along the credit risk to investment banks and institutional investors, both of which could have more effectively evaluated the creditworthiness of a MBS's underlying collateral.

Transparency provides valuable insight for home buyers

What if you tokenized your house? The data transparency provided by distributed ledgers and blockchains could provide not just ownership of the property to potential buyers, but also include an immutable record of sales history or even the last time the roof was replaced, what materials were used and which contractor installed it. Incremental and accurate data may provide valuable info for buyers and tokenization may reduce or remove legal costs associated with transferring a deed. Tokenization combined with fractionalization may also enable a homeowner to sell a property more easily by enabling multiple buyers, unknown to each other, to purchase an interest in the property.

We do not expect hundreds of thousands of individual mortgages or homes to be tokenized in the near term, but use the examples above to illustrate how tokenization enables data transparency and deeper analysis of assets, specifically structured products.

Supply chain fragmentation drives inefficiencies

Supply chains globally rely on a complex web of centralized and fragmented systems. Flows of information, inventory and finances from banks, suppliers and retailers are delayed, prone to tampering and often stored within separate systems that are not interoperable, which limits efficiencies, interoperability, innovation and functionality. Intermediaries exist throughout the supply chain, increasing costs, particularly for cross-border trade (Exhibit 11).

Supply chain optimization, revenue and preventable deaths

We expect DLT/BCT-powered infrastructure to drive optimized inventory management and shipping routes, as well as enhance the detection of fraud and counterfeit items, which accounted for 3.3% of global trade in 2016 and reached ~$450bn in 2019.^{10, 11} Our view is that increasing supply chain transparency will likely save lives by inhibiting the flow of counterfeit drugs and enable corporates to capture billions in unrealized revenue that was instead captured by counterfeit luxury good producers, as well as the rapid resolution of disputes between large companies, which have $200mn pending from disputes on average (Exhibit 12).^{12, 13}

 Efficient allocation of capital

We expect DLT/BCT and tokenization to drive a more efficient allocation of capital at both a macro and micro level and across markets, both financial and non-financial. Our view is that increased transparency and accessibility, as well as real-time settlement and reduced need for intermediaries, may drive increased competition across industries, resulting in better products and lower prices.

Fund manager selection and fund manager investments

Increasing the flow of funds to hedge fund and private equity fund managers who generate the highest risk-adjusted returns may improve the flow of funds to businesses that are best positioned to succeed over the long term. Hedge fund and private equity investors can access historical fund returns when selecting fund managers, but lack of expense transparency prevents potential investors from holistically analyzing fund manager performance, which impedes the fund manager selection process and prevents the efficient allocation of capital.

Fund managers may also benefit from liquid secondary markets for previously illiquid assets by enabling the faster reallocation of funds to investments with higher expected risk-adjusted returns. Increasing data transparency may also drive decreased information asymmetries, particularly for retail investors, which may increase the flow of capital to disruptive companies with unmet financing needs that drive innovation and competition.

Democratized access to capital markets for SMEs

Accessibility also applies to the ability for small and medium-sized businesses (SMEs) to access capital markets. SMEs represent ~90% of businesses and ~50% of employment globally and are generally defined as businesses with less than 250 employees.¹⁴ However, bond origination is traditionally for deal sizes above $300mn, which inhibits access to capital markets by smaller-sized issuers.¹⁵ Despite the significance of SMEs in the global economy, private financing, such as private placements of equity or debt, are largely out of reach to all but the largest corporations and institutional investors, leaving 65mn firms with $5.2tn in unmet financing needs each year.¹⁶ Fractionalization, retail accessibility and reduced costs through operational efficiencies may provide SMEs with increased access to financing by increasing the potential investor and capital pools, enabling a more efficient allocation of capital and increased competition for incumbents in markets with high upfront capital requirements.

Democratized access to capital markets for artists

Let's say you want to produce an album or film. Artists once relied on record labels to provide teams of producers and audio engineers, manufacture physical records and distribute the physical records to retail stores. Improvements in inexpensive recording software and the shift from physical to digital distribution has led to a new generation of artists recording hits in their bedrooms. However, DLT/BCT, smart contracts, tokenization and fractionalization enable emerging artists to access capital markets by issuing tokens to source capital. Thousands of fans may purchase the tokens, providing the artist with capital, in exchange for future recordings or even a share of future revenue generated from the album, enabling musicians to self-finance projects and individual investors to invest in the future success of individual artists.

 Self-Custody

Outsourced custody limits functionality

Individuals buy assets like stocks but often overlook that an entity takes custody of that asset after purchase on your behalf. The inability to self-custody assets makes transferring that asset to your mom, for example, a time-intensive process that likely requires a small mountain of paperwork. Pledging equity holdings or other assets as collateral for a loan is also time-consuming and requires intermediaries.

Self-custody enables greater functionality

The ability to self-custody tokenized assets enables you to fractionalize that asset, transfer it and more easily pledge it as collateral in a DeFi protocol in exchange for a loan without the need for intermediaries (Exhibit 13). Individuals can obtain an overcollateralized loan through a DeFi protocol by pledging tokenized assets as collateral without the need for intermediaries like banks, which may reduce counterparty risk and interest rates for traditional lenders and borrowers over the longer term. Self-custody of tokenized assets also enables new assets, such as interest in a private equity fund or commercial real estate, to be more easily pledged as collateral.

See Appendix IV: Digital Asset Custody for a deep dive

 Smart contracts & robust information pipelines via oracles

Smart contract maturity enables disintermediation and unlocks functionality

Blockchains verify and process transactions in a decentralized manner before the transaction is packaged into a block of transactions and immutably recorded on a blockchain's ledger. Smart contracts are structured with an "if/then" framework, but the ability for (on-chain) smart contracts to access real-world (off-chain) data expands the possible "if" inputs and enables hybrid smart contracts, which may improve upon contracts as we know them.

Blockchains don't know the price of AAPL stock or the temperature

We view oracle networks as critical for next-generation DLT/BCT use cases like the tokenization or traditional assets. Blockchains, decentralized applications and tokenized assets require oracle networks to access real-world data (see our 2/16 report) like market prices, time of day, weather, GPS location, property and art ownership records, election outcomes and the creditworthiness of mortgages used for collateral (Exhibit 14). Connecting a blockchain to a real-world data feeds seems simple but providing the data in a decentralized and secure manner is far more complex.

We expect issuances of traditional assets in tokenized form to become the norm, but traditional assets and markets won't disappear overnight and some assets like gold and real estate are physical. Investors are likely to verify through oracle networks that an asset exists and is held by a custodian before buying a token representing ownership of that asset. Without the ability to verify an asset's existence, our view is that tokenization of pre-existing traditional assets would likely see adoption headwinds.

 And in the future, zero-knowledge proofs…

Zero-knowledge proofs (zk-proofs) enable counterparties to verify that certain data exists without exposing the actual data. Institutional investors frequently require transactions to be private and safeguard proprietary trading strategies and client information. Some asset classes like real estate primarily do not usually release investors' identities or commercial terms due to regulatory or compliance requirements. Individuals are used to showing their license as a form of identification when buying alcohol, for example, but would likely prefer to keep their address private.

However, data on public and permissionless blockchains is immutably recorded and transparent for the world to view and analyze. The ability to create private permissioned subnets on public and permissionless blockchains may mitigate some privacy and confidentiality concerns, but these networks are also likely to interact with ledgers that are public and permissionless. Zk-proofs remain a nascent part of the ecosystem, but we expect them to grow in importance in the near term.

 Bank Tokenization

   Banks are rapidly incorporating DLT/BCT & tokenization

Banks once mocked DLT/BCT and digital assets but are now the largest blockchain patent holders and increasingly integrating the technology to drive efficiencies and lower costs. Banks hold digital currencies and enable programmable payments but often do so by leveraging separate systems for digital ownership records, programmability and value transfer, illustrating the fragmented nature of today's financial systems. We expect banks to incorporate DLT/BCT infrastructure to enable 24/7 real-time settlement, driving reduced credit risk; lower financing, settlement and operational costs; and the ability to reallocate $4tn in funds held as collateral to investments in yield-bearing assets.¹⁷

 Banks remain the counterparty of choice

Our client conversations indicate that FTX's collapse may have slowed institutional investment and trading as they reevaluated counterparty risk and assured themselves that custody, exchange and broker-dealers were separate entities or siloed. However, hedge funds and asset managers continue to move toward token funds and trading. To the disappointment of the crypto purists, we expect traditional financial institutions, such as banks, to lead the trading of tokenized assets. Global investment banks await regulatory clarity before trading blockchain-native tokens on behalf of clients or offering digital asset custody services but are not waiting to leverage DLT/BCT or trade tokenized assets.

 Tokenization drives clearing & settlement efficiencies

What is clearing and settlement?

Clearing involves financial institutions processing financial institutions' payment messages, which include routing information and payer/payee identification, and compliance with AML/KYC requirements. Financial institutions validate the payment messages that they receive, either accepting or rejecting them. Settlement occurs when these financial institutions credit and debit their customers' accounts. Financial institutions must then settle among themselves, which involves the crediting and debiting of participating financial institution "master accounts" held at the Fed. The clearing and settlement process is similar to how nodes in the Bitcoin network process pending transactions before they are entered into the mempool to ensure that payers have the funds they intend to send.

 Real-time settlement produces benefits but there are tradeoffs

Many of the delays we experience when sending money today occur due to netting, or a deferred net settlement (DNS) process, where payment obligations are added and subtracted (netted) at the end of the day, instead of in real time. A real-time gross settlement (RTGS) process, which is what the FedNow system will implement, settles payment obligations in real time, but there are tradeoffs for both processes and faster isn't always better.

DNS vs RTGS - time to settlement and associated risks

A DNS process decreases liquidity risk relative to a RTGS process but increases credit risk and time to settlement. A RTGS process decreases time to settlement, credit risk and allows financial institutions to reallocate funds held as collateral to investments in yield-bearing assets. However, a RTGS process also reduces intra-day liquidity and, subsequently, increases liquidity risk, given that financial institutions must maintain adequate liquidity to settle the gross value of transactions at all times, including during non-traditional business hours like the weekend.

  Distributed (shared) ledgers produce efficiencies

Demand deposit tokenization (stablecoins) - banks to capture market share

We view digital currencies, such as stablecoins, which we view as tokenized demand deposits, and eventually central bank digital currencies (CBDCs), which we view as tokenized currencies, as a natural evolution of money and payments. Excluding algorithmic stablecoins like Dai (DAI), stablecoins are digital assets that are pegged to another asset class such as a fiat currency, like the US dollar, with the goal of maintaining a stable value. Stablecoins enable investors to reduce exposure to more volatile digital assets, lock in gains from trading and transfer funds between exchanges or between exchanges and wallets. Stablecoin adoption has picked up significantly over the past two years with transaction volumes reaching $2tn ytd through Q1 and $7.8tn in 2022 (Exhibit 15).

See Appendix V: What's the difference between CBDCs, stablecoins and tokens? for a deep dive

The $129bn stablecoin market is highly concentrated and some issuers have resisted audits, instead opting for attestations (Exhibit 16). Although stablecoins are largely backed by cash, cash equivalents, Treasuries and tokens, they remain unregulated, operate largely outside the financial system and require limited financial intermediation.

 TradFi jumps into the stablecoin market

Société Générale's digital asset arm SG-Forge issued its EUR CoinVertible (EURCV) stablecoin in Apr'23 to provide a tokenized cash leg for trades and to facilitate atomic settlement, which we view as more disruptive than it may appear, given that there is almost no market system that handles both cash and securities. EURCV is pegged to the euro with ownership immutably recorded on the Ethereum blockchain. We note that the EURCV stablecoin is available only to its institutional clients who were onboarded with the required AML/KYC processes, which limits disruption to stablecoin incumbents in the near term. Over the longer term, we expect individuals to be indifferent to which stablecoin they use, ultimately providing an opportunity for banks to capture market share by creating their own stablecoins.

We note that the data transparency provided by DLT/BCT allows us to see that maximum supply of EURCV is 10mn and that only one address holds the token, indicating that Société Générale has yet to launch the token for clients.

JP Morgan launched a stablecoin (tokenized demand deposit), called JPM Coin, which is backed by tokenized deposits from reserves held in its treasury with ownership recorded on its in-house private permissioned distributed ledger platform called Onyx. JPM Coin has been used by Goldman, BNP Paribas and DBS to settle transactions for short-term loans, primarily repos, but JP Morgan recently extended the token for corporate client payments.¹⁸ JPM Coin enables banks to lend assets without them leaving their balance sheets, which reduces liquidity risk, and to reduce settlement times to hours from 1-2 days.¹⁹ Other companies use the token to generate efficiencies for cross-border payments.  JP Morgan has committed to continue its tokenization of traditional financial assets after processing ~$700bn of short-term loans on the platform since its launch in 2020.²⁰

Goldman joined Onyx in Jun'21 and has swapped tokenized Treasuries for JPM Coin, which decreased time to settlement to 3 hours and 5 mins from days, as well as interest expense, illustrating the resulting benefits of tokenizing both legs of the trade.²¹

 Tokenized repos produce efficiency and cost benefits

Repos are short-term financing agreements in which a loan is collateralized with highly liquid securities, usually Treasuries, that are later repurchased at a premium. Traditional bilateral repo agreements typically rely on centralized (company-owned) financial systems with fragmented infrastructure. DLT and smart contracts create efficiencies for the repo transaction process by tokenizing the collateral after it is placed in escrow and by utilizing smart contracts for real-time and atomic (simultaneous) settlement.

Broadridge's Distributed Ledger Repo (DLR) platform (see our 2/14 report), which leverages the VMWare blockchain and Digital Asset's Daml smart contracts, achieved volumes of $1.4tn per month after launching in Jun'21 with initial volumes of $31bn per week, indicating significant adoption in a short period of time, but a drop in the bucket relative to the repo market's volumes of $10tn+ per day.²² The DLR platform, which was built on Broadridge's fixed income platform, enables the agreement, execution, and settlement of repo transactions on a single shared ledger that integrates DLT, smart contracts and tokenization, resulting in less expensive execution and speedier settlement.  Broadridge announced that its DLR platform enabled the first cross-border intraday repo trade in Apr'23, illustrating functionality that was not possible prior to the implementation of DLT.²³

  Active platform participants include UBS and Société Générale, which may see  cost savings of $1mn for every 100k transactions, with Broadridge expecting 10+ participants to be onboarded by year end. Broadridge's DLT-enabled platform is one of many recent projects in which traditional financial institutions leveraged DLT, smart contracts and tokenization, a trend that will likely accelerate, in our view. Other firms that have explored distributed ledgers for repo agreements include JP Morgan, Goldman Sachs, DBS, BNY Mellon and Banco Santander.

Tokenized LCs provide trade finance efficiencies

 Banks are leveraging DLT/BCT for short-term financing like repos, but are increasingly doing the same for tokenized debt issuances like letters of credit (LC), which are part of the trade finance market, to capture similar benefits.  For example, Citi India issued a tokenized LC in Apr'23 on the Contour Network, which leverages R3's Corda distributed ledger, for Cummins India, a diversified industrials manufacturing company, which enabled a 90% reduction in processing time to 3 hours from 5-10 days on average.²⁴ There are currently 100+ banks and companies who have joined the Contour Network, indicating the efficiencies and reduced costs that distributed (shared) ledgers facilitate.

Tokenized Bonds - repeat bank usage indicates potential benefits

 Bonds take six weeks to issue (time to market) on average and require 100+ individuals to complete 2,000 manual tasks.²⁵ However, tokenized bond issuances reduce time to issuance, resources required and manual tasks, decrease time to settlement to minutes from days, and facilitate automated interest payments, driving banks to accelerate adoption.

We note that the number of banks that have issued tokenized bonds is growing and more expansive than the examples listed below.

Société Générale has issued three tokenized bonds, which are listed on the Luxembourg Stock Exchange (LuxSE):

• A tokenized €100mn covered bond in Apr'19 on the Ethereum blockchain that was backed by home loans and settled in euros. The press release noted that tokenized bond issuances enable "product scalability and reduced time to market, computer code automation structuring…better transparency, faster transferability and settlement. It proposes a new standard for issuances and secondary market bond trading and reduces cost and the number of intermediaries."
• A tokenized €40mn covered bond in May'20 on an undisclosed blockchain and settled in CBDCs.
• A tokenized structured product in Apr'21 on the Tezos blockchain. The press release noted "unprecedented capacity of product structuration, shortened time-to-market, automated corporate actions, increased transparency and speed in transactions and settlements, as well as reduced cost and number of intermediaries."

Société Générale also experimented with DeFi applications in Jul'22, receiving a loan denominated in DAI, a stablecoin issued and managed by MakerDAO, a decentralized lending/borrowing application. The bank then used the MakerDAO loan to refinance its covered bond mentioned above.

The European Investment Bank (EIB) has issued three tokenized bonds:

• A tokenized €100mn 2-year bond in Apr'21 on the Ethereum blockchain, which was sold to third parties, in contrast to the Société Générale's bonds, which were sold to associated entities. The EIB partnered with Goldman, Santander and Société Générale, decreased time to settlement to one day from days and automated the overwhelmingly manual bond issuance process.
• A tokenized €100mn 2-year syndicated bond in Nov'22 on Goldman's private and permissioned DAP platform, which leverages Digital Asset's Canton network, and enabled real-time settlement in a CBDC. The bank partnered with Goldman, Santander, Société Générale and the Banque de France.
• A tokenized £50mn 3-year floating-rate bond in Jan'23 on HSBC's permissioned Orion platform, which leverages the Linux Foundation's Hyperledger blockchain. The bank partnered with BNP Paribas, HSBC and RBC Capital Markets.

BBVA has issued two tokenized bonds, although the first was a pilot:

• A tokenized $150mn syndicated loan in Nov'18 on the Ethereum blockchain in partnership with Mitsubishi UFJ Financial Group and BNP Paribas.
• A tokenized $10mn 2-year bond in Jul'22 on a private version of the Ethereum blockchain in partnership with the Inter-American Development Bank (IDB). The tokenized bond was listed on the BME stock exchange.

 AML/KYC - high costs and higher risks

Although not specifically a tokenization use case, we expect banks to increasingly leverage smart contracts to automate AML/KYC requirements. Onboarding customers is time-consuming and requires manual processes to ensure that all AML/KYC requirements are met. Two-thirds of compliance professionals at banks rely on manual processes to perform AML/KYC processes, increasing the chance of human error.²⁶ The process is also costly, given European banks with assets of €10bn+ spend €14.25mn per year on average to fulfill AML/KYC requirements, and inefficient, given that the same customer may have been approved numerous times by other banks.²⁷ Banks were fined $5bn in 2022 alone for AML/KYC violations, indicating the high risk of noncompliance.²⁸

We expect banks to increasingly leverage smart contracts and NFTs for decentralized identity to fulfill AML/KYC requirements, which may provide a better customer experience by decreasing the time required for onboarding, reduce the risk of violations and fines from human error and lower costs by automating some of the manual tasks performed by bank compliance departments.

 Currency Tokenization (CBDCs)

We provide a comprehensive discussion on tokenized currencies in our Currency (CBDC) Tokenization section but highlight inefficiencies driven by cross-border payments/transfers and bank-specific tokenization benefits below.

Cross-border payments/transfers: intermediaries, long settlement, high costs

CBDCs are tokenized currencies, which may reduce inefficiencies related to cross-border payments and transfers. Cross-border payments and transfers were estimated to have reached $156tn in 2022 and are expected to reach $250tn by 2027.^{29, 30} However, cross-border payments and transfers are heavily reliant on intermediaries and are routed through 2.6 different correspondent banks on average with 20% of euro-denominated cross-border payments requiring the involvement of 5+ correspondent banks.^{31, 32} Introducing intermediaries increases time to settlement to 2-3 days on average, but settlement can take up to 7 days, given banks only process transactions during operating hours.

The reliance on intermediaries also drives up cost, given that each correspondent bank charges a small fee for its services. As a result, cross-border payments can cost 10x more than domestic payments.³³ Banks deposit funds at correspondent banks to cover the maximum net obligation, which removes settlement risk, but this process prevents the efficient allocation of capital. Bank deposits locked at correspondent banks for prefunding are estimated to be $4tn.³⁴

Cross-border payments/transfer: no intermediaries, fast settlement, low costs

In contrast, CBDCs run on distributed (shared) infrastructure, which enables real-time settlement and a decrease in credit risk and transaction costs. CBDCs also remove the need to prefund accounts at intermediaries like correspondent banks, which enables the reallocation of $4tn in funds to yield-bearing assets.

  Corporate Tokenization

  Corporate DLT/BCT use cases are diverse and expanding

We view corporate DLT/BCT use cases as potentially more diverse and expansive than financial institution use cases. Corporates across every industry are increasingly leveraging the same underlying technology as financial institutions to drive efficiencies, decrease costs and generate incremental  revenue streams in the present and in perpetuity. However, corporates are also incorporating DLT/BCT-powered platforms and tokenization use cases to optimize supply chains, increase customer loyalty, combat counterfeiting and offset contributions to climate change.

Corporations are incorporating DLT/BCT & tokenization

 Blockchain-enabled applications pose a threat to mature industries, in our view. Many companies with the greatest risk of disruption, or that fear a loss of market share, are proactively exploring how to enter the digital asset ecosystem and leverage its many use cases.  The majority of corporate use cases are unaffected by token prices, exemplifying how DLT/BCT, digital assets and tokenization provide far greater utility than the speculative trading for which this disruptive technology is often associated. We expect most corporates to touch digital assets in some form within the next 1-3 years, even if it's just accepting tokens as payment for goods and services to expand customer pools.

Royalties, ticketing, loyalty programs, supply chains

Many corporate use cases leverage NFTs with embedded smart contracts to generate incremental revenue in the present and in perpetuity through the creation of royalty streams.  Companies like Nike, Dolce & Gabbana, Tiffany, Gucci, Adidas, Budweiser and TIME have sold NFTs and collect a percentage of secondary sales as royalty payments. Other companies, such as MGM, Flybondi and Sport Illustrated Ticketing, are using NFTs as tokenized tickets to events that include additional perks. Luxury brands like LVMH and Richemont are adding NFTs to luxury goods to tokenize them and provide supply-chain transparency. Pharmaceutical companies like Pfizer and AstraZeneca are tokenizing drugs to combat counterfeiting. Starbucks and Givenchy are leveraging NFTs to drive customer engagement. Still other like Walmart, Alibaba, Home Depot and Maersk are leveraging DLT/BCT and tokenization to optimize their supply chains.

 NFTs are far more than expensive JPEGs

Our view is that NFT use cases are likely to expand significantly over the next several years as financial institutions and corporates incorporate DLT/BCT and the importance of online identities increases. In fact, almost all the corporate DLT/BCT use cases that we discuss in this section leverage NFTs in some form. The artist Beeple sold his NFT titled "Everydays" at Christie's for $69mn in Mar'21, but we view NFTs as far more than expensive JPEGs with weird-looking images of birds and apes that sell for millions.

For example, ownership of a Moonbird NFT, like the one below, enables holders to access curated playlists on Spotify, a concept called Tokengating, illustrating how even "digital collectible" NFTs can include additional utility (Exhibit 17).

Tokenized royalty streams generate incremental revenue

TIME's focus on NFTs is certainly more than a gimmick, in our view. The NFT strategy has not only driven incremental revenue, but also produced the potential to generate revenue in perpetuity for both TIME and artists. Two TIME covers sold as NFTs for ~$400k each and 6,000 NFTs from the four TIMEPieces collections sold for 0.1ETH each. TIME sold Beeple's "TIME The Future of Business" cover for ~$320k, which was resold five months later for ~$2.4mn. Mike Winkelmann (Beeple) received 50% of the proceeds from the primary sale and 5% of the proceeds from the secondary sale with TIME also receiving 5%, exemplifying how smart contract-enabled NFTs can provide artists with royalty streams and bring them into the TIME community. We also expect the data collected to improve awareness of customer interests, which could increase the potential for community engagement, ultimately producing sticky subscription fees.

 Nike, Dolce & Gabbana, Tiffany, Gucci, Adidas, Budweiser and TIME have collectively generated $152mn+ in primary NFT sales and $104mn+ in secondary NFT sales through royalty streams across 142k+ transactions. Nike NFTs have seen over $1bn in secondary trading volumes.³⁵

 Operational efficiency, decreased cost, transparency

 California DMV to tokenize vehicle titles on a blockchain

The California Department of Motor Vehicles (DMV) plans to transform its vehicle title and transfer management system by tokenizing the 14mn+ automobiles registered in the state. The DMV will issue vehicle titles as NFTs with ownership immutably recorded on a private (forked) version of the Tezos blockchain through partnerships with Tezos and Oxhead Alpha, a digital-asset focused infrastructure company. Vehicle owners will be able to access real-time title issuance updates, initiate ownership transfers and verify vehicle ownership through a consumer-facing application.

 From weeks to issue/transfer vehicle titles to minutes

California DMV's project is another example of how companies, as well as federal and state agencies, are implementing blockchain-based solutions to increase efficiencies and reduce costs. The project may reduce the process of issuing and transferring vehicle titles to minutes from weeks, enable more secure ownership transfer through smart contract-enabled escrow accounts, decrease fraudulent activity related to cross-state sale of defective vehicles (lemons) and lower costs by automating some of the manual tasks performed by the DMV's 9k employees.

 FEMA leverages BCT to validate disaster relief applications and reduce fraud

Deloitte's Close as You Go (CAYG) disaster relief platform allows state and local governments to simplify, streamline and validate disaster relief applications and eligibility requirements for Federal Emergency Management Agency (FEMA) funds, while also reducing fraud. Deloitte's selection of the Avalanche platform (see our 12/10 report) highlights how corporations can leverage private permissioned blockchain subnets to increase efficiencies and reduce costs, while mitigating scalability issues and security risks. We note that other federal and state agencies are exploring blockchain-based solutions, including the Department of Homeland Security.

Still early innings - functionality to expand

Our view is that the California DMV and FEMA projects are a first step, but additional functionality could be added like the ability to record repairs within the NFT, use stablecoins as the payment leg for atomic title transfers and allow DMVs from other states to join the platform to realize similar efficiencies, as well as produce incremental efficiencies related to cross-state vehicle sales. Tokenization of vehicle titles could also enable fractionalized vehicle ownership, allow holders to pledge vehicle-title NFTs as collateral in the real world or within DeFi applications (see our 2/8 report and 2/10 report) and increase liquidity on vehicle marketplaces. We also expect a future state of the FEMA project to enable immediate disbursement of funds via stablecoins (tokenized demand deposits) or CBDCs (tokenized currencies) to disaster relief applicants at the same time approval is granted.

 Tokens as Payment

Accepting tokens as payments provides an on-ramp to the ecosystem

We expect most corporates to touch digital assets in some form over the next three years. Our view is that corporates are unlikely to set up digital asset wallets and add tokens to their balance sheets for diversification, to generate yield or to leverage decentralized applications. However, they may end up with tokens on the balance sheet that they received as payment and are far more likely to engage with other parts of the digital asset ecosystem once they already hold tokens. For example, TIME accepts dozens of token as payment, but holding tokens may ultimately lead the company to rotate into yield-bearing stablecoins or tokenized Treasuries. Companies like MoonPay provide an on-ramp for corporates to accept tokens as payment through widgets that are easily embedded into a company's website.

 Cash Management Solutions

Cash management solutions a prerequisite to broader acceptance of tokens

Corporates that accept tokens as payment, usually stablecoins (see our 11/23 report), must decide which to accept, which to hold and which to sell. However, the largest stablecoins do not distribute interest income to token holders, which prevents the implementation of traditional cash management strategies. We do not expect corporates to rotate from stablecoins into memecoins like SHIB or PEPE, nor do we expect them to rotate fully into BTC like MicroStrategy has done, but they may swap stablecoins or other accepted tokens for yield-bearing tokenized assets and funds, rather than immediately converting tokens to fiat currency as many do currently.

High-quality yield drives broader acceptance of tokens for payment

Our view is that tokenized assets like Franklin Templeton's BENJI and Ondo Finance's OUSG, which we discuss in detail in the Hedge Fund & Asset Manager Tokenization section, enable treasurers to generate a high-quality yield with adjustable levels of risk, driving additional corporates to accept tokens as payment and ultimately bringing them into the digital asset ecosystem. Tokenized assets for cash management enable corporates to implement traditional cash management strategies within the digital asset ecosystem.

Corporates are increasingly accepting tokens as payment to broaden the potential customer pool but must decide what to do with tokens upon receipt. Holding stablecoins received as payment reduces volatility, but it also forgoes earning a risk-free yield from investing in Treasuries or other high-quality liquid assets. Corporates may transfer stablecoins or other tokens into the fiat world, but the process is slow and expensive. Tokenized cash management solutions may allow corporates to implement similar cash management strategies in the digital asset ecosystem as they do in the fiat world.

 The next generation of ticketing

Tokenized flight ticket NFTs could accelerate

Flybondi, an Argentinian budget airline, began its Ticket 3.0 initiative, which includes tokenizing all flight tickets as smart contract-embedded NFTs, also known as NFTickets. Flybondi's decision to tokenize its tickets follows a partnership with NFT ticketing company TravelX, which provides a decentralized P2P marketplace for tokenized travel products and runs on Algorand's blockchain. NFTicket ownership is immutably recorded on Algorand, which enables ticket holders to sell, exchange, transfer or auction their tickets after purchase. TravelX partnered with Air Europa in Apr'22 and plans to tokenize tickets for 60+ airlines in the near term. We view Flybondi's Ticket 3.0 initiative as a natural evolution of ticketing after physical tickets and e-tickets (Exhibit 18).

Tokenized tickets reduce costs for airlines and customers

Flybondi's NFTickets may create efficiencies by reducing costs for the airline and fees for customers, which may also benefit from an improved experience. The initiative increases self-service capabilities related to buying, transferring and selling tickets, which may reduce operating costs by automating some of the manual tasks performed by an airline's customer service representatives. The reduction of manual processes may also lead to reduced service costs for customers. We expect increased self-service capabilities to be particularly well-received by customers as airlines like Spirit and Frontier charge customers as much as $25 for a customer service representative to print a boarding pass.³⁶

Incremental revenue through secondary sales and new distribution channels

Flybondi does not charge a transaction fee on primary ticket sales but receives a 2% fee on all secondary sales occurring on TravelX, which also receives 2%, illustrating how corporates can leverage tokenization to generate incremental revenue. Flybondi also has the option to receive a percentage of any profit generated on secondary sales and the ability to specify parameters within the smart contract. Ticket tokenization also has the potential to generate incremental revenue for the airline by producing new distribution channels. Primary sales still originate from the airline, but travel agencies and corporations may purchase tickets in bulk and sell or distribute NFTickets themselves, given the ability to price and seamlessly transfer ownership.

Tokenized tickets are more than just tickets

Tokenized ticket NFTs may drive incremental revenue, reduced costs and better customer experiences, but also enable the inclusion of perks. MGM partnered with YellowHeart, an NFT-based ticketing platform, to sell tickets for a JABBAWOCKEEZ dance performances in Las Vegas in Apr'22. The tokenized ticket NFTs acted as traditional tickets, but also provided holders with additional utility, including prime seating, food and drink credits and opportunities for meet-and-greets with the performers.

Platinum Group, which issues tickets for Formula 1 racing events, leveraged tokenized ticket NFTs for the Monaco Grand Prix in May'23 through a partnership with Elemint, a blockchain infrastructure company. Ownership of an NFT ticket is recorded on the Polygon scaling solution and settled on the Ethereum blockchain. NFT ownership provides access to the race, but also provides additional utility to holders, such as hospitality benefits and future race discounts to incentive customer loyalty, which we discuss in more detail in the next section.

 Supply Chain Tokenization

 Fragmented systems and lack of transparency drive inefficiencies

We expect supply chain tokenization to enable end-to-end transparency from the production of raw material to the customer, driving centralized data collection, which can be utilized to optimize shipping routes, identify bottlenecks, track the provenance of faulty goods or trace where a counterfeit item entered the supply chain. Supply chains globally rely on a complex web of centralized and fragmented systems. Flows of information, inventory and finances from banks, suppliers and retailers are delayed, prone to tampering and often stored within fragmented systems that are not interoperable, which limits efficiencies, interoperability, innovation and functionality. Intermediaries exist throughout the supply chain, increasing costs, particularly for cross-border trade (Exhibit 19).

Lack of traceability - lost revenue, preventable deaths, damaged reputations

 Our view is that reducing the flow of counterfeit goods is likely to save lives and enable corporates to capture billions in unrealized revenue. Supply chain inefficiencies inhibit traceability and prevent the detection of counterfeit items, which accounted for 3.3% of global trade in 2016 and reached ~$450bn in 2019.^{37, 38}

The global luxury market is estimated to have reached ~$1.5tn in 2022, but the counterfeit luxury goods market reached ~$293bn years earlier.^39, Buying a fake Louie Vuitton bag is a bummer but LVMH spends $17mn per year to combat counterfeiting.⁴⁰

Counterfeit drugs, which account for 10-30% of all medicine sold in developing countries, are estimated to be worth upwards of $200bn and result in approximately a million preventable deaths a year.^{41, 42}

Every year, 56% of food producers report one or more recalls, but recalling defective products takes 57 days on average. Each recall costs ~$10mn in direct costs and ~$60mn in indirect costs, such as lost sales and brand damage. Approximately 21% of consumers reported that they would avoid any product from a company following a recall, indicating the long-lasting damage to brand reputation.⁴³

Transparency is needed to generate efficiencies

Lack of transparency reduces the opportunity to optimize inventory management and shipping routes. It also prevents the detection of fraud and likely decreases the amount of trade financing provided by banks to suppliers for working capital. Lack of transparency prevents the detection of errors in real time resulting from manual processes related to inventory, invoices and payments and makes tracking illicit or faulty goods to the source a time-intensive process. We also note that tools to address these issues, such as audits, may identify missed payments, but can takes weeks, are backwards looking and do not drive optimized decisions, in addition to being largely manual processes and costly. Lack of transparency also prevents rapid resolution of disputes, which prevents companies from realizing revenue, the largest of which have $200mn on average pending from disputes.⁴⁴

Distributed systems and transparency drive efficiencies

We expect adoption of distributed (shared) systems among supply chain participants (banks, suppliers, distributors, retailers) to drive efficiencies and optimized decision-making, ultimately resulting in top-line expansion. By bringing connected but disparate data flows onto one system, loans, inventory, invoices and shipments can be tokenized and tracked in real time, which enables efficiencies, innovation and increased functionality. DLT/BCT incorporation may also drive a reduction in manual processes - products moved across borders often require review and approval by over 30 parties - and paperwork, which would decrease labor costs and lead to faster delivery (Exhibit 20).

 Not a thought experiment - companies are tokenizing supply chains

Similar to how competing financial institutions have formed consortiums to capture efficiencies and reduce costs by switching from company-owned infrastructure to distributed (shared) infrastructure, corporates are doing the same.

• Pharmaceutical companies, often competitors, are joining forces to increase pharmaceutical supply chain transparency and traceability. AbbVie, AstraZeneca, Bayer, GSK, Johnson & Johnson, Novartis, Pfizer and Roche are members of the PharmaLedger blockchain consortium. PharmaLedger leverages ConsenSys' Quorum distributed ledger platform and aims to improve the efficiency of clinical supply chains by digitizing the location of packaged medicine for clinical trials. The platform may also be used to increase the traceability of supply chains and to improve the accessibility of health data in a secure manner.
• Bayer, Gilead, Pfizer and Walmart are members of the MediLedger blockchain consortium.
• Companies within the transportation industry, such as Daimler, FedEx, Uber Freight and UPS, formed the Blockchain in Transport Alliance, which leverages Linux's Hyperledger distributed ledger platform and aims to improve supply chain traceability.
• Luxury good producers are forming consortiums to provide authentication, supply chain transparency and secure ownership transfers. LVMH, Mercedes-Benz, OTB, Prada and Richemont founded the Aura Blockchain Consortium, which leverages ConsenSys' Quorum distributed ledger platform and has since been joined by fifteen companies, some of them subsidiaries of LVMH and Richemont.

 Product Tokenization for Authenticity

 Incremental revenue and saved lives

We expect supply chain tokenization to drive increased transparency and traceability, enabling the ability to authenticate luxury goods and medicine, as well as appeal to ESG-focused customers and investors. Our view is that supply chain tokenization is a win-win for sellers of high-value items and pharmaceuticals. It is likely not cost effective to attach radio-frequency identification (RFID) tags to a bag of potato chips, but for luxury goods, as well as highly counterfeited items like medicine, the relatively small incremental cost of adding RFID tags or embedding NFTs is likely to drive incremental revenues, as well as increase customer trust.  Just tokenizing supply chains for pharmaceuticals could result in millions of lives saved this decade.

Real benefits - corporates generate revenue, efficiencies and reduce costs

DLT/BCT, digital assets and tokenization facilitate far more than speculative trading and financial infrastructure. Our view is that a disproportionate focus on bitcoin, memecoins and illicit activity have led some investors to underappreciate how this disruptive technology may enable corporates to generate incremental revenue and reduced costs from tokenizing their supply chains.

• Ant Group, a subsidiary of Alibaba, launched AntChain, a digital copyright services platform. Over 100mn digital records, including transaction details, copyright and property ownership certificates are uploaded to the ledger daily.⁴⁵
• Breitling became the first luxury watchmaker to offer NFTs as digital passports for its timepieces by leveraging Arianee's distributed ledger platform. The digital passport NFTs act as certificates of authenticity and can be used to track a timepiece's service history. Breitling also accepts select tokens as payment.⁴⁶
• Home Depot leverages the IBM Blockchain to increase supply chain transparency, increase efficiencies related to invoice processing and vendor payments and to reduce vendor disputes.⁴⁷
• Maersk has processed and optimized hundreds of millions of shipping events in partnership with IBM by leveraging DLT and the TradeLens platform.⁴⁸
• Mercedes-Benz leverages Acentrik's decentralized data sharing platform to monetize its supply chain data. Platform users are able to purchase the data but are only able to view calculated results and not the underlying data, which enables companies to monetize data while preserving privacy.⁴⁹
• Walmart leverages Linux's Hyperledger distributed ledger, in partnership with IBM, to increase the traceability of its supply chain for food products.  Walmart reduced the amount of time it takes to trace the provenance of mangos in the US to 2.2 seconds from 7 days and can use the ledger to identify the origin of a food-borne illness if an outbreak occurs.⁵⁰
•  Walmart Canada leverages DLT Labs' DL Freight platform, which is powered by Linux's Hyperledger distributed ledger, to increase the efficiency of its supply chain, specifically freight transportation. After six months of platform deployment, Walmart Canada processed 200k+ invoices, reduced invoice disputes by ~70% and reduced the time to approve carrier invoices to under 1 week from 6-8 weeks.^{51, 52}

Corporates are also generating incremental revenue by monetizing their data as data feeds for decentralized oracle networks like Chainlink.

• AccuWeather and the Associated Press monetize their data as data providers on Chainlink's decentralized oracle network. AccuWeather's weather data feeds decentralized parametric insurance products, which farmers can purchase to hedge against the risk of extreme weather events.⁵³

RFID tags devices are critical for corporate use cases and asset tracking

Our view is that supply chain tokenization is likely to produce efficiencies and reduced costs by lowering headcount, decreasing time to arrival, inhibiting counterfeit goods from entering the supply chain and optimizing supply chain routes. We expect corporates to continue tokenizing their supply chains by attaching RFID tags to shipments of goods, which we expect to drive real-time and immutable tracking data recorded on distributed ledgers and blockchains, reduced manual processes and human error. Pharmaceutical companies, such as Pfizer, GlaxoSmithKline, Purdue Pharma, Johnson & Johnson, are embedding many of their drugs with RFID tags.⁵⁴

RFID tags contain a microchip and an antenna and are essentially more advanced bar codes, but with the significant advantage of removing the need for manual scanning and increased functionality with IoT devices. These tags can be remarkably small and as thin as a sheet of paper. They can also be printed onto a good and not removable. We note that RFID tags are critical for how luxury brands are leveraging DLT/BCT for authenticity to reduce counterfeiting and to appeal to ESG-focused customers and investors.

The future (tokenized) process

In the not-too-distant future, a supplier may receive an order, which triggers a smart contract and an automated line of credit request. The supplier analyzes an increasingly large data set and selects the most optimal shipping route. Payment for the shipped goods is determined based on location or triggered automatically upon delivery to the distributor. A distributor scans the RFID tag and effectively takes ownership of the goods after ensuring that all goods originated from a known digital wallet address to mitigate counterfeit risk. The retailer scans the RFID tag upon delivery from the distributor, triggering an automatic payment. Every step of the process is recorded on a distributed ledger.

Automation through smart contracts creates efficiencies and reduces costs

All supply chain participants are likely to have reduced costs and/or generated incremental revenue in the example above. Suppliers and distributors are no longer concerned about lack of payment because smart contracts automate the payment process and are also likely able to decrease time to delivery by analyzing global data flows. Accounts receivable will likely be converted to cash faster, enabling reinvestment in capex or short-term liquid securities, which drives incremental revenue. Reduced time for delivery allows for retailers to meet customer demand for a product with adequate supply, which maximizes revenue, and provide ESG-focused customers with a good's provenance, which drives customer loyalty and potentially incremental revenue.

Reducing cost and time - returns are costly and time-consuming

Retailers may also leverage DLT/BCT-powered platforms and tokenization to optimize the returns process, which is a largely manual process that takes 2-3x longer than initially shipping an item.⁵⁵ By centralizing fragmented systems, retailers may be able to optimize the product's next route, either directing it to a warehouse located near stores where there is significant customer demand or directing it to a warehouse located near a landfill if the item is marked as defective.

Tokenizing supply chains may generate competitive advantages for retailers

Lack of transparency into a supplier's inventory, use of funds and outstanding obligations prevent banks from holistically analyzing credit risk and decreases the amount of financing provided by banks for working capital, particularly for SMEs in developing countries, 40% of which have unmet financing needs.⁵⁶ Our view is that improved transparency may incentivize banks to provide increased financing for working capital. As a result, banks may increase the quantity and size of loans, which drives incremental revenue, all else equal. However, tokenizing inventory may also reduce the need for banks to perform physical audits, which could lower a supplier's financing costs, resulting in competitive advantages if a supplier or retailer is able to lower cost for certain goods and services relative to competitors.

And just for fun…the intersection between DLT/BCT, tokenization, AI, IoT

Distributed ledgers and blockchains enable efficiencies on their own but unlock transformative insights that were not possible previously when combined with artificial intelligence (AI) and IoT devices. We expect the 1% of global data that is currently captured to increase significantly as systems leveraging DLT/BCT are increasingly adopted and incorporated, which will likely increase insights generated by AI far beyond human capabilities.

For example, the ability to analyze enormous data sets, including historical and future weather and ocean patterns, may facilitate decisions on the precise time of day that a specific shipping vehicle should hit the road, sea or sky. AI may even enable shipments to change course after departure if new data indicates a new optimal route. Adding IoT devices to shipping containers, in addition to RFID tags, could trigger alerts related to issues like refrigeration failure.

 Loyalty Programs

NFTs drive customer loyalty, provide valuable data and create community

Corporates are also leveraging DLT/BCT, tokenization and NFTs to introduce loyalty programs in order to drive customer engagement and communities, as well as generate incremental revenue. We expect brands across every industry to increasingly incorporate NFTs, which we view as tokenized loyalty programs, a trend that could accelerate as privacy rules are implemented around the world and third-party cookies are phased out. Thousands of NFT owners have connected their digital asset wallets to TIME.com, providing valuable data on what articles they read and what they own in their wallets, but the individual's identity remains anonymous. The data collected may improve a corporate's awareness of customer interests, which could increase the potential for community engagement, ultimately producing sticky subscription fees.

Transforming NFT buyers into loyal customers

TIME, which was previously known as Time Magazine, incorporated digital assets and NFTs into its marketing strategy, to drive customer loyalty, generate incremental revenue and increase engagement. Other media companies, including Fortune, Rolling Stone, The Economist and Vogue, have launched NFTs of past magazine covers, but TIME has taken the next step by transforming NFT buyers into loyal customers and community members by turning NFTs into loyalty cards with perks. In Sep'21, TIME launched TIMEPieces on the Ethereum blockchain, which included four NFT collections that spotlighted artists in the digital asset industry and provided NFT purchasers with perks like free access to TIME's website and invitations to exclusive events.

Corporate DLT/BCT use cases produce beneficiaries too

We expect corporates to leverage the private sector to integrate DLT/BCT into their processes. Salesforce launched its Web3 platform (see our 3/23 report) to provide companies with the front- and back-end infrastructure needed to create, issue (mint) and manage NFTs for tokenized customer loyalty programs. The launch follows a pilot that facilitated 275k transactions and included Mattel, Crown Royal and Scotch & Soda.⁵⁷ Salesforce is partnering with the Polygon scaling solutions, which provides low-cost transaction processing with settlement on the Ethereum blockchain.

Don't make it so complicated

Salesforce Web3 provides a simplified on-ramp to the Web3 ecosystem for both companies and customers. The platform enables companies to more easily develop NFT collections, sell them directly to customers from their websites and analyze sales data in real time. It also removes the technical complexity and knowledge required for customers by improving poor user experiences that create headwinds to adoption to the extent that customers may be unaware that they are leveraging a blockchain-based application. Companies like MoonPay, which we referenced earlier in this section, also remove complexity for corporates to accept payment in tokens for goods and services. Corporates that leverage MoonPay's solutions are able to accept tokens as payment without ever setting up a digital asset wallet or holding tokens.

Coffee with a side of NFT

Starbucks launched the beta test of its Odyssey rewards program in Dec'22, which intends to create a virtual "third place", or rather, a virtual space that fosters connection and community. An extension of the Starbucks Rewards (SR) program, the Odyssey rewards program allows members to participate in interactive journeys (games/virtual tours) related to coffee education and Starbucks history. By completing journeys, members earn Odyssey Points that can be exchanged for rewards and Journey Stamps (NFTs), which can be collected and traded. We view Starbucks NFT marketing strategy as a potential driver of customer engagement and top-line growth over the longer term.

Long-term opportunity to drive top-line growth

We expect rewards and the potential for financial gain to incentivize members to complete journeys, which may in turn drive SR membership and top-line growth. The Nifty Gateway marketplace has facilitated $2mn in Stamps secondary trading volumes since inception. Starbucks also has the potential to generate incremental revenue in perpetuity from royalty streams linked to these secondary sales.⁵⁸

Transforming the average customer into a loyal one

The Odyssey rewards program could drive customers to visit stores more frequently and to form communities, which provides an avenue to transform average customers into more loyal and profitable ones. Members may complete a journey by purchasing a signature beverage and, in return, earn Odyssey Points, which are redeemable for rewards like merchandise, access to exclusive events and international trips. Members may also form communities around Journey Stamps, which may act as tickets to exclusive events. We view Starbucks approach to Web3 as similar to TIME's and more holistic than the industry's previous forays into the NFT space.

Journey Stamp ownership recorded on a blockchain

Journey Stamps are unique digital assets that are minted (issued) on the Polygon scaling solution, which also records ownership, enabling holders to collect, trade, buy and sell their NFTs - a key Web3 benefit. The Polygon scaling solution increases the Ethereum blockchain's scalability and, ultimately, decrease its network congestion and costs (gas fees) by processing and aggregating transactions into blocks before they are periodically settled on Ethereum. We view Polygon's scalability, low cost and minimal energy consumption as the primary considerations driving its momentum for corporate NFT launches and use cases, including those from Adidas, DraftKings, Meta, MGM, Nike, Reddit and Stripe.

 Corporate Actions and Financing

Manual processes result in manual errors

The costs of corporate actions, such as issuing dividends or coupons, voting on significant issues, stock splits and dividend reinvestment plans, are not immaterial. Receiving a dividend may seem like an automated process from a stockholder's point of view, but corporate actions require time-consuming and manual processes across a company's back office that increase the time it takes for a dividend to pass from an issuer to an investor to 25 days. In fact, 60% of a back office's corporate action processes are automated, but 30% of corporate action costs are due to manual processes that result in human error. As a result, 70% of companies globally pay $2mn+ per year due to errors.^{59, 60}

Tokenized corporate financing provides benefits but remains early

Corporates are increasingly leveraging DLT/BCT infrastructure for short-term financing, such as letters of credit, but the issuance of high-value/low-volume financing products, such as corporate bonds, remain in early innings. Our view is that tokenized issuances may reduce the number of intermediaries required, increase connectivity between an issuer and investors, provide price transparency, increase liquidity and reduce costs, specifically for digital asset custody, which can be ~30% less than the cost of custody for traditional assets.

Democratized access to capital markets for SMEs

Accessibility applies to the ability for retail investors to invest in alternative assets, but it also applies to the ability for SMEs to access capital markets. Fractionalization, retail accessibility and reduced costs through operational efficiencies may provide SMEs with increased access to financing by increasing the potential investor and capital pools, enabling a more efficient allocation of capital and increased competition for incumbents in markets with high upfront capital requirements.

SMEs represent ~90% of businesses and ~50% of employment globally and are generally defined as businesses with less than 250 employees.⁶¹ However, bond origination is traditionally for deal sizes above $300mn, which inhibits access to capital markets by smaller-sized issuers.⁶² Despite the significance of SMEs in the global economy, private financing, such as private placements of equity or debt, are largely out of reach to all but the largest corporations and institutional investors, leaving 65mn firms with $5.2tn in unmet financing needs each year.⁶³

Some intermediaries are actually beneficial

It currently takes six weeks and over 100 people to complete the 2k manual tasks required to issue a bond on average.⁶⁴ However, we expect the operational and regulatory complexity related to the issuance of corporate bonds to create headwinds to adoption. We also note that the benefits of tokenized bond issuances for an issuer remain somewhat unclear, given that some of the intermediaries involved are actually beneficial. For example, investment banks provide AML/KYC procedures to issuers, reducing regulatory risk, and dealers take on the risks of market making, which indicates that the benefits of tokenized bond issuances may be tilted toward smaller issuers and investors.

Real tokenized issuance examples remain limited

Citi India issued a tokenized LC in Apr'23 on the Contour Network, which leverages R3's Corda distributed ledger, for Cummins India, a diversified industrials manufacturing company, which enabled a 90% reduction in processing time to 3 hours from 5-10 days on average.⁶⁵  Siemens issued a $64mn tokenized bond in Feb'23 on the Polygon scaling solution, which was sold directly to investors and removed the need for some intermediaries like dealers, and reduced time to issuance to 2 days from weeks.⁶⁶ However, we note that fiat currency was used for the payment leg of the trade, illustrating that tokenized demand deposits and tokenized currencies are needed to capture a greater range of efficiencies.

Tokenized equity issuances are similarly early and there are few, if any, large corporates who have issued tokenized equity. The St. Regis Aspen Resort in Aspen, Colorado, which is owned by Elevated Returns, tokenized and sold 19% of the hotel's equity to accredited investors in Oct'18 through a Regulation D offering and raised $18mn. We note that the offering had no bank involvement and instead leveraged the Tezos blockchain and the tZERO ATS for secondary trading of the ASPD token. The security offering also included perks to holders like discounted room fees, illustrating the potential for customization for security token offerings.

We also highlight INX Digital's approach to tokenized equity issuance, which includes a dual-listing of traditional and tokenized equity with each providing holders with a different call on cash flows. The INX token entitles holders to 40% of the company's cumulative adjusted operating cash flow, paid in US dollars or ETH, as well as discounted transaction fees on the INX trading platform, but does not entitle holders to voting rights.⁶⁷ The Chia Network also references the potential benefits of a dual-listing of traditional and tokenized equity in its whitepaper.⁶⁸

 Carbon Credit Tokenization

A viable path toward addressing climate change

Our view is that the  tokenization of carbon credits, which are digital representations of the reduction or removal of 1 metric ton of carbon dioxide emissions, provide corporates with a viable path toward reaching net zero and carbon neutral emission targets and may incentivize new carbon credit-producing projects. Ownership and origin of carbon credit tokens is recorded on a distributed ledger or blockchain, enabling corporates to purchase high-quality carbon credit tokens before permanently removing them from circulation to offset emissions.

 Tokenized carbon credits provide corporates with a near-term solution to addressing their contributions to climate change, but critics argue that encouraging corporate purchases of carbon credits to offset their carbon emissions does little to incentivize a reduction in carbon-producing processes. However, global carbon emissions reached all-time highs in 2022, indicating that carbon removal may be a necessary addition to longer-term efforts to reduce emissions organically (Exhibit 21).⁶⁹

The carbon credit market today is fragmented and inefficient

The carbon credit market today is inefficient, which prevents carbon credits from becoming a viable means for corporates to reach net zero targets. Carbon credit markets are fragmented and not accessible to institutional or retail investors, which reduces interoperability, liquidity and efficient price discovery. Limited pricing data for carbon credits is available and the same carbon credit may sell for vastly different prices depending on where it is sold. Over-the-counter (OTC) transactions rely on intermediaries, like brokers and marketing agents, to match buyers and sellers, which increases transaction costs by up to 20% and the time required for a transaction to occur.⁷⁰ The value of a carbon credit also depends on the project type, age/vintage and certification, but buyers are often left to perform due diligence.

Carbon credit tokenization a likely driver of corporate adoption

Our view is that the tokenization of carbon credits may address the shortcomings inherent within the current system. Interoperable liquid marketplaces that allow for retail access and trustless transactions may increase liquidity and price discovery, while removing the need for intermediaries may reduce transaction costs (Exhibit 22). The pooling of carbon credits prior to tokenization may also reduce pricing inefficiencies that result from the homogeneous nature of carbon credits.

Largest companies globally pledge to reduce or offset emissions

Corporate adoption of carbon credits to offset emissions is early but accelerating. Many of the world's largest companies, including Apple, Amazon, Walmart, Exxon and Saudi Aramco, have made net zero (no carbon emissions) or carbon neutral (carbon emissions offset by carbon offsets) pledges. Microsoft pledged to become carbon negative by 2030, remove all carbon emitted by the company since its inception in '75 and deploy $1bn to accelerate the development of carbon reduction and removal technologies.⁷¹ JP Morgan will invest $200mn to purchase carbon credits that represent the removal of 800k metric tons of carbon, which is equivalent to the annual emissions of ~160k cars.⁷² UBS, Boston Consulting Group, Swiss Re and Mitsui O.S.K. Lines formed the NextGen joint venture in May'22 and committed to fund 1mn+ metric tons of carbon removal by 2025, which will cost ~$200mn.⁷³ Alphabet, Meta, McKinsey, Stripe and Shopify formed the Frontier join venture in Apr'22 and committed to spend ~$1bn on carbon removal through 2030 (Exhibit 23).⁷⁴