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Real World Asset tokenization and the future of financial markets: Part 1

Kitco, February 6, 2024, by Jordan Finneseth

  • The tokenization of Real World Assets (RWA) presents a strong use case for blockchain technology

  • Blockchain's ability to provide transparent, immutable, and efficient record-keeping makes it ideal for tokenizing real-world assets such as real estate, art, or commodities

  • Tokenization is expected to influence virtually every category of assets worldwide

  • The total available market for real-world assets is estimated to be worth between $3.5 trillion and $10 trillion by 2030

  • Using RWAs in DeFi offers a way to increase the collateral value at the disposal of investors.

The launch of the first spot Bitcoin (BTC) exchange-traded funds (ETFs) on the U.S. market ushered in a new era of legitimacy for digital assets by giving institutional investors a simple, familiar way to gain exposure to the asset class. 


But the bigger story may be the growing interest in real-world asset (RWA) tokenization, which harnesses blockchain technology to record any financial asset on an immutable decentralized ledger, introducing a new level of functionality to everything from stocks to real estate. 


According to the “Full-Year 2023 & Themes for 2024” report from Binance, “The tokenization of RWAs presents a strong use case for blockchain technology. By bringing off-chain assets onto the blockchain, RWA tokenization allows for greater transparency, increased efficiency, and a new realm of possibilities regarding composability and potential use cases.”


To gain deeper insight into this growing area, Kitco Crypto reached out to multiple experts in the field to find out what is driving interest in RWA tokenization and what investors can expect as the blockchain is increasingly integrated into the global financial system. 


“Real-world asset tokenization is indeed one of the most promising applications of blockchain technology,” said Manit Parikh, CEO of The Binary Holdings. “Blockchain's ability to provide transparent, immutable, and efficient record-keeping makes it ideal for tokenizing real-world assets such as real estate, art, or commodities.”


Parikh said RWA tokenization holds the potential to “unlock liquidity in traditionally illiquid markets, democratize access to investments, and streamline complex processes like property ownership transfers.”


“Additionally, blockchain's smart contract functionality can automate compliance, reduce transaction costs, and enhance security in RWA transactions,” he said. “As the technology matures and regulatory frameworks evolve, RWA tokenization could revolutionize traditional finance and asset ownership.”


According to Aaron Rafferty, CEO of StandardDAO, the biggest benefit offered by RWA tokenization is enhanced liquidity for assets of all types. 


“Liquidity, liquidity, liquidity. If we have learned anything from the past few years, liquidity is king and asset tokenization accelerates this capability,” Rafferty told Kitco Crypto. “Many are confused by tokenization thinking it's merely good for 'fractionalization' of assets, but it goes much further.”


“Liquidity for real estate and commercial real estate, decreased transaction fees, and transactions executing in minutes rather than months,” he said. “Automation of workflows using AI will be the next step once assets are fully onboarded. Using RWAs as collateral introduces a much-needed layer of stability.”


“Tokenization is expected to influence virtually every category of assets worldwide,” said Markus Levin, co-founder of XYO. “The Boston Consulting Group anticipates that the global value of tokenizing illiquid assets will reach an impressive $16 trillion by the year 2030.”


Shawn Carpenter, chair and CEO of Stock Alarm, said “RWA tokenization is a fantastic application of blockchain tech. It's like bringing real-world assets, such as real estate or income contracts, into the digital realm. This move offers many benefits, like more liquidity, transparency, and access for everyone.”


“Real World Assets tokenization is definitely a popular narrative right now,” said Stefan Rust, CEO of on-chain economic data provider Truflation. “It will be a slow-moving oil tanker when it comes to the adoption of tokenized RWAs, though some areas will move faster than others. These areas include synthetic assets and reference pricing associated with those synthetic assets, which will allow people to trade and speculate on real-world assets via a synthetic instrument.”


According to Shayne Higdon, co-founder and CEO of the HBAR Foundation, “The total available market for real-world assets is estimated to be worth between $3.5 trillion and $10 trillion by 2030, making it one of the largest market opportunities.”


“Currently, the estimated value of the tokenized assets market is over $100 billion USD,” he said. “However, there is significant work needed to address current shortfalls in the user experience, and to enable seamless and transparent tokenization. It’s not merely technology integration that’s required – in many cases, a complete business shift is necessary.”


Aman Arman, senior marketing executive at Planet ReFi, told Kitco Crypto that “Tokenizing real-world assets through blockchain is not only a vibrant promise for the future, it could potentially revolutionize how we perceive the Web3 world.”


“Many still view Web3 as confined to a strictly virtual space, but RWA tokenization shifts this perception dramatically, creating a tangible connection between our everyday material world and Web3,” he said. 


Alex Malkov, co-founder of the layer-one blockchain HAQQ Network, said that in his opinion, "RWAs, in some sense, are part of crypto essence, its core idea to provide unrestricted access for wider audiences, to bank the unbanked.” 


“I do think it’s the next step to integrating blockchain into our real-world everyday processes,” he added. “The idea of bringing traditional assets like real estate, art, and commodities into the blockchain fold is not just theoretical – it's happening, and it's reshaping how we think about ownership, investment, and transactions.”


Top RWA use cases


“RWAs offer diverse applications and impactful outcomes in decentralized finance (DeFi),” said Parikh.


“Firstly, RWA can serve as stable collateral in DeFi protocols, unlocking the value of assets like real estate or commodities, thus enhancing the security and stability of the DeFi ecosystem,” he said. “Secondly, by tokenizing RWA, DeFi platforms enable fractional ownership and trading of traditionally illiquid assets, paving the way for increased liquidity and new investment opportunities in the DeFi space.” 


“Furthermore, RWA allows for portfolio diversification in DeFi by providing exposure to traditional assets, potentially reducing the correlation between crypto assets and traditional markets, thus serving as a hedge against market volatility,” Parikh added. “Finally, integrating RWA into DeFi can facilitate cross-chain interoperability, enabling seamless value transfer between traditional financial systems and decentralized networks, which could further enhance the efficiency and utility of DeFi platforms.”


Parikh said that the integration of RWAs into DeFi “could bring about increased stability, wider access to investment opportunities, and a more diverse range of assets within the DeFi ecosystem.”


“However, challenges such as regulatory compliance, valuation methodologies, and risk management need to be addressed for RWA to realize its full potential in DeFi,” he warned. “While RWA's applications in DeFi hold promise, it's important to approach their integration with caution and ensure that proper safeguards are in place to mitigate potential risks associated with real-world asset tokenization in the DeFi space.”


Kadan Stadelmann, CTO at Komodo, also sees RWAs as an optimal use case for DeFi. 


“Using RWAs as collateral for crypto loans does seem like the next logical step in the evolution of DeFi,” Stadelmann said. “At the moment, crypto loans don’t make much sense compared to traditional loans. That’s because crypto loans are currently limited in scope. Crypto loan borrowers have to put up money as collateral to receive additional money. The advantage of a crypto loan is that borrowers can receive funds just about instantly.” 


“With traditional loans, lenders take into account the value of existing, non-cash/crypto real-world assets such as a borrower’s home, automobile, or collectibles,” he said. “However, the disadvantage of traditional loans is the lengthy approval process. RWAs on the blockchain could help greatly improve the efficiency of loan origination since the financial data required for approval would be readily available.”


According to Jeff Owens, co-founder of Haven1, owning assets that are hosted on a blockchain holds several unique advantages. 


“For one thing, blockchain technology provides the kind of liquidity that would never be possible for some types of assets, like real estate,” he said. “It also democratizes access to certain assets, such as single bonds or commodities, for example, making investment more accessible and cost-effective. The benefits of blockchain technology also mean that tokenized asset trading is transparent and tamper-proof, which will reduce the risk of fraud.”


“But perhaps the most exciting thing about RWA tokenization is that it facilitates fractional ownership,” Owens said. “Tokenization makes it possible for anyone to own a small fraction of a property or a tiny section of a painting, and thus diversify their investment portfolio and be able to participate in the upside of these asset classes. They can start investing with just $100, or perhaps even less. This could really revolutionize the investment landscape as we know it.”


"One notable use case is the tokenizing of private company shares through RWA, expanding access to a diverse group of investors,” Levin told Kitco Crypto.


“Unlike traditional finance, where private company ownership is typically limited to accredited investors and institutions, RWA allows blockchain-based tokens to represent partial ownership,” he said. “This democratizes access, enabling investors of varying net worth to acquire shares proportionate to their token holdings, fostering increased liquidity and flexibility for both the company and investors.”


“In real estate, RWAs unlock investment for smaller players, overcoming the limited access and liquidity challenges,” Levin added. “With just 3% of the global population currently participating in real estate investing, these tokens on the blockchain democratize fractional ownership.”


“Within lending platforms, RWAs serve as collateral or debt instruments, facilitating user engagement in cryptocurrency borrowing and lending activities,” he said. “Successfully incorporating tokenized real-world assets will reshape the financial sector and play a role in the widespread acceptance of DeFi.”


Levin said this is the first step toward all assets being represented in digital form and stored on blockchain. “This revolutionary technology tackles enduring constraints, brings about efficiencies, and establishes the foundation for a future in which a wide range of financial assets is effortlessly portrayed in digital format on the blockchain.”


“With tokenized RWAs, you can trade assets 24/7 on secondary markets,” said Carpenter. “This makes assets that used to be hard to sell much more liquid.”


According to Rust, “In the longer term, there is a huge advantage to tokenizing and creating synthetic versions of commodities, which will help reduce the prohibitive costs associated with warehousing physical assets.”


“Just having some sort of digital collateral pegged to the price associated with commodities like copper and uranium, and ensuring that they are 100% collateralized, represents a far greater opportunity in terms of cost-effectiveness and efficiencies, and a more attractive opportunity for speculation,” he said. “This will help create an open, limitless market associated with these commodities.” 


“This will mean that, for the first time, a mass audience will be able to participate in commodity trading, where in the past $100 billion worth of profits have been limited to, say, 15 different types of institutions,” he noted. “Now, retail investors will be able to buy into all sorts of interesting commodities: from orange juice futures to uranium. With the help of tokenization, 2024 will be the year commodities trading moves on-chain.”


“I wouldn’t call on-chain stocks or gold something truly revolutionary, truth be told,” said Max Thake, co-founder at peaq. “It’s more versatile, more accessible, but overall, not a breakthrough. Things get more interesting with more creative use cases, though.” 


“Tokenized real estate is a great exercise of turning illiquid assets into fast-paced liquid ones, and the same goes for any sort of real-world machine creating real-world value,” he said. “ELOOP, a project in the Peaq ecosystem, is pioneering this approach with the tokenized car-sharing Teslas that reward holders with a part of their revenues.”


“This model can be expanded to include anything from a robot restaurant to a drone delivery service or a wind turbine field,” he added. “Besides the sheer excitement of turning such dynamic assets into tokens generating sustainable rewards, this model also enables all sorts of innovative projects to raise liquidity faster and with fewer hurdles, giving the global Web3 community a chance to contribute to a project with a real impact while earning rewards.”


“RWAs are definitely the next big thing for DeFi, or at least one of them, as they indeed enable you to do more with the regular assets,” said Thake. “In Web3, you’ll be able to stake your tokenized stocks with a few clicks, earning extra rewards on top of their dividends and price action, and there are multiple other hypothetical use cases for them, from yield farming to DeFi lending.” 


“Still, I’d like to think RWAs will be way more exciting than stocks on steroids,” he said. “RWA tokenization will bring businesses to Web3 as they look for ways to do more with their assets and unlock new revenue streams. It will also enable dreamers and innovators to access liquidity directly from the global Web3 community, rewarding them with a stake in their exciting projects.”


According to Heine, “Likely applications of RWAs include tokenizing financial and digital products such as staking yield, real estate, art, commodities, and even intellectual property.”


“As Fred Ehrsam from Coinbase once said in 2018 “‘Everything will be tokenized and connected by a blockchain one day,’” he said. “As well, BlackRock CEO Larry Fink mentioned that tokenization is ‘the next generation for markets’ which I would agree with. The rate of these statements is increasing which speaks to the rapid integration into TradFi and the recognition of the industry to move towards a tokenized future.”


“Though RWAs are not the only important application of blockchain technology, they remain among the most promising,” said MacPherson. “They are a very important part of blockchain utility in the real world, and I believe that we will see their application underpin the next bull market.”


“Further, we may see RWAs onboard more people to DeFi as they provide a familiar touchpoint within an unfamiliar space,” he added. “RWAs will scale up DeFi by several orders of magnitude. Their use in over-collateralized lending is set to be the most significant area of impact, but even just having a shared, public ledger will drastically improve efficiencies in managing assets.”


“The primary RWA focus within the DeFi space until now has involved assets such as tokenized Treasury bills, and I expect this will continue,” he said. “However, other asset classes are increasingly prominent across the Web3 ecosystem, including precious metals, artwork, and real estate.”


Higdon also agreed that “The tokenization of real estate stands out as a key application.” 


“Imagine being able to fractionalize and trade a portion of a shopping center, for example,” he said. “Tokenization opens up the market to more investors and democratizes assets that were once only available to the ultra-wealthy or ultra-connected person.”


“RWAs can be and will be ubiquitous,” said Arman. 


“Tokenized RWAs can have a range of items as their underlying asset, including physical collectibles, financial instruments, commodities, intellectual property, VC funds, energy, consumer products, agricultural products, luxury goods, and much more,” he added. “This synergy between RWA and DeFi has led to much enthusiasm among the crypto investor community.”


Arman noted that historically, “the lack of real utility value and inefficient tokenomics have often slumped the growth of DeFi as investors kept shifting to more stable and well-known asset classes. However, the arrival of RWAs removes that growth bottleneck by introducing new asset types to the DeFi ecosystem.”


“For example, real estate, a category often seen as slow-moving and somewhat illiquid in nature, has been transformed by RWAs into a lucrative opportunity through fractional ownership, enhancing its liquidity and inclusivity,” he said. “Enhanced value propositions like these are evident across several other classes. So, there is no reason why RWAs could not become the next big thing in the realm of DeFi.”


Banon said “RWAs offer multiple DeFi applications, including collateralization for loans, expanding DeFi products, enhancing liquidity, fostering organizational innovation, promoting environmental sustainability, and solving integration challenges.”


“This could revolutionize finance by bringing real-world assets into a single, liquid, digital market,” he said. 


Tokenized treasuries

“RWA has been talked about for quite a long time but it seems that 2024 will be a great year for the technology as it picks up more steam and we see significant upticks in capital and growth in associated projects,” said Sebastian Heine, chief risk and compliance officer at Northstake. “The focus of tokenization recently has shifted towards financial products such as treasuries and I do believe that is where we will see the biggest growth as a means to make global financial markets faster and more efficient.”


“The tokenization of treasuries clearly shows the direction we are moving in, which is an institutional blockchain and digital assets world that is getting more and more interlinked with the TradFi world of banks and asset managers,” he added. “Tokenized treasuries show the demand for tokenized financial instruments as these hold clear advantages in terms of cost and speed.”


“Regulation for these instruments is not there yet but there are good examples, such as in Germany and Luxembourg, and also the U.S,” Heine said. “These countries are providing some regulatory basis but the digital securities are still limited and therefore we need further advancements from regulators to integrate them further.”


“People traditionally invest in treasuries as a flight to safety during economic or geopolitical turmoil,” said Higdon. “If banks can provide instant settlement, lower fees, 24/7 trading, and transform an illiquid asset into something liquid, it’s an attractive proposition for the trader and the bank. It’s a no-brainer.”


Parikh said the move to tokenize Treasuries “reflects the growing acceptance and integration of blockchain technology and digital assets into traditional financial instruments.”


“It has the potential to revolutionize the way traditional financial assets are traded, settled, and managed,” he added. “By leveraging blockchain technology, tokenized Treasuries can enhance transparency, reduce administrative costs, and increase accessibility to a broader range of investors. This has the potential to open up new opportunities for capital formation and investment diversification.”


“The adoption could indeed be a sign of things to come within the industry,” he said. “It may pave the way for the tokenization of various other assets, such as stocks, real estate, and commodities, leading to a more efficient and inclusive financial ecosystem. However, it's important to note that regulatory and technological challenges will need to be addressed for widespread adoption to occur.”


According to Levin, “Utilizing tokens for Treasuries has the potential to streamline operations, decrease administrative burdens, and create opportunities for increased investment and liquidity.”


“Moreover, advancements in the field are challenging the simplistic view of crypto as ‘high-risk’ and treasuries as ‘low-risk,’ fostering a more nuanced integration of both realms,” he said. “This evolution is unlocking unexplored risk profiles, and empowering fund and asset managers to devise intricate portfolios and management strategies in the evolving financial landscape.”


"On-chain money market products will see a big surge,” said Markus Infanger, senior vice president of Ripple.


“According to crypto research site, the market value of tokenized U.S. Treasuries increased nearly six-fold since Jan 2023, jumping from $104 million to $675 million,” he said. “By the end of 2024, I predict that tokenized treasuries could reach $5 billion as more businesses recognize the value of transforming physical assets into digital tokens. This shift could unlock significant liquidity and open up new avenues for investment and asset management.”


“Tokenizing treasuries was one of the initiatives that really helped spur the adoption of RWAs,” said Rust. “Seeing the flexibility and market opportunity tokenized treasuries offered really helped propel crypto into the fiat world.” 


“In the past, it’s always been about bringing fiat money into crypto, which is what we're seeing with the ETFs,” he added. “However, the move to tokenize treasuries is short-term – they’re attractive for investors as long as the interest rates are high. In the tokenized treasury market, investors will seek higher yields than 5%.”


Sam MacPherson, CEO and Co-founder at Phoenix Labs, said tokenized T-Bills “are the low-hanging fruit and are an ongoing RWA trend that started with USD stablecoins. They continue to be the safest stablecoin investment vehicle. This trend will continue as economic pressures bring more RWA asset classes on-chain due to efficiency and a high-interest rate environment.”


For Alan Vey, founder and chair of Aventus, the “increasing presence of tokenized treasuries is a major marker of the maturation of the blockchain industry, indicating that its applications beyond crypto and DeFi are being recognized on a significant scale.”


“In particular, tokenized treasuries will be able to enable trustless transactions via the Economy of Things, whereby direct, secure, and efficient exchanges between IoT devices, machines, and humans will be able to occur without a centralized authority,” Vey said. “Imagine being able to order a ridesharing car and the payment is settled automatically, without Uber and your bank charging fees and a bespoke insurance contract is issued for the ride.”


“As people see the benefits of tokenized treasuries, including efficiency and transparency, security and interoperability, it's likely that a snowball effect will begin to occur,” he concluded. 


“Tokenized treasury bills are a prime example of what could happen if blockchain unleashes its true potential to make our access to real-world assets easier,” said Arman. “Meanwhile, for the providers, they are easy to issue as crypto tokens, and investors or buyers can hold, trade, or exchange them on a blockchain through automated trading and enhanced accessibility.”


“Additionally, they possess the additional benefits of blockchain, including improved security and fraud prevention qualities, enhanced speed and efficiency, and liquidity,” he added. 


“The move towards tokenized U.S. Treasuries highlights blockchain's potential to make financial markets more inclusive and efficient, offering global access and simplifying transactions,” said Justin Banon, co-founder of Boson Protocol. “This trend points to a future where more assets could be digitized, broadening investor access to financial markets.”


Malkov agreed that “The move towards tokenizing treasuries highlights the potential bridging between traditional finance and DeFi.”


“It's like watching two different worlds start to find common ground,” he said. “Specifically, tokenizing US Treasury bills is a big deal because it's a vital part of the infrastructure for stablecoins, which are increasingly important in the crypto space. Of course, T-bills are low-hanging fruit: they are a relatively safe investment, widely accessible, and beneficial for the US government, which could be more lenient towards the crypto industry as long as it helps to fuel its Federal Reserve.” 


“Tokenized treasuries are the next evolution of stablecoins where interest from dollars held are passed to the stablecoin holders,” said Tegan Kline, CEO of Edge & Node. “They are a natural evolution of the stablecoin market. USDT Tether for example reported profits of $6.2bn in 2023 on a base of 50 employees. It is natural for some of these profits to pass through to holders.”

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