Real-world asset tokenization lacks infrastructure, not just regulation

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

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

Tokenization is a path to fractionation, which allows multiple people to own a portion of an asset that would previously have had to be sold as a whole at a higher value. Big Four firm PwC predicts that global assets under management will reach $145.4 trillion by 2025, a massive market that is expected to welcome more investors and thereby improve asset liquidity through tokenization.

Institutional investors — those who manage that capital around the world — are looking for “services that work well with what they’re already doing, that are easy to implement, flexible and upgradable,” Butler said.

Polygon said it has worked with many of these global players. In January, investment firm Hamilton Lane announced the first of three tokenized funds backed by Polygon, bringing part of its $824 billion in assets under management onto the chain. By tokenizing its flagship Equity Opportunities Fund, Hamilton Lane was able to lower the minimum required investment from an average of $5 million to $20,000.

Another example is JPMorgan. In November, the American giant conducted its first cross-border DeFi transaction on a public blockchain. The initiative was part of a pilot program exploring DeFi potential for wholesale funding markets. The trade was also carried out on the Polygon network.

Despite recent progress in integrating DeFi into traditional markets, the lack of clarity regarding regulation continues to prevent many from embracing new technologies. A main question on this topic is: What are securities? The United States Securities and Exchange Commission has argued through enforcement actions that the definition may apply to a wider range of assets and services than many crypto firms expected. As Butler asked:

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

Jez Mohideen, co-founder and CEO of Laser Digital – the crypto arm of Japanese banking giant Nomura – believes the lack of regulation affects risk management of digital assets, as it prevents firms from effectively separating entities and business models.

“More regulation is particularly needed in certain parts of businesses – for example, ensuring that capital is safeguarded by individuals with fiduciary responsibilities. As more and more regulatory enforcement of this nature comes into play, there will be an increasing amount of institutional interest, ” he told Cointelegraph.