Tokenization in Europe — Current state and future outlook

After the substantial rally of cryptocurrencies such as Bitcoin in recent months, it is time to take a detailed look at the current and future market development for tokenized assets.

The joint study by Plutoneo and Tangany focuses in particular on Europe and its share of the global market capitalization of tokenized assets. For the first time, comprehensive data for the security token market was collected, depicting the most precise statement for this category in Europe.

The trend is clear; the underlying magic of blockchain and Distributed-Ledger-Technology is advancing more and more. At this moment, the market for tokenized assets consists almost exclusively of cryptocurrencies. However, the future belongs to security tokens. We venture a look at when this will happen.

Authors: Benjamin Schaub, Martin Kreitmair, Julian Richter

Key assumptions

For this study, we analyzed the research conducted by third parties and combined it with data from relevant market participants. To calculate the market size for tokenized assets in Europe, the underlying key assumptions are:

1. Market share of cryptocurrencies in Europe

2. Outlook of market size for cryptocurrencies in Europe

3. Market share of security tokens in Europe

4. Outlook of market size for security tokens in Europe

Assumptions 1 and 2 are used to derive the market size of cryptocurrencies in Europe, while 3 and 4 are used to derive the market size for security tokens in Europe. Combined, we can project the market size for tokenized assets in Europe. In the following, we explain our thought process behind all four assumptions.

For the first time, it was possible to determine the market volume for security tokens without approximations based on the gross domestic product on a global or European level. The mathematical model developed for this study focuses on the key parameters of the financial markets, such as market size for equities and bonds, and extrapolates the degree of tokenization in the coming years.

Remark: In this study, we define the term “cryptocurrency” as payment and utility tokens. While cryptocurrencies heavily dominate the market in terms of market capitalization, more and more regulatory progress opens up the space for the tokenization of classical financial instruments. Therefore, this category is referred to in this study as “security token”.

Both segments are part of the larger digital assets pool, which also contains FIAT-backed tokens and the catching pool for new yet unclassified tokens. FIAT-backed tokens are classified as security tokens in our study, as they are backed by an asset. FIAT-backed tokens are either issued by a private entity such as Tether (USDT) or Binance USD (BUSD) or by a public institution such as the European Central Bank (ECB), aiming to have a constant exchange rate — usually 1:1 — to a major currency like the Dollar. The pool of others contains appearances like Non-Fungible Token (NFT), mostly used for video games, art, and by creatives and designers. NFTs are not part of this case study.

Figure 1: Categories of digital assets covered in this study

1. Market share of cryptocurrencies in Europe

CoinMarketCap thoroughly tracks the history of the global market size of cryptocurrencies. However, it is not easy to determine how this is distributed among the various continents, in our case Europe. Based on the extensive studies of Cambridge Center for Alternative Finance¹²³, latest statistics⁴⁵⁶, and data⁷⁸, we were able to determine that ~55 million Europeans (~7,5% of the European population) hold or use cryptocurrencies. Furthermore, our results show ~40% of global cryptocurrency users come from Europe. As a result, Europe is leading concerning the number of users worldwide. However, with regard to the global market capitalization in cryptocurrencies, Europeans only cover ~25%.

2. Outlook of market size for cryptocurrencies

The market for cryptocurrencies is experiencing a further bull market in recent months. As a result, the price of the leading cryptocurrencies, Bitcoin and Ethereum, is climbing almost unstoppably from an all-time high to an all-time high. Additionally, there is a steady stream of positive news within the industry providing a significant tailwind to the market. This includes, for example, PayPal’s strong interest in establishing itself in the crypto segment, which can be observed in the acquisition of digital asset security firm Curv.⁹ Moreover, even the giants of the traditional financial world such as Goldman Sachs¹⁰ and JP Morgan¹¹ can no longer ignore their customers’ demand to access digital assets. Another step that shows how advanced the mainstream adoption of digital assets has come was certainly the IPO of Coinbase with a market capitalization of over 80 billion US dollars.¹²

The growing interest of financial institutions in digital assets now enables institutional investors to access this asset class. For the further development of the market, significant growth is to be expected as institutional investors have not been able to invest in digital assets for regulatory reasons and, in some cases, still are not able to do so. However, a new law in Germany allows precisely that. Here, institutional investment funds (Spezialfonds) can allocate up to 20% in crypto assets in the future. Even if such financial instruments invested only a few percent of their capital in digital assets, the impact on the crypto market would be enormous. This is because these investment vehicles have a market capitalization of approximately 1.2 trillion Euro in Germany alone.

Figure 2: Projection digital asset market size Europe from 2018 to 2026 in EUR bn

3. Market share of security token in Europe

The market for security tokens sparked a few years ago, no earlier than 2017. Since then, the field of security tokens has seen rapid growth. Regulators worldwide adopted the new form of financial instruments into existing regulation. The process started in early 2020 with the financial license introduction for custody of digital assets in Germany and other EU member-states.

Governments see this area as a field where innovation is being created, and the next digital giants are evolving. In this light, countries like Germany are preparing their legislation to allow securities to be represented in the form of tokens. Especially European countries are leading this movement while the US is still looking for their way to go. Asian jurisdictions have chosen quite different ways of approaching this topic while closely monitoring the developments in Europe.

The global market volume of security tokens — which includes all kinds of tokens that are asset-backed or represent a kind of value — was ~2.7 billion Euro in 2019. In contrast, about 0.7 billion Euro were issued in Europe (~25%). That includes the European Union and all other European countries.

The market volume in Europe will be around 918 billion Euro in 2026, covering all kinds of security tokens. For the first time, security tokens will surpass cryptocurrencies by then. Despite the strong growth within the next few years, the tokenized market will still cover only a small portion of the total market which is expected to grow 259 trillion Euro in Europe. The tokenization share will be 0.35%, indicating that the tokenized market will still be pre-matured with attractive growth rates beyond 2026.

In the past, the majority of security tokens were issued on Ethereum, with a reported market share of 94%. The other 6% are held by solutions like Tron, Stellar, Neo, and similar.¹³

4. Outlook of market size for security token

The security tokens market is evolving dynamically and can still be considered to be in its infancy phase. In 2017 only five reported security tokens were issued. This number has increased to more than 100 in 2020. Our projections forecast a continuous growth within the next five years up to a total market volume of more than 918 billion Euro by 2026 in Europe alone, including FIAT-backed stablecoins.

Based on the analysis of four major market segments — real estates¹⁴, stocks¹⁵, debts¹⁶, and FIAT currencies¹⁷ — regarding the future growth of security tokens, it can be concluded that the growth from 2021 to 2026 will be around 81% per year.

The increasing interest in digital assets drives this trend, mainly focused on cryptocurrencies such as Bitcoin, but more and more around tokenized assets which provide high liquidity and come with low management fees. Furthermore, upcoming regulations like the German crypto security are amplifying the whole trend. With that, the aim of the European Union Commission to create a harmonized digital asset market is also a notable positive action. This regulation shall be issued by the latest 2023 by introducing MiCA (Markets in Crypto-Assets) which can be considered as the pendant to existing MiFID II regulation of traditional financial instruments and activities.

Europe can be described as being at the forefront of security tokens. It is mandatory that innovative startups, traditional companies, and institutions, just as governments and regulators, keep handling this area progressively and positively to secure this position.

Conclusion

The overall market of digital assets will keep growing at a swift pace. While the market currently consists almost exclusively of cryptocurrencies in terms of market capitalization, the area of security tokens will grow strongly in the coming years. Progressive regulation in countries like Germany and the EU-level will lead to Europe being the global leader in security tokens. Based on our data model, which for the first time does not rely on approximations such as GDP, the volume of security tokens will exceed the volume of cryptocurrencies for the first time in 2026.

From a European perspective, a look at the crypto market also yields exciting results. With regard to blockchain adoption, it should be noted that Europe accounts for around 40% of global cryptocurrency users. Although European users “only” hold approximately 25% of the worldwide cryptocurrency market capitalization, this clearly shows that the retail segment, in particular, is highly receptive to digital assets.

TL;DR

The market for digital assets today:

1. 55 million cryptocurrency users (~7,5% of the European population)

2. 40% of global cryptocurrency users come from Europe

3. 25% of the global market capitalization in cryptocurrencies held by Europeans

4. The security token market is still in its early days with major regulation upcoming

The market for digital assets in 2026:

1. The total market capitalization of digital assets will be 1,820 billion Euro

2. Security token volume (50.39%) will be larger than cryptocurrencies (49.61%)

3. Tokenized stocks will contribute 32.77% to the security tokens market

Remarks

Please note that this is a current market overview as of May 2021. You are welcome to contact us for additional information, which we will then be happy to consider.

If you like this article, we would be happy if you forward it to your colleagues or share it on social networks. If you are an expert in the field and want to criticize or endorse the article or some of its parts, feel free to leave a private note here or contextually and we will respond or address it.

Plutoneo is a strategy and management consultancy for the financial and asset management industry, focusing on the securities business and its processes (front to back). More information under (https://www.linkedin.com/company/plutoneo/).

Tangany is a regulated institute that offers a white-labeled digital asset custody solution. The Tangany Custody Suite was launched in 2018 and is currently used by more than 30 clients (https://www.linkedin.com/company/tangany).

Authors

Benjamin Schaub is the Head of Digital Hub at Plutoneo. His interests include blockchain use case development and integration in the financial industry as well as crypto custody. Besides, he works as a senior consultant at INTAS.tech, a blockchain consulting firm that the Frankfurt School and Plutoneo have set up. You can contact him via mail (b.schaub@plutoneo.com) or on LinkedIn (www.linkedin.com/in/benjamin-schaub).

Martin Kreitmair is one of the co-founders and CEO at Tangany. He is responsible for business development together with Julian Richter. Furthermore, he is a member of the board at Bundesblock e.V., the German blockchain association. Contact details are info@tangany.com or LinkedIn (https://www.linkedin.com/in/martin-kreitmair/).

Julian Richter is Head of Business Development and Sales at Tangany. He is an expert when it comes to market insights, market trends and custody of digital assets. Before Tangany, Julian used to work at different companies such as FinTecSystems, in the asset management field at Continentale Versicherung and in the treasury at the LfA Förderbank Bayern. He can be found on LinkedIn: https://www.linkedin.com/in/julianrichtertangany/.

References

1. Cambridge Center for Alternative Finance: “Global Cryptocurrency benchmarking study”, released 2017.

2. Cambridge Center for Alternative Finance: “2nd Global Cryptoasset Benchmarking Study”, released 2018.

3. Cambridge Center for Alternative Finance: “3rd Global Cryptoasset Benchmarking Study”, released 2020.

4. Statista: “Cryptocurrency adoption in 55 different countries worldwide 2020”, released 2021.

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7. BusinessOfApps: “Coinbase Revenue and Usage Statistics (2021)”, released 2021.

8. Binance Blog: “Binance 2019: Year in Review”, released 2019.

9. Cointelegraph: “PayPal purchases digital asset security firm Curv”, released 2021.

10. CNBC: “Goldman Sachs is close to offering bitcoin and other digital assets to its wealth management clients”, released 2021.

11. Coindesk: “JPMorgan to Let Clients Invest in Bitcoin Fund for First Time”, released 2021.

12. CNBC: “Coinbase closes at $328.28 per share in Nasdaq debut, valuing crypto exchange at $85.8 billion”, released 2021.

13. Blockstate: “Global STO Study 2019”, released 2019.

14. Visual Capitalist: “All of the World’s Money and Markets in One Visualization”, released 2020.

15. Statista: “Volumen des weltweiten Aktienhandels von 1980 bis 2019”, released 2020.

16. Visual Capitalist: “All of the World’s Money and Markets in One Visualization”, released 2020.

17. Wikipedia: “Geldmenge”, last viewed May, 2021.