With digital assets receiving a boost in legitimacy following the launch of the first spot Bitcoin (BTC) exchange-traded funds in the U.S., asset managers are increasingly exploring the concept of real-world asset (RWA) tokenization to bring greater efficiency to financial markets.
To get an insider perspective on the growing RWA trend and how the next wave of crypto businesses can help advance the transition to a blockchain-based financial system, Kitco Crypto spoke with Reid Simon, Head of Credit at Securitize, which recently launched its new Securitize Credit subsidiary to bring on-chain yields to digital assets by leveraging private market returns.
As the conversation got underway, Simon highlighted the changing state of the companies looking to provide services to the crypto industry, noting that “Securitize has a broker-dealer license, an ATS license, and operates as a regulated transfer agent.”
“Those are all the core ingredients for how securities are traded in TradFi, so the concept of the company was to take that and be able to deliver real-world assets, bring them on-chain, and allow users to hold those assets and use them on-chain,” he said.
But it’s not always a straightforward process, he noted, as the regulations and pain points that exist for TradFi related to accreditations and qualified purchaser restrictions – which keep private assets largely out of the hands of retail investors – “triply exist on-chain for real-world assets.”
“If you look at what’s on-chain today, it’s not particularly high quality, at least in the credit opportunity space,” he said. “So there are a lot of challenges, very elementary, where some of these credit issuances take place in countries that don't even have perfection laws. So ultimately, enforcement against creditors doesn’t really exist.”
He said that is beginning to change now that countries are getting more serious about regulating the digital asset industry, which is leading to a rise in debt issuance via tokenization as opposed to issuing equity.
“In the traditional world, generally, you're taking on debt because you don't want to necessarily give away the upside to your equity,” he said. “But in the on-chain world, you have the advent of tokens, which I think supplanted the traditional role of debt.”
“So you can sell tokens, you have your user base. There's some utility to them. You're not giving away the upside to the equity and the tokens are free,” he said. “So I think debt, on-chain, has been looking for a product-market fit, and it's starting to emerge.
Referring to his time running the credit business for Blockchain.com, Simon said it was always a challenge to identify where debt creates value.
“In a context where tokens don't exist in the traditional world, debt has real value in growing businesses,” he said. “On-chain, it's struggled to find its place, and the only real use case to this point has been leverage.”
“The assets that Securitize sells on its platform are largely assets managed by $100 billion AUM asset managers,” he noted. “They've done this forever, and the assets that they generate create real value, whereas in the on-chain world, my view is that debt and interest rates are largely just a function of supply and demand.”
He noted that the way it has worked for crypto platforms in the past, “Someone will throw incentives on a new platform,” and once people take advantage of the rewards, “all of the assets leave one chain and go somewhere else, leading to a volatile mishmash of everything. So our goal with Securitize Credit was to be able to bridge those two worlds as we see regulation moving in a more favorable direction.”
“We've got crypto embracing more regulation and institutions that are more willing to look at where the real value is held in this space. So we think the natural merge of the two makes sense,” he said. “So the business case with Securitized Credit comes from the fact that we've got these high-quality digital securities that users of ours hold on-chain, and we provide sustainable, transparent yield opportunities to users on-chain for their crypto.”
He noted that the current yield landscape in the crypto ecosystem is “a one-size-fits-all opportunity set that doesn’t offer a risk-adjusted way to look at the rates offered because they are really just a reflection of supply and demand.”
This led Securitize Credit to look at RWA tokenization as “we understood the value that high-quality private assets have been able to provide for a very long time in the traditional world, along with having low volatility, so they are quite attractive collateral assets to be able to lend against.”
The goal of the platform is “to provide utility to holders of tokenized assets and then be able to provide sustainable, transparent, and predictable yields to users on-chain who want to lend those assets,” he said.
Part of the reason for this approach is to help mitigate the volatility that crypto is known for, which keeps many investors from exploring the asset class further, Simon said.
“Volatility is tough. If you've been in crypto for a while, you kind of get hardened by it and in some ways, come to appreciate it,” he said. “But with larger institutions entering the scene that is changing. As these markets mature, there ought to be a maturation of credit opportunities as well. We view ourselves as the platform to deliver that.”
Navigating regulations
When asked what the biggest challenge is when it comes to migrating assets on-chain, Simon said, “The challenge is mostly driven by the fact that securities are securities that come with a regulatory burden that has to be dealt with.”
“The U.S. is the most liquid and strongest market to issue securities in, so if you want to do that, you have to follow the rules,” he noted. “I think one of the primary friction points is due to the restrictions on who can actually hold these assets. Those restrictions don’t just go away because the assets are now on-chain.”
“So, I think the challenge has been that it's been difficult to prove out utility for holding one of these digital securities on-chain because you can't put it into a smart contract because a smart contract is a pooled investment, is owned by a bunch of different people, and it can’t be reported in the transfer agent books,” he said. “You can’t necessarily trade that asset P2P with someone else unless that individual is verified, KYC’d, and eligible to hold the security.”
He added that another “big friction point for why more assets of high quality aren't coming on-chain is because there isn't a ton of utility at the moment versus just looking at your Morgan Stanley account and seeing the same kind of ledger entry there.”
For Securitize and other companies looking to change this dynamic, Simon said that if they “can offer investors who own these assets utility, whether it’s liquidity, leverage, or even compostability, then that is a draw for other asset managers and demand from investors who want to hold these assets on-chain.”
“And by the same token, the value that they're able to generate in and of themselves ought to provide a more stable and financially secure collateral base for lenders to earn a yield instead of just needing to submit to the whims of whatever large hedge funds want to speculate on a position,” he added.
To help provide offerings that will facilitate long-term investments by clients, Securitize has focused on partnering with “the highest quality and most well-known asset managers,” Simon said. “So the likes of KKR, Hamilton Lane, S&P – the real premier brands – because high-quality opportunities in the crypto space are few and far between. So we've taken the approach that we really wanted to stick to the preeminent asset managers, but that could change over time as things evolve.”
RWA liquidity
On the topic of liquidity for tokenized RWAs and how firms can make a market for these assets if they only exist on smaller platforms, Simon said that is a valid concern that will likely take time to overcome as more assets are brought on-chain.
“One of the assets on Secruitize – the Senior Credit Opportunities Fund (SCOPE) – is issued by Hamilton Lane. It’s their senior credit opportunities fund,” he noted. “It’s fully disclosed online, you can see all the investments that they’ve made, and since it’s a senior credit fund, they have senior security on the companies they invest in, and it currently generates a yield of around 10.5%. It has periodic liquidity, meaning you can redeem those shares monthly at the prior NAV.”
“If you think about that asset as a collateral asset in the context of Securitize Credit, it’s generating about ten and a half percent interest a year. So if you are able to finance that at say 9%, then it's economically rational for anyone that holds it to do that,” he said.
On the opposite side of the equation, “As a lender, if you are able to earn something like eight and a half percent on your stablecoins, and that’s the collateral asset that you are otherwise facing off against, it offers an innate yield, the lender has a higher quality asset that they’re able to earn off of, and ultimately, it's a sustainable yield that can be delivered rather than it needing to be something that’s artificially stimulated or depressed based on whatever is going on in the market,” he said. “It’s something that you can set and forget, and it gives the lender an opportunity to diversify and have a bit more control over risk management.”
“If you are on-chain, it probably means you are looking for capital gains with the assets you are holding, but it doesn’t mean that needs to be the only opportunity,” he said. “I think a lot of the platforms on the credit side that offer 90% APY show that people are looking for equity-like returns in a credit context, and because of that, they throw out the risk mitigation side with the thought that, ‘it’s a credit product, it should be less risky,’ where I don’t necessarily think that is the case.”
Future of RWAs
When asked what the future of the RWA movement looks like as it gains traction and adoption increases, Simon noted that “bilateral corporate lending is largely an unregulated activity in most places globally, which presents an interesting opportunity, when taking into account investor restrictions.”
“Credit structures offer financial engineering opportunities that can allow users who can’t necessarily hold a security to access a similar return profile on these assets,” he said. “Through credit structures, high-quality assets that can’t otherwise be held by these individuals can offer similar returns – if you are able to onboard them.”
“That is one interesting way we are working on being able to disintermediate lenders on-chain to users in countries who otherwise wouldn’t be able to individually hold that asset in the real world,” Simon added. “This allows them to approximate some of those allocations on-chain.”
He noted that the emergence of these offerings could help lead to a global regulatory framework for lending, which could help “provide more clarity, at least on the crypto side of things.”
When asked if he thinks we are headed toward a future where all assets will be represented on-chain, Simon said he does, but added the caveat that, “right now, there’s not a whole lot of reasons for everything to be tokenized.”
“Even just moving dollars from BNY Mellon to an exchange to be able to buy crypto is not a seamless process,” he said. “Plaid and some of the other integrations with some of the big exchanges works quite well, but we’re not to the point where it makes sense for a lot of assets to be tokenized because there is no utility for it.”
He said his vision for tokenization “makes sense for things like real estate, as it would allow me to hedge my house price, which I can’t do while the asset sits in a physical deed governed by a regulatory structure that doesn’t allow for that.”
Simon also suggested that a portfolio of assets, real-world and otherwise, “ought to be able to be collectively leveraged or be used as collateral to obtain liquidity.”
“I don’t think it happens overnight, but we are trying our best to be able to help create a bit more of that future whereby we can provide utility to holding high-quality assets on-chain that are then able to interact with other stakeholders and crypto native platforms,” he said.
“Who knows how things will adjust, but the industry is adaptive to pivoting and figuring things out, so I’m confident they will sort it out,” he added. “We’ll do our best here to be able to serve both traditional investors who are interested in bringing assets from the real world on-chain, and us providing them with the utility to do so, while also providing high-quality, sustainable yields on-chain to people who don’t necessarily want to, or can’t, take their asset off-chain to be served by the traditional financial system.”
Uptick in interest
When asked if Securitize has seen a rise in interest and demand for services amid the ramping-up bull market, Simon said the combination of crypto and private credit is attracting a host of new investors.
“If you watch Bloomberg for 10 minutes, I guarantee you someone is going to mention private credit,” he said. “Private credit as an asset class has seen astronomical growth in the traditional finance world in recent years. Post Dodd-Frank, a lot of banks had to pull back from lending because they couldn't hold those loans on their balance sheets with the same capital rules they could before, which opened the floodgates for private credit.”
“Now, they have basically supplanted the place of banks in actually lending to companies, and instead, it’s banks lending to private equity funds, and private equity funds lending to businesses,” he said. “In that contraction of banks, you got this huge influx of availability looking for private dollars to be put to work, and those dollars are generally earning somewhere north of 11 or 12 percent in today’s environment.”
“So that’s one trend we’ve capitalized on well, and people have been very interested in the SCOPE product,” Simon said.
When you combine that with the fact that most of the centralized lending and earn platforms imploded following the 2021 bull market, he said “People are looking for opportunities and our goal is to be able to be the one-stop shop in that regard.”
Briefly touching on the collapse of platforms like Celsius, BlockFi, and Voyager, Simon said, “Unfortunately, uncollateralized lending to people who steal money from you is not a good business.”
A new era of legitimacy
With companies like Securitize looking to bring regulated private credit markets to the crypto ecosystem, combined with the launch of the first spot BTC ETFs on the U.S. market, Simon said digital assets have entered a new era of legitimacy.
“In less than two months, the Bitcoin ETFs brought in $10 billion in assets under management. That’s the fastest ascent of any ETF in history. They have already outpaced the AUM for silver, and they are past the halfway point on gold,” he said. “They have completely legitimized the process of institutional investors allocating to Bitcoin, and I’m sure there will be more ETFs that follow.”
