After our deep dive into the tokenization industry mapping last week, a change of pace is in order. Instead of focusing on micro-level transaction data aggregation, let’s take a step back and survey the whole tokenization market to understand what is happening across the various commercial application spectrum.
Apart from our usually talked about onchain tokenization of securities market, there are 2 other tokenization big verticals that are seeing traction.
Tokenized money (stablecoin, intra-bank, inter-bank and unified deposit ledgers)
Tokenized consumer goods
In this week’s newsletter, I will take you on a tour to look at examples of commercial applications leveraging the tokenization technology and their traction numbers.
Tokenized Money
Stablecoin
The most prevalent and well known form of tokenized money today is the stablecoin issued by private enterprises such as Tether and Circle.
What traction have we seen with them? Well according to the latest figures from Circle, in 2022, global stablecoin settlement exceeded $7 trillion compared to $14 trillion settled at Visa and Mastercard. Not bad for a market that barely existed 3 years ago.
Unlike volatile crypto assets, stablecoins offer a store of value and method of payment solution to missions of users worldwide.
The business model of a stablecoin issuer has never been more profitable. When a user makes an USD deposit with Tether or Circle, the two issuers create a corresponding amount of tokenized money (stablecoin) on a blockchain and send it to the user’s wallet.
While the tokenized money gets used in the crypto world, the USD deposits sitting in issuers’ bank accounts are being deployed into various financial assets generating a yield for the issuers.
With the short term US rates at decade high, the issuers are being given permission to print money. Tether reported $1.48 billion in net profit for Q1 2023. By comparison, BlackRock, world’s biggest asset manager with $10 trillion AUM, made $1.16 billion in net income in Q1 2023.
Tokenized Deposits
While stablecoins issued by private enterprises are a good solution for store of value and payment for crypto natives due to a lack of competition from big financial players, they are not appropriate for banks to rely on given the lack of regulatory clarity and risks associated with them.
However banks are also interested in the benefits that tokenized money has to offer. The best known example is JPMorgan’s JPM Coins that represent tokenized money in its internal systems.
Today payments on banking rails are conducted through messaging via SWIFT, with the banks each updating their ledgers (databases) separately upon sending/receiving actual payment values. Using distributed ledger technology, the messaging and the settlement are unified and expedited, reducing the extensive reconciliation process. Of course instant settlement is preferred.
JPM Coin is designed so that JPMorgan’s institutional clients can send and receive money instantly with other qualified JPMorgan account holders. In this sense, JPM Coin is a form of tokenized intra-bank money. It improves on the current banking settlement rail through instant settlement finality no matter your geography or time zone. To date, there has been over $300 billion in transactions on the JPM Coin network.
However, a client who has a bank account at JPMorgan and another bank account at a different bank cannot instantly transfer money across banks and jurisdictions. Tokenized inter-bank money is needed on top of tokenized intra-bank money. See JPMorgan’s own table describing different types of tokenized money.
There are two forms of tokenized money that link up individually tokenized intra-bank deposits.
First, two or more tokenized intra-bank deposit ledgers can interact if they themselves are linked up through a shared ledger. Two examples of this are Partior and Regulated Liability Network. Both are still in the early stage of deployment. However, both have attracted interests from heavy hitters such as the JPMorgan and Federal Reserve Bank of New York.
Second, instead of multiple individual bank ledger systems linking up with each other, there can be a single network with enough buy-in from biggest players that all financial institutions onboard on to.
For example, Bank of International Settlements posited a concept called Unified Ledger that links up individual ledger systems to enable a seamless flow of value transfers. There are two likely paths forward from this: CBDC or tokenized wholesale bank deposits. Both are in the early stage of research and development.
Tokenized Consumer Goods
While financial adoption of tokenization is getting a lot of attention, it is the tokenization of commerce that will bring more immediate mass adoption and higher margins.
Consider Louis Vuitton’s ultra limited edition collection Treasure Trunks. Released in June 2023, it is a collection of a few hundreds of digitally created LV Trunks. Owners are to be given exclusive access to limited future products and experiences, both physical as well as digital.
With $82 billion in 2022 revenue and millions of customers worldwide, Louis Vuitton’s brand cache in the luxury industry is as powerful as its distribution is far reaching.
Unlike RWA tokenization where we must have offchain assets before we can tokenize to create onchain representations, these trunks are designed digitally and born directly onchain.
A physical LV handbag that sells for $3,000 in a retail store may have a cost base of $1,500, accounting for the material used, general sales & marketing etc. By comparison, a digitally born LV trunk that sells for $40,000 may have a cost base of $200 each accounting for IP and marketing spend.
In total, 122 Treasury Trunks were bought or “minted”, generating close to $5 million in revenue for Louis Vuitton in a few hours. Each holder has exclusive rights to purchase more digitally created items in the future. Though LV has promised to also make physical versions of digitally purchased items. Not bad for a starting point that will lead to more sales. Even better as a branding and customer relations building tool.
Not only is the margin on digitally generated goods astronomically higher than that of physical goods, the experience and relationship with customers can be far more intimate and personalized.
As an example, the popular athletic footwear and apparel brand, Nike, has generated more than $200 million revenue by acquiring and leveraging the CloneX, an onchain digital identity/fashion project that collaborated with the famous Takashi Murakami. The product offered different individual onchain avatars along with customizable apartments as well as exclusive apparel and footwear items that drew upon Nike’s IP.
Verified holders of CloneX were organised and aggregated inside a single communication channel where they were in direct communication with creators. This highly engaged form of customer relationship has been the holy grail in retail but rarely achieved.
Nike’s CloneX endeavour successfully experimented with a new form of product distribution, consumption and experience by tapping into the intersection of culture and fashion. Nike’s competitor, Adidas, had a similar experience with its Bored Ape x Adidas collaboration.
A key commercial innovation that drove the project's success was the programmatically enforced royalty function embedded in the tokenized form of its IP. Every time a CloneX token is bought or sold, think of it as buying or selling a highly sought-after sneakers, a royalty % is sent to Nike.
This ease of transfer of these digital items fostered a vibrant secondary market which in turn contributed to robust demand in the primary market for even more digital item launches.
This is very different from a secondary market in physical consumer goods. Louis Vuitton does not get any royalty from customers buying and selling its handbags with each other nor is it able to have visibility on volume, price and authenticity of goods exchanged.
Blockchain technology in commercial uses has demonstrated promising traction in distribution, customer engagement, authenticity verification and royalty revenue areas. I fully expect luxury brands to take the charge in spearheading the effort to harness the power of tokenization as a new revenue unlock as well as extending authenticity control of its products.
Conclusion
Whilst onchain securitization of assets has been the driver of tokenization newsreel and much of the excitement in the market, there are many other commercial applications for tokenization.
From consumer goods to inter-bank deposits, each vertical has its own specific use cases and challenges. No matter which application we focus on, most are still in the early pilot and learning phase. However as the broader conversation of crypto adoption moves forward with the market size and maturity, more and more implementations will come to market.
Keeping an eye on the market and staying well informed so you don’t miss out on the early success stories would be a key to building your own project or product as well as understanding how to allocate your resources. And of course, I will be covering them in the Crypto Adoption Curve newsletter. Subscribe and stay tuned.
Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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