(Kitco News) – Bitcoin (BTC) tends to dominate headlines related to digital assets, but behind the scenes, excitement is building around the growth of real-world asset (RWA) tokenization, which many feel holds the promise of bringing meaningful changes to the global economic system.
“A significant shift is underway in the world of finance,” said analysts at Schroders. “Tokenisation and blockchain are transforming asset management, propelling us from paper to digital assets in mere decades. For asset managers, embracing tokenization is necessary to remain competitive in an increasingly digital landscape: making our ecosystem more efficient, accessible, and interconnected than ever before.”
For an in-depth exploration of this burgeoning trend, Kitco Crypto spoke to Luca Prosperi, co-founder and CEO of M^0 Labs, a decentralized on-chain protocol and a corresponding set of off-chain standards and APIs that power a federation of crypto dollar issuers.
“Referring to so-called ‘RWA tokenization’, in our opinion, the market intends to encompass a wider theme, which is that of using new technology to represent, manipulate, and transfer value across the globe, blurring legacy and crypto technology, and resulting in a myriad of benefits for both institutional investors and end users,” Prosperi said. “The primary advantage of so-called ‘tokenization’ lies in the ability to elevate how assets can be managed, traded, and leveraged within a permissionless ecosystem.”
He noted that while the space has “immense potential, [it] is still largely unexplored, with most efforts being not-too-imaginative attempts to wrap old financial primitives with new technological tools,” such as tokenized US Treasuries, which now total $1.9 billion, according to data provided by RWA.xyz.
“The potential of DeFi is the unbundling and enhancing of the backend operations of financial systems,” he said. “Bringing finance onto a permissionless, composable, and hyper-transparent technology can enhance liquidity, reduce frictions in asset transfers, and provide a new layer of transparency and efficiency – especially for the most sophisticated use cases currently monopolized by opaque intermediaries.”
Prosperi said that M^0 has been “at the forefront of this movement, focusing on creating a decentralized infrastructure that supports the issuance and management of digital dollars (we call them cryptodollars in contrast to stablecoins) backed by high-quality validated collateral.”
He said that it’s important to differentiate between financial products and financial primitives.
“A money market fund, for example, is not a financial primitive but rather a product,” Prosperi explained. “What’s the primitive behind it? In my opinion, the desire to access risk-free sovereign yield in a monetary system, but in an efficient and easy-to-manage way.”
“A fund is a piece of technology, not of monetary philosophy,” he added. “The idea of tokenizing a fund is no different from scanning an analog picture printed on paper through film. Why not think of new ways to natively record images through bits so that they could be represented on screen?”
“Today, unfortunately, most people in the space see blockchain as a new distribution channel to distribute existing products, brushing the same old products with fresh paint to make them compatible for the new market,” he said. “We refuse this approach. Blockchain has completely upset the way we can represent value (through e.g. scarcity, security, etc.) and (the good) DeFi should continue to do the same.”
The goal of M^0, Prosperi said, is to expand what is possible with RWA tokenization.
“Blockchain is being used more and more for a diverse set of use cases, and needs to accommodate the requirements and standards of large money movers, while also welcoming (when in good faith) the scrutiny of regulation,” he explained. “Even crypto products that emerged in the first generation of DeFi (e.g. automated market makers) are evolving to meet the requirements of a new set of users, such as quality of execution, traceability, segregation, predictability, etc.”
As for which types of assets are seeing the most demand for tokenization, Prosperi said “The more widespread a financial primitive, the more demand it attracts.”
“With the dollar being the cornerstone financial promise in the global financial market, it is not a coincidence that it’s proxies of the dollar risk-free rate that get most of the attention,” he said. “Within the crypto market, however, demand for this is still insufficient.”
“A market is a two-sided reality; we need both offer and demand,” he explained. “The pools of capital that currently exist within crypto are not the same which might require those products to exist in the first place. Crypto-native financial capital is still risk-on, impatient, and typically not too sophisticated; we believe this will evolve as more people get on board thanks to the obvious advantages of the technology.”
To help attract more users interested in RWA tokenization and digital assets more broadly, Prosperi thinks there needs to be more of a focus on usability rather than incentives.
“Subsidizing through (equity-like) incentives can only go so far,” he said. “Crypto has actually done pretty well through incentives but now needs to attract more sustainable users via the benefits it provides them. Stablecoins, the most successful iteration of a crypto product, actually exploded through usability and not through incentives.”
Stablecoins and central bank digital currencies
Delving further into the topic of stablecoins and concerns that the implementation of stablecoin legislation in the U.S. is the first step towards introducing a central bank digital currency (CBDC), Prosperi said the two concepts are actually at odds.
“Actually, those are in tension with one another,” he said. “While stablecoin legislation aims to regulate how financial intermediaries work and too often protect the intermediation function of commercial banks, CBDCs are attempts by centralized governments to expand their footprint and take on roles typically handled by private intermediaries.”
“We do not believe in a future of government-led finance; it is dystopian and ultimately inefficient, just as we do not believe in a future entirely dominated by the same financial intermediaries that dominated the past,” he added. “Where the previous era of photography was dominated by film producers like Kodak, the current one is dominated by data indexing companies like Google.”
Speaking specifically about the ongoing efforts to pass stablecoin legislation in the U.S., Prospei said “We should not obsess over crafting a new dress for old products but instead, try to tackle an existing financial need by fully leveraging the benefits of new technology.”
“The world wants a fully fungible, digitally available, composable, and permissionless form of money that is safe and can interact with the world around it,” he said. “We should stop and think about how we can provide this to users thanks to novel tech. Opening a bank account in a regional bank and having someone input a corresponding number in a smart contract under the periodic paper-based supervision of a regulator doesn’t seem to us an ambitious enough approach. We can and should do better.”
End of the cypherpunk era
The early days of the cryptocurrency ecosystem were dominated by the cypherpunk ethos, which then morphed into a form of crypto anarchy – a philosophy that's all about using cryptographic technology to build communities invisible to the state and multinational corporations.
Since that time, the ecosystem has seen tremendous growth. The launch of spot
Bitcoin and Ethereum (ETH) exchange-traded funds (ETF) earlier in 2024 ushered in a new era of legitimacy and raised the stature of digital assets on the global financial stage.
When asked how this growth, along with the entry of venture capital into the space, has reshaped the original cypherpunk and degen ethos of the cryptosphere, Prosperi said “The influence has gone both ways, actually.”
“VCs have become more experimental thanks to the success of early crypto phenomena, getting more interested in areas of the economy they were previously not touching, like financial services,” he said. “The crypto movement, on the other hand, has become more institutional but also more accustomed to starting with deep pockets and, necessarily, world domination ambitions.”
“VC has definitely turbocharged the sector but has also created the impatience and desire to grow quickly, which is required for those companies to be funded in the first place,” he added.
As for how the integration of TradFi and Defi will reshape the global financial and monetary infrastructure, Prosperi expects a complete overhaul.
“Most old champions will not cross the chasm, and new ones will be crowned,” he said. “We hope, however, not for a mere substitution of incumbents, but for a sector that is more transparent, more resilient, and with far fewer rent seekers.”
“Currently, large financial intermediaries (namely investment and, to some extent, commercial banks) have too much power and an overly opaque profit function in society,” he added. “We should aim at decomposing their role through code, for a global, fully integrated, and continuously evolving sector.”
As for the most promising aspects of DeFi and blockchain technology that can help accelerate adoption, Prosperi highlighted stablecoins and automated market makers (AMM).
“Stablecoin, or better digital dollar, uses – with their potential to integrate with global payment and dollar-denominated financial networks,” he said. “Automated market makers and permissionless lending markets, thanks to their ability to facilitate asset aggregation and transactions in a permissionless and composable manner.”
He also sees great promise in “Financial applications entirely operating on DeFi rails.”
“We should expect the new generation of fintech champions to be largely detached from the banking sector and simply focus on the front-end experience for their users by leveraging back-end financial innovation that exists on-chain,” he concluded.
