The finance industry has undergone significant evolution over the years due to changes in technology, regulations, and business practices. Traditionally, finance focused on bookkeeping and accounting, relying on ledger books and manual calculations for financial transactions. However, the advent of the Internet has democratised access to financial services, providing millions, including the unbanked and underbanked, with secure, reliable, and convenient options, such as cross-border payments.
The volume of cross-border trades has surged, with global B2B cross-border transactions expected to surpass USD 40 trillion by 2024, marking a 9% increase from USD 37 trillion in 2022. Projections suggest a further 43% rise to USD 56.1 trillion by 2030. This underscores the critical role of cross-border transactions in finance, particularly for international trade and e-commerce.
Linda Ang, Head of Strategy at aelf helps us understanding the complexity of Web3 and blockchain
However, the current traditional finance industry, known as TradFi, relies on outdated systems that involve intermediaries such as banks and other financial institutions for transactions. This often results in expensive transaction fees, slow processing times, especially for cross-border transactions, inefficiency, and additional documentation requirements. According to a study, a typical cross-border transaction in the United States can take an average of one month for a business to receive payment.
Web 3.0 emerges as a game-changer in this scenario, offering faster, more secure, and advanced financial services. While some view it as a long-awaited financial liberation, others fear it may disrupt the traditional financial system.
Why TradFi institutions must embrace Web 3.0 to stay relevant
Web 3.0 represents a huge transition, ushering in a new banking model that differs from existing financial institutions. The rise of decentralised finance (DeFi), digital assets, and user-centric new paradigms within the Web 3.0 landscape are critical to this transformation. Embracing Web 3.0 will not only keep TradFi institutions relevant but will also create new chances for growth and expansion in the digital economy.
For instance, DeFi uses blockchain technology to establish a trustless and transparent infrastructure, empowering individuals to have more control over their assets and financial future. This shift can be evident in how people manage their finances, with an increase in peer-to-peer contacts and transactions that are not supervised by intermediaries. Furthermore, a report states that DeFi outperforms traditional financial (TradFi) systems in terms of security and transparency, resulting in lower expenses and transaction times.
Additionally, blockchain technology facilitates easier cross-border money transfers using alternative currencies like Bitcoin. In December 2023, Bitcoin surpassed the $40,000 mark for the first time since the bear market with a gain of 134.6%, where its performance has notably outshone traditional assets such as bonds, gold and the Nasdaq index.
To stay ahead of the competition and cater to the dynamic needs of customers, TradFi institutions must delve deep into the trends of Web 3.0, rapidly positioning themselves in the evolving industry. Offering secure and reliable real-world asset tokenization services could be a game-changer.
However, it is crucial to acknowledge the potential challenges and risks associated with its implementation. Cybersecurity threats, regulatory uncertainties, scalability issues, and data privacy concerns are some of the key areas that need to be carefully navigated to ensure the successful integration of Web 3.0 technologies. Failure to address these areas could result in significant financial and reputational damage to organisations.
Unlocking the potential of tokenization in Web 3.0
Tokenization lies at the core of Web 3.0, enabling the representation of various real-world assets, rights, real estate, intellectual property, and even smart contracts as digital tokens on a blockchain or blockchain-based token. This process enhances market liquidity, enables fractional ownership, and facilitates easy accessibility of assets with full transparency.
Tokenization replaces “individuals” or “institutions” with “codes.” This approach allows for trustless transactions with no reliance on a single party, permissionless execution and verification of transactions by any participant, and the immutability of records once finalised, preventing any single entity from changing the transaction’s state.
Real-world asset (RWA) tokenization is expected to grow, even though the Web 3.0 market is currently in a bear market and global sales revenue is expected to drop from USD 3.34 billion in 2022 to USD 0.45 billion in 2023. The immense prospects that Web 3.0 presents are expected to fuel rapid growth in the tokenization of real-world assets.
The potential to tokenize real assets in this decade is particularly significant, with estimates of up to USD 16 trillion by 2030. This is assuming that traditional financial institutions begin integrating blockchain technology into their systems early and continue to do so.
Why Tradfi giants are abuzz with tokenization trend
Global banks have already begun showing a special interest in tokenization. For example, the $1.4 trillion investment giant Franklin Templeton expanded support for the first United States registered mutual fund (FOBXX) to the Polygon blockchain and Ethereum. Citibank has been working on blockchain technology at its Innovation Lab for years. Deutsche Bank is collaborating with a Swiss crypto startup to establish digital asset custody and tokenization services.
In Asia, Singapore and Hong Kong are taking steps to position themselves as regional hubs in case the tokenization business takes off. For instance, the Monetary Authority of Singapore is supporting the rise of RWA tokenization by evolving the traditional regulatory framework to accommodate the unique characteristics of Web 3.0 and RWA tokenization. Even in Hong Kong, a $100 million green bond issuance has been successfully tokenized, demonstrating the potential benefits of tokenization for improved efficiency, enhanced asset utility, and transparency.
This proves that tokenization has lately acquired interest among fintech companies as a viable method for transforming traditional financial markets. Many private companies are also raising education and awareness of the seamless integration of Web 3.0 and the centralised off-chain world through conferences like ONCHAIN 2024.
A promising future
It is impossible to write off Web 3.0’s emergence in the fintech sector as merely an overhyped buzzword. The growing acceptance and integration of decentralised technology is evidence of their potential to open up a multi-trillion-dollar global opportunity.
Web 3.0 has the potential to completely transform the way we transact, invest, and manage our funds, despite certain obstacles and concerns in this new financial era. Businesses and individuals must remain aware and adjust to these new developments to prosper in the digital economy, as the industry continues to innovate and evolve.
The article titled “Web 3.0: Overhyped buzzword or gateway to a trillion-dollar fintech revolution?” was contributed by Qin En Looi, Partner of Saison Capital and Principal organiser of ONCHAIN 2024
About the author
Qin En Looi is a Partner at Saison Capital where he actively leads pre-seed and seed investments in startups across fintech, B2B commerce and web3. He is an advisor to Southeast Asia-based web3 startups including Avium, Avarik Saga, Helix and Mythic Protocol, and also co-founded a web3 growth blog.
Qin En was previously the co-founder and COO at Glints, the leading talent ecosystem in Southeast Asia (Series D). During his tenure, he was recognised by Forbes 30 Under 30 and Entrepreneurs 27 Under 27 for being one of the youngest founders to have raised venture capital in Southeast Asia.
Qin En is an accomplished professional with a Bachelor of Science degree in Management Science & Engineering from Stanford University. He ranked in the top 15% of the overall student population and served as a Teaching Assistant for over 180 undergraduates.