One of the common criticisms of the traditional financial system, especially after events such as the 2008 financial crisis, is the lack of transparency and the inability of different sectors to share information effectively. Financial institutions have become so large and complex that it is nearly impossible to fully understand the risks and liabilities they carry. Advocates of blockchain technology are quick to point out the transparent and immutable nature of the ledger, ensuring that no third party can dispute the data. While security and oversight concerns remain, especially from regulatory bodies like the SEC, the technological innovation occurring in the crypto world cannot be ignored.
Although the divide between traditional financial institutions and cryptocurrency enthusiasts may seem difficult to bridge, the application of blockchain technology to the financial sector is inevitable—and, in some cases, already happening. For example, JPMorgan Chase's recent use of blockchain technology to clear capital markets and the Strike network's facilitation of fee-free remittances have shown that this technology can have real-world applications. While these developments may seem idiosyncratic in the context of the $738 billion remittance market and multi-trillion dollar clearing industry, their potential to enter the mainstream is real.
One area of the financial services sector ripe for disruption is wealth management. Investment-grade products – traditionally reserved for high-net-worth individuals and institutional investors – are generally considered stable and low-risk, offering predictable returns. These include:
- Corporate Bonds: These debt securities issued by companies are considered lower risk than stocks and offer regular interest payments. They are generally reserved for large institutional portfolios because of the high capital required to buy these bonds in bulk.
- Real estate investment trusts: These are companies that own or finance real estate that produces income and they provide dividends to investors. Institutional investors traditionally dominate the commercial real estate space, where REITs typically invest.
- Investments in Infrastructure: These include financing projects such as highways, airports and utilities, which are usually considered stable and essential services, providing long-term returns. However, such projects are usually only available to institutional investors due to high capital costs.
In the current system, investment-grade products are generally available to institutional investors or accredited individuals because they require large sums of money to directly access or expertise to structure and manage them. However, with tokenization, these assets can be shared and made available to a wider audience. Tokenization works by creating digital tokens that represent a portion of an underlying real-world asset—whether that's a corporate bond, a share in a REIT, or a portion of an infrastructure project. These tokens are stored on a blockchain, a decentralized ledger that provides transparency and security. Retail investors with smaller amounts, say $5,000 or $10,000, can now buy fractional ownership in these products. Instead of buying an entire corporate bond that might demand $100,000 or more, they can buy a small percentage of it, gaining access to the same yield and interest payments as larger investors.
For example, let's say a company issues a corporate bond worth $1 million, with an annual interest rate of 4%. Instead of having to buy all or a large portion of the link, tokenization allows the link to be broken down into smaller units, each represented by a digital token on a chain. A retail investor with $5,000 can buy tokens that represent their proportionate share of the bond, and they will receive interest payments based on the amount they own, all while benefiting from the stability of investment-grade products.
REITs can be marked similarly. Rather than needing to invest in a large-scale REIT with a minimal capital requirement, retail investors can purchase marked shares of income-producing commercial real estate or residential properties. These tokens represent ownership in a portfolio of properties, allowing retail investors to earn a share of rental income or real estate development profits without the need for large amounts of capital or property management expertise.
Infrastructure investments, which typically require billions in capital, can also be broken down into smaller units through tokenization. Retail investors can own tokens linked to projects such as toll roads, airports or power plants, giving them exposure to stable, long-term returns generated by essential infrastructure. Such opportunities have previously been exclusive to governments or large institutional players such as pension funds.
Tokenization of these investment-grade products gives retail investors access to a range of diversified and sustainable assets that were previously inaccessible. By allowing smaller investments in these products, tokenization democratizes finance, leveling the playing field for retail investors who want access to stable, lower-risk assets without having to be part of the elite investor class.
This matters because it not only creates a fairer and more equitable investment landscape, but also provides more opportunities for individuals looking to save for their future. In the US, where the nature of work and employment is changing rapidly, millennials and Gen Z are unlikely to spend their entire careers with one employer or benefit from the defined benefit pensions of previous generations. As the workforce evolves—with gig work, short-term contracts, and multiple career changes—the need for flexible, accessible savings and investment options is more pressing than ever. Unfortunately, the infrastructure available to most Americans to take control of their financial future remains outdated.
Decentralized finance offers a solution by democratizing access to financial products that were traditionally reserved for institutional investors. With tokenized investment-grade products, individuals who may not have the benefits of employer-sponsored pensions can gain access to sophisticated financial tools. Greater transparency, flexibility and performance metrics, along with reduced fees, make these options attractive to a new generation of investors. Although the future of work and the broader economic landscape remains uncertain, one thing is clear: the old methods of financial planning are no longer sufficient. Now is the time to leverage blockchain technology to empower Americans to take control of their financial future and secure the economic freedom they deserve.
Nathan Guavin is the founder and CEO of Digital Gray.