Why Tokens Will Lead the Next Wave of Financial Innovation

Author: Alex Tapscott, CoinDesk; Compiled by: Baishui, Golden Finance

In less than two decades, assets under management in exchange-traded funds (ETFs) have surged from $1 trillion to more than $10 trillion today, with Bank of America predicting the ETF market will reach $50 trillion by 2030. Investors are attracted to ETFs because they offer the diversification of mutual funds through the liquidity of stocks, typically with lower fees.

But that alone doesn’t explain their success.

ETFs, at their core, are a financial technology that has democratized access to asset classes and strategies that were once inaccessible to most investors. These include everything from municipal bonds to foreign stocks, stock options to private credit. By reducing barriers to entry and enhancing flexibility, ETFs have fundamentally changed the way people invest.

The success of ETFs shouldn’t surprise us. Financial innovations throughout history have followed similar trajectories—improving access, reducing friction, and expanding choice, which in turn can create entirely new markets. Mutual funds (1924) allowed investors to pool their money together and invest it in a portfolio of securities. The first charge card, the Diners card (1950), enabled consumers to pay for goods without having to carry cash, creating a massive market for consumer credit in the process. Discount brokerages (1975) opened up stock trading to the average investor, while online banking and brokerage firms (1990s) made banking more convenient and accessible to people with limited mobility or living in remote areas.

Each of these technologies started small and took some time to penetrate their respective markets.

ETFs were initially viewed as niche products that might be suitable for a few DIY investors, but not for advisors, traders, institutions, high net worth individuals, or other major Wall Street players.

While ETFs did start as index funds, most ETF launches today are for active strategies. According to BlackRock, active ETFs account for 76% of all U.S.-listed ETF issuance in 2023 and 21% of global ETF inflows in the same year. The firm expects active ETF assets under management to surge to $4 trillion by 2030, more than four times the current $900 billion.

The success of the ETF market is an example of Clay Christensen’s innovator’s dilemma. When a new technology emerges, incumbents in the market (in this case, traditional asset managers, banks, and brokerage firms) tend to be slow to adopt it, giving disruptive innovators a critical head start. Their stance is understandable, Christensen says. In the investment world, small DIY investors were initially the least interested class of customers. They didn’t have a lot of money to invest and were stingy with fees, so they were easily dismissed.

This view was shortsighted. It was precisely because of technological innovations like ETFs (and online brokerage) that incumbents misjudged the growth potential of the DIY segment. They mistakenly assume that ETFs could have broad appeal.

You can’t analyze a market that doesn’t exist, Christensen said. ETFs have created an unprecedented $10 trillion market. New markets cannibalize old markets.

Like ETFs, tokens have the potential to further democratize finance.

Myths and misinformation abound when it comes to tokens. Often, all tokens are categorized as “cryptocurrencies,” as in “cryptocurrency.” This is unfortunate, as the term “cryptocurrency” is a misnomer. In fact, many, if not most, tokens are not trying to be money in the traditional sense of the word, i.e., medium of exchange, store of value, and unit of account. Instead, tokens are best viewed as simple containers of value. Imagine a standard shipping container that can hold everything from computers to car parts, potatoes to canned prunes, and everything in between.

These programmable containers can represent anything of value—stocks, bonds, art, intellectual property—just as a website can be “programmed” to contain any type of online information, such as a storefront, social media site, or government landing page. Tokens are accessible to anyone with an internet connection around the world, and eliminate the need for many traditional intermediaries. Embedded technologies such as smart contracts can automate functions once handled by brokers, exchanges, and transfer agents, reducing friction and fees.

To date, the first killer app for tokens is the U.S. dollar.Tokenized dollars, or stablecoins, enable users to transfer and store U.S. dollar value, and then deploy those dollars in a variety of financial services, such as trading securities, depositing them with a lending platform to obtain a loan, or using them to invest in a new startup. Today, stablecoins have a circulating supply of over $150 billion and process trillions of dollars in payments each year. Now, billions of people can easily own dollars. This is a breakthrough.

Like ETFs, tokens have the potential to create new markets (billions of people are not invested in financial markets) and make financial products more accessible and customizable (tokens are infinitely programmable). As banks and competitors work to adapt to this new technology, early adopters will be positioned as global leaders. Incumbents will have no choice but to follow or partner with those pushing the financial frontier.

Just as Wall Street giants BlackRock, Vanguard, State Street, and others grew into giants on the back of ETFs, so too will the next generation of financial giants emerge from the token revolution. But who will they be? There are competitors, but it still feels like anyone’s game.