In part 1 of our exploration into real-world asset (RWA) tokenization, we explored the concept of digitizing assets like treasuries and stocks, enabling them to be hosted on a blockchain and utilized in decentralized finance (DeFi), and covered some of the main use cases currently available to investors.
In part 2, we look at the future of tokenization and how it will factor into the adoption of blockchain technology and cryptocurrencies moving forward.
Future of tokenization
When asked if RWA tokenization is the first step toward all financial assets being represented in digital form and stored on blockchain, Manit Parikh, CEO of The Binary Holdings, told Kitco Crypto “It's highly likely that the trend of representing financial assets in digital form and storing them on blockchain will continue to grow.”
“Blockchain technology offers security, transparency, and efficiency, making it an attractive option for digitizing and managing financial assets,” he said. “As more industries and institutions adopt blockchain technology, it's plausible to envision a future where most, if not all, financial assets are represented in digital form and stored on blockchain.”
“However, the pace and extent of this transition will depend on various factors, including regulatory frameworks, technological advancements, and market acceptance,” he said.
“In 20 years, the idea of keeping your asset titles off-chain will seem as absurd as actually trading stocks in the New York Stock Exchange or waiting 5 days for an ‘Out of State Check’ to clear,” said Alex Hochberger, founder of Web3 Enabler. “Tokenization of securities is an obvious use case, and merely an extension of the migration from paper records to digital records.”
“In order for RWA tokenization to really take off and bring the benefits of Web3 to the masses, several things must be ironed out,” said Jeff Owens, co-founder of Haven1.
“Firstly, we are currently seeing institutional tokenization experiments, but mass retail applications are yet to emerge,” he noted. “For this to happen, we need the necessary infrastructure, which includes some form of on-chain identity verification for proof of ownership.”
“There are also regulatory hurdles – owning a fraction of a property should, in theory, be subject to the same rules as the property market itself, so we need to understand how this pertains to tokens,” Owens said. “This is why we’re likely to see the tokenization of stocks, bonds and ETFs first, with the regulators appearing more open to handing out traditional brokerage licenses.”
“On our side, DeFi participants need to figure out how these considerations fit in with the permissionless nature of the space,” he added. “Essentially, how do we combine the best of both worlds, DeFi and TradFi? We will need to answer these questions before tokenized RWAs become as common as ETFs.”
According to Markus Levin, co-founder of XYO, “To propel tokenization to its full potential, some advocate for innovation to unlock diverse use cases, while others emphasize the need to refine its design to ensure improved liquidity and long-term sustainability. A comprehensive approach addressing these aspects is crucial for tokenization to fulfill its promises and transcend mere hype.”
“We will see new infrastructure that focuses on backward integration with legacy financial institutions to help drive change management and increase adoption of blockchain,” said Markus Infanger, Senior Vice President of RippleX, which supports partnerships and developer growth around the XRP Ledger. “For example, the expanding use of smart contracts and tokenization on XRPL/blockchains tokenizing conventional assets such as bonds, equities, real estate, funds, and various financial products may be the use cases that allow traditional finance to tap into crypto technologies.”
“While only some things will go digital overnight, RWA tokenization is a big step,” said Shawn Carpenter, chair and CEO of Stock Alarm. “The benefits of blockchain, like efficiency and transparency, are too good to ignore. So, it's a sign that more financial assets will go digital.”
Sam MacPherson, CEO and Co-founder at Phoenix Labs, said “The economic forces that are at play in the background mean that it is inevitable that everything will eventually move on-chain. Once the advantages of early use cases become apparent, it's likely we’ll then begin to see a snowball effect, with tokenization quickly rolling out across industries.”
“With a staggering potential market capitalization of $20 trillion, RWA tokenization has the potential to play a huge role in driving revenue for businesses by providing real-time data visibility, advanced security and scalability, and a zero and first-party customer data funnel at a time when data privacy laws are on the rise and customers are demanding more data protection,” said Alan Vey, founder and chair of Aventus.
“Additionally, RWA can fuel brand loyalty – which is crucial with research indicating it is 5 to 25 times less expensive to keep an existing customer than acquire a new one,” he added. “Brand-integrated digital marketplaces, products and experiences that prioritize ‘ownership’ and meet consumer demands for choice, enabled by RWA, create sticky habit loops and brand advocates, building deeper brand loyalty.”
“DeFi is definitely one of the most natural applications of RWA, and in many ways, has served as a proof-of-concept for RWA – but they have so many broader applications,” said Vey.
“From supply chain management, where tokenizing products on the blockchain allows consumers to trace the origins and authenticity of products, reducing counterfeiting, to real estate, where fractional ownership of RWA enables investors to buy tokens representing a portion of a property, enabling them to invest in real estate without the need for significant capital, the applications of RWA are vast,” he said. “It’s likely we’ve only seen the beginning of RWA’s applications.”
Vey noted that while it’s “a bold move to say that absolutely all financial assets will be represented in digital form and stored on blockchain, the world is certainly becoming more and more digital – and as Gen Z and Gen Alpha, who are totally digitally native and very comfortable with digital representation of physical assets, come to represent larger proportions of society, the resistance against this transition will only decrease.”
“Digital representation on a blockchain can have significant benefits which will also help accelerate this transition, including providing a more fair and equal playing field – for example, those in developing countries will have equal access to financial assets – all they need is a cell phone and internet access,” he said. “It’s also a safer route when it comes to financial assets, as the immutable and decentralized nature of blockchain means that committing fraud is significantly harder.”
“The merging of the TradFi and DeFi ecosystems seems inevitable, with tokenization being the most logical starting point,” said Shayne Higdon, co-founder and CEO of the HBAR Foundation. “For DeFi assets to become viable capital without exorbitant interest rates, greater stability and regulation are required. While the returns in DeFi are great, the risks are also substantial.”
“Businesses consistently seek faster, cheaper, and more secure ways of operating. This is certainly true in the banking world,” he added. “If a bank can shave 200-300 basis points off of billions of daily transactions then the business will be more capital efficient and profitable. The shift toward digital representation on Web3 technologies aligns with these business objectives, therefore it’s hard to imagine that businesses, and shareholders in particular, would not be on board with this.”
“Tokenized RWAs have already established their presence quite prominently in linking TradFi and DeFi,” said Aman Arman, senior marketing executive at Planet ReFi. “In the future, more utility-rich tokens will emerge, covering all sorts of financial assets as their underlying assets.”
But it won’t all be smooth sailing for RWAs as global regulators are likely to want to have a say in the matter while large legacy financial institutions have historically been slow to adopt new technologies that upend established business practices.
“Navigating regulatory landscapes will continue to be a significant challenge in the blockchain and cryptocurrency sector, especially around customer vetting and Anti-Money Laundering (AML) checks,” said Alex Malkov, co-founder of the layer-one blockchain HAQQ Network. “These requirements often conflict with the Web3 community's privacy values.”
“However, there's a growing effort within the sector to address these concerns,” he said. “Many projects are now diligently working to establish strong Know Your Customer (KYC) and AML frameworks, aligning with regional laws and obtaining the necessary licenses. This shift towards compliance is crucial for building a safer and more trustworthy environment in the digital finance realm, balancing the need for security with the community's privacy expectations."
Tegan Kline, CEO of Edge & Node, said “The demand side is the most important part of the equation,” when it comes to what will help with the adoption of tokenization. “Today the demand for all financial assets appearing on the blockchain is low. Banks, real estate, and insurance companies have existing systems that have been built over decades. These systems are unlikely to be replaced. So RWAs will be driven by *new* markets where there is demand.”
RWAs and cryptocurrency adoption
Addressing the topic of RWAs and the broader adoption of cryptocurrencies, Parikh said that RWA tokenization “holds the potential to broaden the reach of blockchain technology and cryptocurrencies by making real-world assets more accessible to a wider investor base, thereby democratizing asset ownership and attracting more individuals to the crypto space.”
“Tokenizing real-world assets can improve liquidity in traditionally illiquid markets, drawing in traditional investors who may have been hesitant to engage with cryptocurrencies due to concerns about market stability and liquidity,” he noted. “RWA tokenization enables fractional ownership of assets, allowing investors to diversify their portfolios without the high capital requirements typically associated with real-world asset investment.”
“Blockchain technology's transparent and immutable ledger enhances trust in the ownership and transfer of assets, potentially appealing to individuals and institutions valuing transparency and security,” he added.
“However, it's vital to address the regulatory challenges associated with RWA tokenization to ensure widespread adoption,” Parikh warned. “Regulatory clarity and compliance frameworks are crucial for successful integration into the mainstream financial ecosystem.”
“While RWA tokenization offers clear benefits for driving the mass adoption of blockchain technology and cryptocurrencies, addressing regulatory concerns and ensuring robust and secure infrastructure are imperative,” he concluded. “Effectively navigating these challenges could pave the way for RWA tokenization to play a pivotal role in driving widespread adoption.”
“If anything can be the catalyst for the mass adoption of cryptocurrencies, it’s real-world asset
Tokenization,” said Owens. “More so even than the long-awaited spot Bitcoin ETF, whose main role is to make it easier for all types of investors to buy Bitcoin.”
“RWA tokenization is about much more than that,” he added. “It has the potential to bring almost any type of asset onto the blockchain – from US treasuries to real estate and paintings. Over time, RWA tokenization could literally bring the entire global investment market on-chain, which means trillions of dollars of liquidity.”
“RWA demonstrates the capability of blockchain technology to address real-world challenges,” said Levin. “For far too long, the mainstream’s perception of crypto has often been linked to get-rich-quick schemes and extreme volatility. Tokenization, however, is poised to bring real-world tangible value on-chain, challenging crypto’s association with hype and spam while making investments accessible to a broader audience.”
Carpenter told Kitco Crypto that “RWA tokenization can absolutely bridge the gap between traditional finance and cryptocurrencies.”
“When people see real-world assets represented on the blockchain, it becomes less intimidating and more accessible,” he said. “This could bring more people into the crypto world and, who knows, even into other blockchain-based industries.”
“The RWA tokenization sector is set to grow in 2024 and beyond,” Carpenter said. “However, it's not all smooth sailing. There are challenges, like dealing with regulations and building trust. Collaboration between blockchain companies, traditional financial institutions, and regulators will be crucial to success. As the sector evolves, it could spark even more innovation in blockchain technology, opening up new possibilities.”
In the opinion of Max Thake, co-founder at peaq, “RWAs will most definitely bring more people and companies to Web3 as they offer investors something that they can feel comfortable with – a familiar tool in a shiny new wrap, with some extra features on top.”
“It’s not a bad offer, especially at the time when various investment apps are so popular,” he said. “Furthermore, I think there’s also value in bringing Web3 closer to the real world. For too long, some of us have been stuck in the echo chamber of inside-baseball coin talk; it’s time for Web3 to get real, and going real-world is just the way to do it.”
Sebastian Heine, chief risk and compliance officer at Northstake, said there are two ways that RWA tokenization will increase the adoption of blockchain and cryptocurrencies.
“The institutional side will focus on tokenized yields and financial instruments and then the retail or private investor side might be more interested in tokenized real estate or high-priced commodities and collectibles such as sneakers and watches,” he said.
“The application of RWAs is the most obvious path to providing the value of blockchain technology and cryptocurrencies to the world,” said MacPherson. “Beyond current use cases, the ability to tokenize any product or asset and allow for additional security, particularly in relation to the verification of certain assets, is highly compelling. Bringing assets from the real world to blockchain provides non-Web3 natives with an access point with which they have familiarity and works to easily facilitate individual and mass blockchain adoption.”
Higdon said that mass adoption will truly occur “when people who use a product or service don’t know that the underlying technology is blockchain.”
“Blockchain-backed products and services must deliver a user experience that is an order of magnitude greater than the current experience provided by Web2 technologies,” he said. “Although blockchain can do that, it currently requires a considerable level of know-how by the user.”
“It’s analogous to past technological advancements like the transition from the flip phone to the iPhone, and the horse and cart to automobiles,” Higdon added. “Both of these services do the same thing but one has many more benefits and capabilities than the other. The Web3 industry is rapidly advancing, moving from the equivalent of the Blackberry phone, towards an era-defining innovation, possibly yet to be invented.”
“While the growing adoption of blockchain and cryptocurrencies is a function of several variables, RWA tokenization is definitely a forerunner among the drivers, significantly expanding the opportunities for crypto investors,” said Arman.
“Through tokenization, investors can now access a broader array of assets, previously beyond the scope of decentralized finance, enhancing the system's security, speed, and transparency by bringing it on the chain,” he added. “This innovation has opened up high-priced assets like revered artworks, luxurious real estate, or jewelry to retail investors who were previously unable to afford such investments.”
“This is all thanks to tokenization that enables fractional ownership and pooling of resources, addressing issues related to accessibility and tax evasion strategies,” Arman said. “Thus, RWA tokenization is set to spur market growth by streamlining processes, increasing transparency, and facilitating audits. By reducing systemic risks, it bolsters trust, which is essential for wider adoption across various sectors.”
“RWA looks like the most logical (if not the only) way to increase crypto capitalization or, more precisely, total value locked, one of the key metrics defining overall popularity and usability of the chain,” said Malkov. “Through RWA, Web3 is showcasing how recently the ‘claim-to-be-virtual’ industry can solve real-world problems and generate benefits for both sides of the economy, legacy and cutting-edge.”
And Dean Tribble, CEO of Agoric System, believes RWAs will help with crypto adoption by reducing the complexity of transacting within the various layers of the ecosystem.
“A major challenge for traditional financial players in interfacing with the crypto market as it currently exists is its complexity,” Tribble said. “Firms may not know which chain to issue on or how to attract a user base. As the market moves more towards chain abstraction, with applications orchestrating across chains, this concern will subside and firms will be able to issue assets without fear of being locked into the ‘wrong’ ecosystem.”
RWA tokenization: A massive opportunity
“In a nutshell, RWA tokenization is reshaping the way we think about assets and finance,” said Carpenter. “While there are hurdles to overcome, the potential is enormous. So, prepare for a future where more of what we own and invest in is digitally represented on the blockchain. Exciting times ahead!”
Thake said the process offers the world “an immense opportunity to transform the very foundations of how we own, manage, and earn from things big and small, from on-chain stocks to an actual Tesla driving around the streets of Vienne.”
“Seeing this exciting sector merely through the prism of traditional financial instruments feels a bit reductionist, to the point of missing out on a colossal chance for change,” he added. “There are hurdles to overcome, as always, and yet, I feel that RWA tokenization is a great opportunity for Web3 builders to let their imagination run wild — and wow us all as they merge the real and the digital worlds and value.”
According to Arman, for the RWA sector to “achieve its true potential, [it] needs the most is a streamlined and uniform regulatory ecosystem, and for that, contours that define what is legal and what is not also need to be drafted.”
“In blockchain’s case, the world is becoming increasingly confident about its usability and advantages, thanks to the efforts that are being made towards these aspects,” he said. “Innovations aimed at enhancing scalability are crucial, especially as the need to accommodate a large number of investors and retail participants rapidly grows. Being capable of securely delivering that space would mean sky-high growth for the sector soon.”
According to the 2024 outlook report from Binance, RWAs are expected to “benefit from the tailwinds of elevated interest rates.”
“Alongside the accelerated institutional adoption of RWAs, developments in related infrastructures such as decentralized identity, oracles, and interoperability solutions are also expected to gain momentum,” Binance said. “These elements are crucial for the establishment of a comprehensive RWA ecosystem. As more institutions delve into the tokenization of RWAs, the advancement of these supporting infrastructures is likely to follow suit.”