Tokenized Securities vs Prudential Regulated Assets: Diversify your Web3 Treasury

As more and more Web3 companies move their treasury to blockchain platforms, they look for different ways to diversify their portfolio. Tokenized securities and prudential regulated assets are two examples of on-chain products being developed to meet this demand.

Companies are increasingly interested in Treasury Management as a way to maximize their assets, upgrade their investments, and ensure liquidity, reduce risk and liabilities, and assure regulatory compliance. This activity entails both daily operational and financial decisions and long-term return on investment ventures, with an analytical approach encompassing market assessment and product understanding.

With the advent of Web3 products, organizations have more investment options to choose from, with some risk-free opportunities such as fixed yield tokenized securities or prudential regulated assets. In this article, we’ll look at the differences and similarities between these on-chain products, and analyze their benefits and downsides.

The Evolution of Treasury Management in Web3

Traditional treasury management has undergone significant changes with the advent of blockchain technology. Chief Financial Officers (CFOs) and financial managers now face the challenge of allocating organizational funds in an environment of both opportunity and uncertainty.

Market Growth and Projections

The tokenized securities market is experiencing rapid growth:

- Verified Market Reports (April 2024): Projects the Tokenized Securities Market to reach $301 Billion by 2030, with a CAGR of 5.96%.

- McKinsey (August 2023): Forecasts $4-5 trillion of tokenized digital securities issued by 2030.

- Future Market Insights: Predicts the global tokenization market will grow from $2.8 billion in 2024 to $14.2 billion by 2034, with a CAGR of 17.6%.

What are Tokenized Securities?

Tokenized securities are assets materialized in token form registered on the blockchain using a distributed ledger technology infrastructure. They can be implemented on various on-chain networks, such as Ethereum, Polygon, Solana, or others.

They include equity tokens, such as company shares and equity; debt tokens, like loans and treasury bonds; and asset-backed tokens, which represent ownership of physical properties like real-world assets or commodities. They can also be a total or fraction of a material product, such as art or real estate, granting democratization of the investment and redefining traditional investment paradigms.

Globally, over $10 billion worth of tokenized bonds have been issued, with highly notable issuers including Siemens, the City of Lugano, and the World Bank, according to this McKinsey article.

The real estate sector is one of the sectors that most benefit from tokenization since it enables fractional ownership and improves owner liquidity. Simultaneously, tokenized securities are gaining traction in the Decentralized Finance (DeFi) industry, unlocking innovative financial products and services, such as on-chain loans and staking.

What are Prudential Regulated Assets?

Prudential Regulated Products are financial instruments subject to more strict and closely monitored regulations to ensure financial stability and risk management. This category often includes government and corporate bonds and other financial products that must adhere to strict regulatory oversight​.

One key example is tokenized U.S. Treasuries and other government bonds, which are growing daily. In March 2024, it was announced that the market value of Treasury notes tokenized through public blockchains like Ethereum, Polygon, Avalanche, Stellar, and others, surpassed $1 billion for the first time. This data was tracked by Tom Wan, an analyst at crypto firm 21.co, and reported by CoinDesk.

This type of investment is thoroughly regulated by high-level entities such as the Federal Reserve in the United States of America, the European Central Bank (ECB) in Europe, and other national financial regulatory authorities, ensuring high standards of risk management and stability to the entire financial ecosystem.

Comparing Tokenized Securities vs Prudential Regulated Assets

Tokenized Securities are less regulated products, which allows for more flexibility in purchasing and redeeming the assets. Most providers are available 24/7 worldwide, which grants greater access for anyone, democratizing investments. However, this represents more risk associated with investing in such products since trading can happen at any given time.

Tokenized securities have easier access, with options for fractional acquisition and ownership of products, but face some difficulties with issuance and redemption, as they are not overly regulated and, hence, not as easily transferable. 

Despite that, tokenized securities have greater yield and market efficiency, with fewer costs over transactions due to the reduced need for intermediaries, such as brokers and custodians, which allows for a more streamlined settlement process.

Simultaneously, regulation is ever-evolving, which can cause uncertainty and instability. It’s crucial to be aware of this and to be prepared for potential risks. Safety concerns, particularly security vulnerabilities, must be addressed in the near future to ensure the safety of your investments.

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Advantages

- Increased liquidity: fractional ownership and 24/7 trading

- Enhanced transparency: immutable ledger and reduced fraud

- Cost efficiency: lower transaction costs and automated compliance

- Accessibility: global reach and democratization of purchase

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Disadvantages

- Regulatory uncertainty: evolving regulations and compliance challenges

- Safety: security vulnerabilities and technology dependence 

- Market adoption: small pool of buyers and liquidity challenges

- Operational risks: custody risks and market manipulation

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Prudential Regulated Assets have a more robust structure and less risk for buyers and holders, with a Stamp of Approval from the main regulatory organizations, which grant the stability of the products since they have a reputation to uphold.

Since Prudential Regulated Assets are permissionless, allowing for multisig wallets, the subscription and redemption processes are easier and quicker (not restricted to business days), and safety is assured.

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Advantages

- Safety and stability: low risk and financial stability

- Regulatory tight oversight: investor protection and systemic risk management

- Trust and credibility: reputation of regulators and government backing assets

- Market acceptance: widespread adoption and increased liquidity

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Disadvantages

- Lower yields: conservative returns due to low risk and inflation rates

- Regulatory burden: compliance costs and operational constraints 

- Interest rate: market value fluctuations and reinvestment risk

- Limited growth potential: conservative investment and restricted exposure

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Conclusion

Both tokenized securities and prudential regulated assets offer unique opportunities for Web3 companies looking to diversify their treasuries. While tokenized securities provide increased liquidity and potential for higher returns, prudential regulated assets offer stability and regulatory certainty. The choice between them - or a combination of both - depends on your company's specific needs, risk profile, and long-term financial strategy.

As the digital asset landscape continues to evolve, staying informed and adaptable will be key to successful treasury management in the Web3 era.

Learn More

If you are looking to diversify your asset portfolio and company’s treasury, you can opt to choose both of these products or to apply your funds to the one that best suits your needs.

If you need any additional information, our OTC service is available to help you with any questions you may have. Contact us here today!

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