Tokenization seen to boost alternative investments, market liquidity

Economies could attract more liquidity to alternative investments beyond traditional stocks and bonds through tokenization, a practice that is now being tested in the Philippines, Moody’s Analytics says.

In a commentary, the unit of Moody’s Group says tokenization—or the process of converting a traditional asset into a digital token that is storable and transferable using blockchain technology—can help develop a liquid secondary market for alternative assets.

Some examples of alternative assets are hedge funds, private equity, venture capital and private debt investments as well as real assets such as real estate, infrastructure and natural resources. While they have grown popular among investors, these assets often have large minimum investment requirements, as well as liquidity constraints that lock up capital for extended periods.

Moody’s also says these investments often lack transparency.

”Blockchain networks could offer a clearer view into the relatively opaque world of alternative assets, thanks to token holders’ real-time information on their tokenized assets,” the think tank says.

”Additionally, tokenization, through fractionalized ownership, would lower barriers to accessing certain types of alternative assets, making these illiquid assets much easier to trade,” it adds.

“As secondary markets develop and the investor base widens, alternative assets could become much more liquid.”

Some economies have already explored the tokenization of assets, including the Philippines.

In late 2023, the government raised P15 billion from its maiden sale of tokenized Treasury bonds, which were sold in the form of “digital tokens” that would be maintained at the bureau’s Distributed Ledger Technology (DLT). The tokenized bonds were offered to institutional investors, although the state is also looking at tokenizing Retail Treasury Bonds to attract small creditors.

The issuance made the Philippines among the countries that have included tokenized bonds in their menu of debt offerings. In February, Hong Kong raised 800 million Hong Kong dollars from its maiden sale of tokenized green bonds.

While other well-known use of blockchain technology like cryptocurrencies was met with caution, the tokenization of real assets like debt and equity instruments is seen as a huge step in democratizing financial markets.

”Efficiencies gained through tokenization, such as lower issuance costs, could translate into higher returns for investors,” Moody’s says.

Moving forward, Moody’s says the integration of artificial intelligence (AI) could also amplify the advantages of tokenization.

“The combination would enhance market analysis and decision-making, where AI’s prowess in parsing extensive market data and trends can significantly benefit investors in the tokenized asset space,” it says.

“Assets like real estate, art and private equity could be evaluated with a depth previously unattainable, allowing for more nuanced investment decisions.”