We highlighted how significant future growth in EM tokenized local debt can come from the unbanked across the world. Now we will focus on how a shift from the US to emerging markets can drive volumes and returns in tokenized EM local debt, taking from the wallet share of BUIDL and FOBXX.
The market shares of BUIDL and FOBXX of tokenized government bonds are too high at over 90% of tokenized fixed income. Asset classes, or businesses that have over 90% market share, rarely maintain that share over time, especially when barriers to entry and costs are low, like they are in the blockchain world.
To see what can happen, we can look back on equities. In the 1980's, 1990's, and 2000's non-US equities were a tough sell. Very few US investment managers invested in Europe or Asian equities, with the standard refrain being "why invest outside the US when the best companies are in the US?" Such arrogance did not stand the test of time as Japan, Europe, and Emerging Markets all grew to the point that now the MSCI ACWI Index, the benchmark index for global equity investing, is now 40% US and 60% non-US with the largest chunk being in Europe.
If equities can go from 99% of the global index to 40%, it can happen in tokenized bonds. Early dismissal by investors of non-US equities only lasted so long. Eventually they gave in and allocated funds to non-US equities, leading to significant demand and great returns.
While the development of equities is a reflection on what could happen in tokenized bonds, the move to non-US tokenized bonds will be much faster. The requirements to set up foreign accounts and custodians in the 1980's, 1990's, and 2000's created headwinds to increasing exposure to non-US equities. They were both onerous and costly.
But with blockchain, there are no cumbersome regulations acting as headwinds to get set up for foreign exposure. Sure, there are KYC requirements, but they are in the US too. There are no piles of paperwork that must be completed to establish custodians, and the cost is low.
Combing attractive returns and low cost to entry, EM local tokenized debt could be poised to take share from BUIDL and FOBXX.
Emerging market tokenized bonds by Etherfuse in Mexico yield 5.78%, in Brazil 13%, and in South Korea 2.25%. Instead of owning BUIDL or FOBXX you can get a higher yield by a combination of Mexico, Brazil, and South Korea; the yield on an evenly weighted portfolio of these bonds is 7% on Etherfuse. These bonds can be bought on the same platforms as BUIDL and FOBX, and eventually these bonds will eat into the wallet shares of BUIDL and FOBXX.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
