Archax, Tokenization & the Underserved Institutional Demand for Blockchain
Archax, Tokenization & the Underserved Institutional Demand for Blockchain
This week we discuss how London-based, FCA-regulated digital asset exchange Archax is meeting the underserved institutional demand in blockchain for exposure to tokenized assets – a market set to be worth trillions - as the world’s previously untapped assets begin to move on digital rails for the first time.
Traditional Capital Markets are in Need of an Upgrade
Ark Investments projects the global cryptocurrency market cap to exceed $3tn by 2025 and other estimates are even higher. Yet to date, this has been driven primarily by retail investors and cryptocurrencies, rather than broader capital markets, tokenized securities or other real-world-assets (RWA), which represent a substantially larger market opportunity in the near future ($16T according to BCG).
But institutional investors are rapidly realizing the inefficiencies in traditional capital markets, which despite appearing exceedingly digital externally… are often quite slow on the backend (with things like post-trade settlement often taking 3-5+ days), more analog than most would believe (creating excess points-of-failure), and a mess to audit and manage (compliance is an intensive, manual process). All of which requires lots of overhead and oversight, at significant cost.
Hence, digital assets and digital securities - which trade globally, 24-7, with nearly instantaneous settlement, enforced by smart contracts (which are easily auditable, en masse) - represent a massive opportunity for financial institutions; a recent report by 21.co projects that even in the worst bear case, which we think is quite unlikely, tokenization represents at least a $3.5T opportunity by 2030.
Massive, Underserved Institutional Demand
And institutions are already rushing to establish exposure to digital assets and securities to meet the growing demand. Unfortunately, they have been notably underserved. The limited institutional offerings that exist to date have provided only piecewise solutions, often neglecting the full life cycle of digital assets & securities to focus on only trading or custody.
This creates a massive opportunity to meet the underserved demand from institutions worldwide looking for a reliable, regulated, safe, and transparent solution in an institutional-grade package, that allows them to access the power and efficiency of digital assets & securities.
And that’s where Archax comes in, and why we were so excited to participate in Archax’s $28.5M Series A round in late 2022, led by UK asset management giant Abrdn (>$600B in assets).
Archax: The Regulated Gateway to Digital Markets
Archax is the first ever global cryptocurrency & regulated digital asset ecosystem built with institutions in mind, which allows institutions to access digital assets in a fully regulatory-compliant manner, all in one place. Founded in 2018, Archax is the only digital securities exchange regulated by the Financial Conduct Authority (“FCA”) in London and has secured coveted FCA brokerage, custody and virtual asset service provider permissions (a rare trifecta).
By servicing all parts of the value chain, from primary raises to trading, custody, exchange and settlement, Archax is positioned to service the whole trading lifecycle, and consequently, its total addressable market far exceeds niche competitors operating in a single vertical. Archax is also built to accommodate digital securities, existing traditional securities and cryptocurrencies, allowing them to serve both new and existing market demand in a single, comprehensive, regulatory-compliant solution (as seen below).
Digital Assets & RWA: A Growing and Investable Market
Commerce is digitalizing, and we’re already seeing it proven out that the world’s assets will eventually all travel on tokenized rails (which are faster, cheaper, more secure, and more transparent). And at its core, the digitalization of assets, or the process known as “tokenization,” represents a multi trillion-dollar opportunity, as a larger share of the world’s physical assets become tradable in digital form.
This includes assets which have some current digital aspect, such as gold ($9.1tn) and stocks ($109tn), but also extends to other hard and/or illiquid assets such as real estate, art, and public debt ($800T+). Even things like depreciation streams on property, equipment or capital assets could be tokenized, creating a whole new world of financial tools and products based on assets and forms of value thought previously intangible, immeasurable or illiquid.
In theory, the total addressable market represents nearly all real-world assets, as the term RWA implies. Which is why Blackrock CEO, Larry Fink, (who in 2017 called Bitcoin an “index of money laundering”) now sees tokenization as the “next generation for [all] markets.” As such, regulated offerings have an opportunity to secure large portions of the emerging global market for digital assets and securities.
Leading the Race to Tokenize the World’s Assets
Given the unique value proposition Archax brings to institutional players, it’s no surprise that Abrdn, one of the world’s largest institutional investors, led the Archax Series A funding round. In an announcement of the partnership in late 2022, Abrdn CEO Stephen Bird stated:
“Archax is one of the most promising UK players in this next expected high growth area in finance – the use of digital and tokenized securities with same-day settlement… [and our] investment not only provides an opportunity for substantial financial benefits, it also creates a partnership with some of the leading thinkers in an area that has the potential to play a substantial role in the future of finance.”
Since then, Archax has been hard at work and is already delivering on their promise, as the leading regulated gateway to capital markets. In October, in a landmark move, Archax went live with an institutional-grade money-market fund token (MMF) – the first of its kind. And Abrdn and Archax are already lining up customers.
Clients have to be onboarded and approved, and the token is only available to professional investors still, but the tokenized tranche of the Abrdn fund (built on Hedera) is available for as little as $5,000, potentially opening the product up to a whole new group of investors. Archax already has a pipeline of more than $400M of interest here, according to Chief Marketing Officer, Simon Barnby.
Early next year, Archax will introduce trading pairs of the Abrdn MMF token and bitcoin (BTC), meaning rather than trading BTC against the U.S. dollar or USDC, users will be able to trade bitcoin against U.S. dollar MMF tokens directly for the first time ever.
This Makes the Market More Mature, Traversable & Compliant
The ability to trade MMF tokens, or other non-cash equivalents, against Bitcoin directly has a handful of key benefits and bridges the gaps in the market where stablecoins are not yet fully blessed or regulated. First, since money market funds are designed to maintain a stable value, (typically around $1 per share), MMFs can provide a more predictable, lower volatility trading experience compared to cash, which can fluctuate due to inflation. Trading with MMF tokens exposes cautious trading partners to fewer risks associated with the depreciation of fiat currencies.
At their core, MMFs aim to provide a return that exceeds inflation, helping to preserve the value of assets over time. This can also be quite attractive to investors looking to park their funds in a stable asset while not actively trading. Furthermore, MMFs are typically highly liquid, allowing for quick conversion which can facilitate easy trading and portfolio management.
And maybe most importantly, in many regions around the world, using MMFs in trading pairs may be more compliant with regulatory requirements than using cash or stablecoins. This bridges the gap in markets where stablecoins are not yet regulated (including the vast majority of DeFi), in theory providing universal access in Web3 to a stable store of value that is already accepted the world over in traditional markets. And is, potentially, a better answer than cash as the primary tool for the global trading of value in Web3.
And This is Just the Beginning
Looking further down the road, Barnby said, “a token that represents ownership in the money-market fund [like this] could be used as collateral in an area like regulated DeFi.” Duncan Moir, Abrdn’s alternative investments leader, echoed this sentiment, noting that the posting for collateral is a potentially much much larger use case;
“Swap dealers accept money-market funds, so it could be used to post margin on a swap, for example,” Moir said. “Looking ahead, I'll be interested to see if it can be used for settlement of tokenized securities. I can certainly imagine a future where there are other tokenized funds, and this as the cash asset you’re trading against makes a lot of sense.”
Meaning.. Products like the MMF token could soon replace cash, as the de facto store of value in Web3 and beyond. Stablecoins aren’t yet widely familiar or comprehensively regulated, and cannot be used yet in many commonplace Web2 transactions like posting margin on a swap. But MMFs, which are already known and accepted globally, could be – extending the reach of Web3 trading into previously inaccessible traditional capital markets and tools.
The onset of a higher interest rate environment is already accelerating tokenization plans focused on low-hanging fruit like treasury bonds and money market funds. But it’s also driving trends in DeFi towards things like yield-bearing stablecoins.
And as traditional capital markets shift to the digital asset trading lifecycle and tokenized securities become commonplace, synergistic use cases like this will translate into massive savings in efficiency, compliance and management overhead for institutions while opening the door to a whole new world of financial tools based on previously untapped RWA. Money market fund tokens and treasury bonds are, truly, just the beginning.
Author
Christopher Nelson
Head of Digital Asset Research