The merger between decentralized finance (DeFi) and traditional assets has been hampered by a lack of infrastructure and regulatory standards around the world, according to sources Cointelegraph spoke to recently.
“There just weren’t good systems in place at an institutional level for these companies to engage. It’s clear that they’re not just going to run their entire system using a regular blockchain wallet and centralized exchanges,” said Colin Butler, Global Head of Institutional Equity at Polygon.
Tokenization is a path to fractionation that allows more people to own a portion of an asset that would previously have to be sold as a whole for a higher value. Big Four PwC predicts global assets under management will reach $145.4 trillion by 2025, a huge market expected to welcome more investors and 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 scalable,” Butler said.
Polygon said it works with many of these global players. In January, investment firm Hamilton Lane announced the first of three tokenized funds backed by Polygon, putting some of its $824 billion in assets under management on 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.
We are excited to share that a portion of our recently closed Equity Opportunities Fund V is now available to qualified investors through a new @Secure feeder fund tokenized on @0xPolygon. More information: https://t.co/ZxfaNJwgBx pic.twitter.com/4SOezI2Ma2
— Hamilton Lane (@hamilton_lane) January 31, 2023
Another example is JPMorgan. In November, the American giant made its first cross-border DeFi transaction on a public blockchain. This initiative was part of a pilot program exploring the potential of DeFi for wholesale finance markets. The trade was also made on the Polygon network.
Despite recent progress in integrating DeFi into traditional markets, regulatory uncertainty continues to prevent many from adopting the new technology. One main question on this topic is: What are securities? The United States Securities and Exchange Commission was enforcement through enforcement actions that the definition may cover 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 it?”
Jez Mohideen, co-founder and CEO of Laser Digital – the crypto arm of Japanese banking giant Nomura – believes the lack of regulation is affecting risk management of digital assets by preventing firms from effectively separating units and business models.
“More regulation is particularly necessary in certain parts of businesses – for example, ensuring that capital is looked after by individuals with fiduciary duties. As more and more regulatory measures of this nature come into play, there will be an increasing amount of institutional interest,” he told Cointelegraph.