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The start of June 2024 saw the end of one of the biggest cryptocurrency and Web3 events of the year — Consensus 2024.
Featuring some of the biggest names in the decentralized finance (DeFi) space, this year’s event also garnered a lot of attention for real-world assets (RWAs), particularly at the RWA Summit.
As Chainlink’s co-founder, Sergey Nazarov pointed out, the RWA tokenization trend has surpassed DeFi by nearly 50%, with DeFi’s total value locked (TVL) standing at $107 billion and the tokenized RWA trend standing at over $160 billion.
And as companies usually associated with TradFi start inspecting the scene, industry experts suggest that the RWA tokenization market may scale into the trillions, if not hundreds of trillions of dollars.
However, for that to be achieved, global financial systems must become more compatible with blockchain. Which is not the same as saying blockchain must become compatible with global financial systems.
Key Takeaways
- RWA tokenization is outpacing DeFi by nearly 50%, signaling a significant shift in the blockchain landscape toward real-world asset adoption.
- The effects are now moving into the real world, allowing individuals worldwide to invest in properties and intellectual property while eliminating intermediaries and paperwork and unlocking liquidity for traditionally illiquid assets.
- Industry experts highlight its trillion-dollar potential and the opportunities for peer-to-peer economic development, particularly aiding small businesses.
- But there are plenty of discussions to be had on regulatory compliance, both in the U.S. and worldwide.
RWA Opens New Borders for New Opportunities
It seems like RWA tokenization is giving the blockchain industry a fresh glow-up, opening borders for new opportunities where various real-world assets, such as real estate or commodities, can be tokenized, fractionalized, and given a boost in liquidity (something like a house is not a particularly liquid asset).
While larger players will stomp onto the scene first, it also unlocks the ability of individuals worldwide to invest in properties, schools, or intellectual property with ease.
The elimination of intermediaries, reduction of paperwork, and simplification of legal procedures make RWA tokenization a much more accessible choice for people looking to diversify their portfolios — although making this safe and in a regulated landscape is still virgin territory.
Nibras Siebar-Bang, the CEO of Brillion, a wallet for RWA, DePIN and Autonomous Agents told Techopedia:
“RWA tokenization slashes costs by eliminating the need for intermediaries, reducing paperwork, and simplifying legal procedures.
“This makes dealing with assets not only more efficient but also more affordable, freeing up resources for you to invest in other opportunities. All this is done 24/7 in a true self-sovereign manner through the access of your own non-custodial wallet.”
Other industry experts are highlighting that the true promise of RWA tokenization lies in its potential to facilitate peer-to-peer economic development, with a specific focus on small businesses, allowing them to tokenize revenue or equity and access alternative funding sources.
Carlos Mercado, Flipside Crypto’s data scientist explained:
“Small businesses with one or two locations tokenizing their revenue/equity, selling pieces to trusted parties, using this as alternative funding sources for growth (i.e. banks compete with non-banks)…
“It’s easier to double, triple the efficiency and revenue of small businesses than publicly traded ones”
What About Regulatory Compliance?
Regulatory compliance is always a big topic within the DeFi industry, but how does RWA tokenization fit into the discussion?
Nevin Freeman, President of Confusion Capital and co-founder of Reserve Protocol, a project that focuses on the permissionless creation of stablecoins by bundling RWAs, explained to Techopedia how tokenization is working in the current climate.
“Tokenized securities that are coming to market today are doing so within existing securities law boundaries.
“In the U.S., they are all done under exemptions like Reg D that allow offerings without approval so long as they are limited to high-net worth holders (Franklin Templeton, BlackRock) or Reg S, for offerings that exclude US users (such as Ondo).
“But abroad, we’re seeing regulatory approval for retail-accessible products, such as Backed, Swarm, Mountain Protocol, Dinari, and Midas, many of whom are getting approval from European regulators.”
Miguel Buffara, the lead financial engineer at RACE, a global full-stack marketplace advancing the opportunity for tokenized, yield-generating assets, added that law enforcement can easily identify the illegal transfer of assets when they are on blockchain rails due to the available transparency.
However, the integration of tokenized RWAs into DeFi also sees a variety of legal complexities.
According to Flipside Crypto’s Mercado, MakerDAO is leading this charge with nearly $2.4 billion DAI stablecoins minted via real-world asset collateral like Monetalis Clydesdale, which offers bond management services to MakerDAO.
He said:
“The biggest risks are conflicts in the code and the legal apparatus behind the issuer and the asset.
“We see that USDC and USDT (and eventually MakerDAO’s new-not-yet-launched stablecoin) have the ability to freeze assets and block an address from using their stablecoins.
“This is critical for anti-money laundering, sanctions, and other regulatory rules on ensuring value flows don’t go to entities that the government of the issuer doesn’t want getting money. This is also key for freezing assets stolen from a protocol.”
Reserve’s Nevin Freeman also agreed that DeFi protocols that includes tokenization will need to comply with a variety of securities laws, that at the moment, hold a number of unsolved issues.
Hence the Digital Securities Initiative, an industry collaboration focused on solving the hardest consumer protection and market integrity issues that DeFi raises.
RWA Tokenisation to Give Way for Global Trade and Cross-Country Transactions
RACE’s Buffara noted that the global trade industry and any sector that depends on cross-country transactions are about to emerge as the biggest winners in the surge of RWA tokenization.
“Blockchain enables rules to be coded into smart contracts, reducing the need for trust between parties, which is especially challenging in cross-country transactions.
“This technology can streamline processes, reduce fraud, and increase efficiency in sectors like real estate, finance, and supply chain management.”
Additionally, tokenized versions of assets that are already seeing popularity in traditional finance, such as stocks and bonds, are also due to gain popularity within RWA tokenization, Reserve’s Freeman said.
“Tokenization allows assets to be freely held, traded, and used as collateral in DeFi, and I think the market will mostly want to do that with existing assets.
“Over time, we’ll see if the new form factor enables fractionalization and trading of other assets, but I think that’s more speculative.”
The Bottom Line
The surge of RWA tokenization represents a monumental shift in the blockchain industry. Along with the rise in stablecoins and asset-backed currencies, this suggests one of the first key uses that the ‘real world’ will benefit from.
Discussions are needed, particularly around the trade-offs between privacy and security and regional regulation in a global world.
DeFi unlocks the power of programable money, but at the moment, it does not fit easily within regulatory frameworks that have evolved over decades and centuries to cater to a fiat-based world.
But often, it takes the innovators to show the way before markets follow the money, and governments (on a good day) will look to enable that unlocking of new markets with wise guardrails. We live in hope.
