Why Tokens Will Power the Next Wave of Financial Innovation
Date: 2024-10-16 Author: Oliver Abernathy Categories: CRYPTO PAYMENTS
The exchange-traded fund (ETF) market has grown from $1 trillion to more than $10 trillion in just two decades, and Bank of America expects it to reach $50 trillion by 2030. ETFs appeal to investors because they offer the ability to diversify portfolios like mutual funds, but with the liquidity of stocks and often lower fees.
ETFs are a financial technology that has made a variety of assets and strategies previously unavailable to most investors accessible. This can include everything from municipal bonds to foreign stocks to private credit. By reducing barriers and increasing flexibility, ETFs have fundamentally changed the way investors invest.
The history of financial innovation shows that new technologies improve access, reduce friction, and expand choice, often creating new markets. Mutual funds (1924) allowed investors to pool their money to invest in securities. The first credit card, the Diners Card (1950), opened the door to the consumer credit market. Discount brokerages (1975) made stock trading accessible to the general public, and online banking (1990s) made it much easier for people in remote locations to access financial services.
Each of these technologies started small and gradually penetrated the market. ETFs were initially perceived as niche products for individual investors, but today most new ETFs are active strategies. According to BlackRock, active ETFs will account for 76% of all U.S. launches in 2023, and are expected to reach $4 trillion in assets under management by 2030, quadrupling today’s $900 billion.
The success of ETFs is an example of Clayton Christensen’s “innovator’s dilemma.” When a new technology emerges, incumbents are often slow to adopt it, leaving room for new companies to seize the lead. Small retail investors were initially seen as unattractive clients by large players due to limited capital and an unwillingness to pay high fees, but this segment has grown thanks to technologies like ETFs and online trading.
Tokens, like ETFs, could further democratize finance. Despite the many myths and misunderstandings surrounding tokens, their primary purpose is to be containers for value. Like standard shipping containers, tokens can represent anything from stocks and bonds to art and intellectual property. They are accessible to anyone with internet access and can replace many traditional intermediaries by automating processes through smart contracts.
The first “killer” feature for tokens is the US dollar. Tokenized dollars, or stablecoins, allow users to easily move and store funds, using dollars for various financial transactions such as trading, getting loans, or investing in startups. Today, there are more than $150 billion in stablecoins in circulation, and the volume of transactions using them reaches trillions of dollars per year.
Like ETFs, tokens have the potential to create new markets and make financial products more accessible and flexible. Financial institutions that quickly adapt to this technology will become leaders, and others will be forced to follow or partner with innovators.
