Closed and Permissioned Blockchains: The Trending Choice for Future Institutional Tokenization?
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Closed and Permissioned Blockchains: The Trending Choice for Future Institutional Tokenization?
In the near future, most institutional tokenization will primarily occur on closed, permissioned networks, as public networks, despite their potential, currently face compliance, technical, and regulatory challenges.
Navigating Web3 tides with focused insightsAuthor: GRAEME MOORE
Translation: Baihua Blockchain
At least in the near future, most institutional tokenization will take place on closed, permissioned networks.
Many believe that BlackRock’s $100 million investment into Ethereum signals the long-awaited breakout of institutional tokenization on public, permissionless networks. That is true—but BlackRock’s tokenized fund is merely chipping away at the tip of a massive iceberg.
The crypto industry has repeatedly claimed that institutions are coming, and now we know they are indeed interested in tokenization. Major institutions such as BNP Paribas, JPMorgan Chase, Goldman Sachs, the Hong Kong government, Franklin Templeton, Hamilton Lane, and now BlackRock have been exploring blockchain technology for some time.
When the world’s largest asset manager chooses a public chain over solutions like JPMorgan’s Onyx or Goldman Sachs’ offerings, it is undoubtedly a watershed moment. BlackRock’s tokenized fund on Ethereum demonstrates institutional trust in public, permissionless networks, lending much-needed legitimacy to the emerging public ecosystem. This move will also encourage other traditional financial players to shift toward on-chain funds.
Yet despite being a bold and eye-catching move, the reality is that tokenization today primarily occurs on private, permissioned blockchains.
To date, most institutional efforts have focused on private networks. The Hong Kong government’s $100 million tokenized green bond utilized GS DAP deployed on the Canton blockchain, which features privacy capabilities.
Goldman Sachs, BNY Mellon, Cboe Global Markets, and others recently conducted a series of pilot projects on the same network. HSBC used its Orion Digital Asset Platform to tokenize gold for retail investors in Hong Kong. Meanwhile, BlackRock tokenized shares of its money market fund using the private Tokenized Collateral Network on JPMorgan’s Ethereum-based Onyx platform.
Bitcoin proved that a multi-billion-dollar market can emerge from nothing. The industry believes blockchain can tokenize and trade any asset, unlocking enhanced liquidity. However, the enticing promise of liquidity for real-world assets has so far proven illusory.
The early 2018 token craze speculated about trillions of dollars worth of tokenized assets on public networks. Seven years later, total assets managed on public networks amount to only several billion dollars—negligible compared to the theoretically possible scale. In contrast, private networks handle tens of billions in transactions daily.
The crypto industry loves citing Boston Consulting Group’s prediction that $16 trillion in illiquid assets could be tokenized by 2030. Even more conservative estimates—such as McKinsey’s forecast of $5 trillion in tokenized real-world assets—are still enormous figures.
Yet, judging from current trends and realities, most of these assets will first be tokenized on private networks.
Unlike crypto assets—a completely new asset class existing natively in open ecosystems—real-world assets inherit the legacy of traditional finance. This legacy favors control over assets and clients, closed ecosystems, and compatibility with traditional markets, standing in stark contrast to the ethos of public, permissionless networks.
This explains why financial institutions prefer private networks. Private networks are closer to existing financial infrastructure and can more easily meet compliance requirements. They better serve business needs by offering flexibility in governance and customization—such as modifying consensus protocols, transaction validation rules, and access permissions. These networks also support higher transaction throughput, which is critical for scalability.
Regulation is another key issue. Only recently have regulators begun enacting and implementing comprehensive frameworks to guide participation in crypto assets. Until then, public blockchain technology was largely out of reach for these institutions, for whom compliance is paramount.
For securities, there is at least some clarity: tokenized securities remain securities and must operate within existing regulatory frameworks. However, certain assets—like real estate—may not be securities off-chain but could be deemed securities once tokenized. The industry is still figuring out exactly how these assets can meet existing requirements.
Today, no one doubts the benefits of blockchain technology. For traditional finance, the main challenges lie in integration and technical costs, infrastructure compatibility, and regulatory issues. While public networks offer greater transparency, immutability, and decentralization, private networks are more practical and familiar to financial institutions.
Technical hurdles remain as well. Take Ethereum—the network chosen by BlackRock—as an example. Although Ethereum has made progress with Layer 2 solutions and its transition to Ethereum 2.0, the network still faces challenges in meeting the speed, privacy, and compliance demands required by regulated institutional trading platforms.
As technology matures and regulatory frameworks evolve, we can expect more tokenized assets to migrate to public blockchains, ushering in a new wave of innovation. However, at least in the near future, most institutional tokenization will continue to occur on closed, permissioned networks.
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