Mapping the Leading Jurisdictions for Tokenization of Assets Today

Superstate May 21, 2024
Mapping the Leading Jurisdictions for Tokenization of Assets Today

This is Chapter 2 of our Book on Tokenization series, focusing on the jurisdictions where tokenization adoption is more prevalent. Stay tuned for future installments that delve deeper into the power and nuances of tokenization, or review Chapter 1 for a high-level summary of tokenization.

  • The United States currently leads in number of tokenization initiatives (34.8%), although regulatory challenges persist that threaten to dwindle this dominance.
  • Regulatory clarity, robust financial infrastructure, and institutional investor interest are the primary factors driving tokenization adoption.
  • Europe is emerging as a major tokenization contender. Germany’s finalized digital asset laws and the EU’s MiCA regulation provide significant regulatory clarity, while Switzerland’s crypto-friendly laws have enabled cities like Zurich and Basel to issue tokenized bonds.
  • City-states Hong Kong and Singapore lead the APAC region in tokenization experimentation and market share.

The tokenization of real-world assets is the creation of digital tokens representing ownership or a share in an underlying asset on a distributed network. This process can transform the global financial landscape by enabling more utility and composability of assets. By understanding the key jurisdictions at the forefront of this shift, stakeholders can identify opportunities, mitigate risks, and develop strategies to navigate the evolving regulatory environment.

In the following sections, we’ll explore the leading jurisdictions, including the United States, Germany, Switzerland, and Singapore, that are shaping the tokenization landscape through legislation and collaborative projects. We’ll also delve into the factors and challenges driving tokenization adoption in these regions, such as economic dynamics, regulatory clarity, robust financial infrastructure, strong blockchain ecosystems, and growing institutional interest.

United States

The United States currently dominates the jurisdictional landscape for asset tokenization, with 34.8% of all tokenization initiatives domiciled in the nation. However, regulatory challenges continue to mount and threaten this dominance. The recent approval of a Bitcoin ETF brought a cryptocurrency onto traditional financial infrastructure for the first time in the U.S. This development demonstrated both the potential and peril of blockchain adoption in the U.S.

The Bitcoin ETFs swelled at a record pace, indicating latent demand for exposure to the asset class. However, regulatory approval for the product was only granted after a decade-long dialogue with regulators and numerous rejections that necessitated a judicial challenge. There remain uphill challenges to not only provide U.S. investors exposure to cryptocurrencies but in enabling tokenization in the United States.

Persistence has thus far portended success for digital asset initiatives in the U.S. Within Congress, the effort is leading to tangible movement. For example, last week, SEC Staff Accounting Bulletin 121 (SAB121), an interpretation that made it economically untenable to custody cryptocurrencies, was struck down as an improper rule. While President Biden indicated he would not sign the measure, its passage from both the House and the Senate indicates general support in Congress. The Financial Innovation and Technology for the 21st Century Act, or FIT21, was finally approved on May 16, 2024, by the House Financial Services Committee (HFSC) and will move to a full House vote shortly. That being said, it remains unlikely to receive approval in the Senate as HFSC Chair Patrick McHenry, a staunch advocate for blockchain technology and cosponsor to FIT21, announced he will step down following the conclusion of his term this year.

Conversely, Senators Lummis and Gillibrand’s introduction of the bipartisan Stablecoin Bill represents a step towards establishing a clear regulatory framework for dollar-denominated stablecoins, which comprise 99% of this asset class. This move will hopefully reset banking sector engagement and provide clarity on the path forward. For instance, OCC has allowed stablecoin payments since early 2021 but has recently taken a more critical stance on oversight, custody, and servicing blockchain services. It has been reported that firms in the industry have difficulty opening new bank accounts, major banks that service the space are experiencing pressure to close existing accounts, and new banks focusing on servicing the industry have been denied. This collective pressure has sometimes informally been referred to as Chokepoint 2.0.

The United States also comprises a significant proportion of tokenized private debt. At the time of writing, tokenized U.S. Treasuries total over $1.25 billion and show no signs of slowing down. Notable tokenization projects and platforms in the U.S. include Securitize, which facilitated BlackRock’s BUIDL fund’s onchain migration, Franklin Templeton’s Benji, the second-largest U.S. Treasury tokenizer by volume of assets tokenized, and Superstate’s USTB, one of the fastest-growing tokenized U.S. Treasuries funds of 1Q 2024. These initiatives suggest a solid desire to tokenize in the U.S., highlighting the demand for tokenization solutions in the country.

Germany

With 11.4% of all tokenization initiatives inhabiting its jurisdiction, Germany is taking significant steps to establish itself as a leader in asset tokenization. The government’s support and initiatives, such as the recently finalized national digital asset laws, provide a clear regulatory framework for the jurisdiction.

Additionally, the EU’s passage of the Markets in Crypto-Assets Regulation (MiCA) laws has begun to offer greater regulatory clarity regarding digital assets. However, each European jurisdiction must enact national legislation to comply with the new MiCA regulation. Germany has massed the Kryptomärkteaufsichtsgesetz, or “KMAG” law, that allows German regulators to enforce compliance with the broader MiCA legislation.

Due to this comparative regulatory progress, the EU maintains a significantly higher proportion of digital assets custodied with its financial institutions than the U.S. This concentration is primarily due to United States regulation SAB121, which showcases Germany’s comparatively progressive approach to tokenization. Despite this concentration of asset custody, the jurisdiction is still in the experiment phase of tokenized bond issuance.

While state-owned KfW bank issued €20 million of tokenized bonds using a centralized security depository in 2023, it has plans for issuance with a decentralized depository in late 2024. Additionally, Liechtenstein-based LCX has tokenized €10 million worth of Euro-denominated bonds thus far.

Leading tokenization companies and infrastructure in Germany include Deutsche Börse and Tradias (a subsidiary of Bankhaus Scheich), both of which are helping to drive the adoption of tokenized assets in the region.

Switzerland

Switzerland accounts for 9% of all tokenized asset initiatives, partly due to its ongoing efforts to establish itself as a digital asset-friendly jurisdiction. The country’s regulatory environment has encouraged the issuance of independent tokenized bonds by cities like Zurich and Basel.

The nation is emerging as a leader when it comes to tokenized bond issuances sold on private markets. The Canton of Basel issued a 105 million CHF bond via the SIX Digital Exchange, while the Canton of Zurich and the City of St Gallen issued their own 100 million CHF bonds. The City of Lugano has thus far issued two 100 million CHF bonds, one maturing in 2029 and the other in 2034, demonstrating a reliable trend of testing public debt tokenization in the jurisdiction.

Swiss privacy laws, robust financial regulations, and an established reputation as a leading economic hub have been significant drivers for the growth of tokenization in the jurisdiction. The city of Zug, known as ”Crypto Valley” since 2017, has emerged as a significant tokenization hub and ecosystem, attracting many blockchain and tokenization projects. Ethereum was launched from Zug in 2015, and the city domiciles over 500 crypto companies, including Bancor, Backed Finance, and Polkadot.

Singapore

Singapore has taken an increasingly progressive stance on digital assets and tokenization. The country’s 8.5% proportion of all tokenized real-world asset companies and initiatives is partly supported by its leadership in Project Guardian, a multi-year collaborative effort exploring tokenization in the financial industry.

While no tokenized bonds are publicly listed on the Singapore Exchange at the time of writing, the jurisdiction has actively promoted regulatory clarity for tokenization. The Monetary Authority of Singapore (MAS) is working on the Global Layer 1 (GL1) blockchain initiative and fund tokenization regulation. These initiatives have positioned it as a critical player in the Asia-Pacific region, attracting global interest in its tokenization ecosystem.

These key jurisdictions are continually shaping the global tokenization landscape. As the demand for tokenized assets grows, these countries will likely play an increasingly important role in driving adoption and innovation. Notable tokenization companies in this jurisdiction include Matrixdock, Libeara, and DigiFT.

Hong Kong

Hong Kong has recently emerged with an aggressive approach to accommodation in an effort to establish itself as a technological hub for asset tokenization. While only domiciling 2.5% of all tokenization companies and initiatives within its jurisdiction, it has made significant progress toward regulatory clarity and tokenization milestones.

The tokenization of an 800 million HKD green bond kicked off the trend, and shortly thereafter, HSBC issued the first multi-currency tokenized bond, settleable in HKD, CNH, USD, and EUR, totaling $766.8 million in total value.

The recent passage of Bitcoin and Ethereum ETFs, the latter being the first in the world, from Hong Kong signals an increasing desire to endow the city-state with a comparative advantage for digital assets. HSBC additionally allows retail investors in Hong Kong to purchase tokenized gold custodied in its London vault, demonstrating the slow percolation of tokenized assets issued in this jurisdiction into the broader retail mark.

United Kingdom

The UK, home to 3.5% of all tokenization initiatives and companies, has emerged with forward-thinking tokenization policy driving further adoption in the jurisdiction. The jurisdiction’s Financial Services and Markets Act (FSMA) regulatory sandbox allows for broad participation by multilateral trading facilities and central securities depositories compared to its European Union counterpart.

Additionally, the UK’s Regulated Liability Network (RLN) is an ongoing initiative to determine the optimal configuration for programmable money issued by nation-states and central banks. The initiative recently selected Corda, the leading private blockchain of established firm R3, and Quant, a popular British DLT firm, as dedicated technology partners.

UK-based real estate DLT startup Coadjute additionally leverages tokenized settlements to decrease real estate transaction times, having courted two major real estate agencies in the country, Foxtons and The Property Franchise Group. The UK government continues to urge companies and firms to experiment with tokenized assets, including securities, within its sandbox.

Economic Dynamics

Economic dynamics such as capital accessibility, economic stability, and robust technological infrastructure all play a crucial role in tokenization adoption. Comparatively strong and stable economies provide a solid foundation for growth, and these nations are actively seeking ways to leverage tokenization to drive innovation, attract investment, and stimulate economic development.

Regulatory Clarity and Support

Regulatory clarity is essential for incumbents to interface with tokenization confidently. Europe’s MiCAR laws and Singapore’s Project Guardian demonstrate the commitment of these jurisdictions to create an environment conducive to sustainable asset tokenization initiatives.

Robust Financial Infrastructure

Leading jurisdictions have well-established financial systems, including secure payment networks, efficient settlement mechanisms, and reliable custody solutions. These infrastructures provide a solid foundation for integrating blockchain technology, and the presence of experienced financial institutions and service providers supports tokenization experimentation and growth.

Robust Blockchain and Crypto Ecosystems

The nations leading the asset tokenization charge are defined by a high concentration of talented developers, entrepreneurs, and established companies working on cutting-edge blockchain solutions. Existing digital asset communities, industry and trade associations, and educational institutions foster collaboration, knowledge sharing, and innovation in asset tokenization. For example, the Canton of Zug in Switzerland has contributed nearly 40 million Swiss Francs to the University of Lucerne for blockchain research. At the same time, Cornell’s Emin Gün Sirer founded the Avalanche blockchain network.

Institutional and Investor Interest

A significant driver of tokenization adoption is the growing interest from institutions and investors. Financial institutions, asset managers, and high-net-worth individuals in these regions increasingly recognize the potential benefits of tokenized assets, such as increased liquidity, faster settlement, and fractional ownership. The involvement of respected institutions, such as BlackRock and UBS, in tokenization initiatives validates the market and attracts further interest from other players.

These factors collectively contribute to the adoption of tokenization in the United States, Germany, Switzerland, Singapore, and other leading jurisdictions. The combination of favorable economic conditions, regulatory support, robust infrastructure, strong ecosystems, and institutional interest creates an ideal environment for the growth and maturation of the tokenization market in these regions.

Key jurisdictions, including the United States, Germany, Switzerland, and Singapore, are shaping the regulatory landscape and fostering the growth of tokenized assets through supportive legislation and collaborative projects. Despite an ongoing lack of regulatory clarity in the United States, there continue to be initiatives gaining traction, and the building blocks that will form the foundation for tokenized assets are taking shape globally.

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