Since its inception in 1851 by Western Union, the finance industry has experienced significant transformations in its operational frameworks and methodologies. The evolution from the introduction of the first money telegraph service to the advent of the Internet and mobile banking has revolutionised the landscape of financial transactions, particularly in the realm of cross-border payments. 

Cross-border transactions have experienced significant growth, with B2B cross-border transactions representing a Total Addressable Market (TAM) of US$39.4 trillion in 2023. Projections indicate that this figure is expected to reach US$56.1 trillion by 2030, reflecting a substantial 43 per cent increase.

Cross-border transactions have become a fundamental component of international trade and commerce. However, the industry’s slow uptake in fully embracing and integrating innovative solutions while sticking to traditional finance (TradFi) approaches is why cross-border transactions remain expensive, slow and inefficient.  

In a study conducted by Oliver Wyman and J.P Morgan among multinational corporations (MNCs), for a transaction volume of US$23.5 trillion, the cross-border transaction costs amounted to US$120 billion, with a long settlement period of two to three days. As such, it is unsurprising that one of the key goals of G20 is prioritising enhancing cross-border payments with a keen focus on improving transaction speed, cost, access and transparency. 

The challenges experienced can be attributed to the existing deficiencies in traditional financial approaches. The absence of interoperability among correspondent banking systems in various countries has led to the engagement of multiple intermediaries from different regions, time zones, and operating procedures.

Consequently, the lack of transparency and consistency among correspondent banks has resulted in delays and increased costs. Moreover, the absence of a uniform legal and regulatory framework across nations complicates compliance with regulatory standards, further prolonging the processing time required for cross-border transactions.

This is where Web3 comes in as a game-changer. 

Preventing another SVB-like situation: Why the shift to Web3 is necessary for TradFi institutions 

One of the potential models for TradFi institutions to overcome challenges faced in cross-border transactions is by integrating the technological solutions offered by Web3 technologies, particularly tokenisation. In the International Monetary Fund’s (IMF) 2022 Global Financial Stability Report, the IMF has found that DeFi’s nuanced approach to financial markets results in outstanding cost savings as compared to TradFi systems due to its strong ability to increase security and transparency, which decreases costs and long transaction times. 

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By utilising smart contracts and blockchain technology brought forth by Web3, the process of tokenisation involves the substitution of “individuals” or “institutions” with “codes”. This approach enables trustless transactions, where there is no reliance on any single party, permissionless execution and verification of transactions by any participant, and immutability of records once finalised, preventing any single entity from altering the state of the transaction. 

The largest bank run of Silicon Valley Bank (SVB) provides a strong testament to the importance of transparency. The failure of the bank can be attributed to several underlying issues, one of which pertains to the “liquidity gap.”

By tokenising both assets and liabilities, the bank would have been able to provide customers with immediate visibility into its reserves and capital, thereby assuring them that the bank was not insolvent and had not engaged in excessive leveraging. This, in turn, could have prevented the spread of panic through social media channels.

Beyond cross-border payments: Tokenisation also paves the way for greater access and inclusion

Tokenisation is set to reimagine the finance industry by shifting the way real-world assets are perceived and managed in the digital realm. Tokenisation essentially entails the conversion of entitlements to a valuable digital asset, whether tangible, such as real estate, or intangible, like intellectual property, into a digital token residing upon a blockchain.

These tokens, predominantly on decentralised platforms, symbolise ownership or a stake in the underlying asset, facilitating effortless transferability, divisibility, and ease of trade within Web3.  

The St. Regis Aspen Resort case offers a real-world example that showcases the untapped potential of tokenisation, especially in real estate investments. Real estate firm Elevated Returns took the unconventional approach of offering digital tokens representing equity (tokenising) to accredited investors. The low capital requirement, increased investor access, and high liquidity led to the resort’s price increase of 32 per cent with the investment growth.

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Now, consider the potential for replicating the achievements seen in the real-estate sector to other real-world assets, including infrastructure, financial assets and even intellectual property — the opportunity is endless. 

Tokenisation is now a rapidly expanding frontier reshaping the finance industry

While the Web3 market is currently facing a bear market, with Global Web3 Market Sales Revenue dropping from US$3.34 billion in 2022 to US$0.45 billion in 2023, there is a positive outlook for the expansion of real-world asset (RWA) tokenisation. The tokenisation of real-world assets is anticipated to grow at a rapid pace due to the vast opportunities presented by Web3.

Particularly noteworthy is the multi-trillion-dollar potential, US$16 trillion by 2030, of tokenising real-world assets. This growth is further supported by the increasing interest from private entities and government bodies in Asia, who are embracing RWA tokenisation and implementing new regulations to safeguard investors. As a result, the industry is poised for exponential growth in the upcoming years. 

The benefits of RWA tokenisation have led to a substantial accumulation of assets in the off-chain TradFi realm awaiting tokenisation. It is anticipated to significantly expand the DeFi landscape by enabling off-chain assets to be acknowledged on-chain.

This convergence of traditional finance practices with digitalised Web3 fintech approaches presents a promising opportunity for the financial sector to leverage the best of both worlds, paving the way for a more efficient and interconnected financial ecosystem. 

Asia is well-positioned to be the next frontier for tokenisation and will take the lead

With its vast and diverse population, advanced technological infrastructure, and progressive regulatory environment, Asia is well-positioned to take the lead in adopting and implementing tokenisation. For greater widespread adoption of RWA tokenisation, it is crucial for both private entities that work on overcoming technical challenges and government bodies that work on improving the regulatory barriers to come together to improve the ecosystem 

For instance, the Monetary Authority of Singapore is supporting the rise of RWA tokenisation by evolving the traditional regulatory framework to accommodate the unique characteristics of Web3 and RWA tokenisation. The regulators are now working with 17 financial institutions (FIs) to test promising asset tokenisation use cases which would scale the tokenised market in the city-state. 

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For private entities, apart from working on overcoming technical challenges such as bridging the decentralised on-chain (Web3) and centralised off-chain world seamlessly, increasing education and awareness through conferences, such as ONCHAIN 2024, is also vital in driving mainstream adoption and trust in the decentralised platform. Only through conferences that focus on advancing the exchange of knowledge and innovations on the intersection between TradFi and Web3 will we continue to see a boom in tokenisation and Web3. 

Web3 is the key to unlocking the multi-trillion industry of tokenisation 

The rise of Web3 in the Fintech industry cannot be dismissed as just another hype or cash grab. Its potential to unlock a multi-trillion dollar opportunity globally is evident in the increasing adoption and integration of decentralised technologies.

While there may be challenges and uncertainties in this new era of finance, it is clear that Web3 can revolutionise how we transact, invest, and manage our finances. As the industry continues to evolve and innovate, businesses and individuals must stay informed and adapt to these new developments to thrive in the digital economy.

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