Financial History, Legal System, and Technological Cycle The Trillion Dollar Narrative of RWA Cannot Withstand Scrutiny

RWA's Trillion Dollar Narrative A Critical Examination of Financial History, Legal System, and Technological Cycle

As the cryptocurrency market continues to decline, the concept of Real World Assets (RWA) has gained momentum and become a grand narrative recognized by various parties in the industry, even attracting the interest of traditional institutions such as Goldman Sachs and Citigroup.

However, it must be said that the narrative surrounding RWA is far more confusing than that of DePIN. To determine whether a DePIN project is reliable, you only need to rely on your own professional knowledge (such as the technical knowledge of an IoT professional or the business knowledge of a crypto professional) to judge how unreliable Helium is. On the other hand, the narrative of RWA involves financial history, legal systems, and blockchain technology cycles. These knowledge areas have no direct relevance to the productivity of the crypto industry and therefore become irrelevant blind spots.

This article starts with common knowledge to critically analyze the grand narrative of RWA, and welcomes counterarguments and corrections.

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Financial History: From Securitization to Digitization to Tokenization

“Put real-world assets on the blockchain!” This story is indeed very tempting, especially in the current environment of tightening liquidity.

Therefore, you will see the crypto industry, traditional financial institutions, and even governments advocating the narrative of RWA. It can be said that people from different fields, due to their lack of knowledge in financial history, have mistakenly judged RWA, which unexpectedly formed a multi-part chorus in the market and further reinforced their misjudgment.

When you incorporate these voices (referring to all research reports and discussions advocating RWA) into the perspective of financial history, you will find that the exaggeration is too much—they have skipped the historical processes of asset securitization and asset informatization, and directly provided a solution for asset tokenization. The summarized advantages of the RWA solution can be summarized in three points: increased liquidity, simplified transaction processes, and elimination of financial intermediaries.

If it was 1970 and blockchain technology was discovered, and then a solution of “packaging illiquid assets into tradable securities and putting them on the blockchain” was proposed, it could be said as a financial genius. But now it is 2023.

Let’s take the widely cited BCG report as an example. They advocate putting real assets such as real estate, cars, stocks, metals, and artworks on the chain, and conservatively estimate that the value of tokenized assets will reach $16 trillion by the 2030s.

So here’s the question, if the goal is to improve liquidity, do these assets need asset tokenization? The answer is that they need asset securitization. If the goal is to simplify transaction processes, do these assets need asset tokenization? The answer is that they need asset informatization.

Let’s briefly review the transformation of financial instruments since 1970 from the perspective of asset carriers, and their fallacies will become clear.

Asset Securitization for Increased Liquidity

Although mortgage bonds were issued by American farm railroads in the 19th century, true asset securitization began in 1970 when Ginnie Mae issued securities backed by mortgage portfolios. In simple terms, it means packaging and selling the mortgages that banks have not yet recovered to investors in the financial market. This not only allows banks to retrieve funds in advance, but also provides investors with stable financial products, directly leading to the prosperity of the real estate market.

The financial magic of asset securitization lies in the fact that those non-negotiable assets were originally idle, but they are revitalized through securitization. This approach quickly expanded from bank loans to corporate bonds, accounts receivable, and even parking fees. In short, all assets can be securitized.

The wave of asset securitization has released astonishing liquidity and has created countless financial empires during its growth process (such as investment banks shown in “The Wolf of Wall Street”). However, the relaxation of regulations (mainly due to the reckless issuance of junk bonds and leveraged acquisitions) led to the financial tsunami in 2007.

Asset securitization has developed a very mature operating model (asset types, business logic, product principles, transaction structures, etc.) and market norms (issuance filing, listing, etc.) over the decades. The touted trillion-dollar market of RWA today is actually mostly the market of asset securitization. When they boast, it seems that they have forgotten about asset securitization.

So here comes a very realistic and painful question – for those real-world assets, if the goal is to address liquidity, why choose the RWA market instead of the larger and more compliant asset securitization market?

This question actually existed in 2017 when ICO was promoted, but today the answer about ICO is already very clear, which is that ICO and IPO are in different ecological positions, and the irreplaceable advantage of ICO is a lower threshold. Those who promote RWA today are still making the same mistake as those who promoted ICO to replace IPO in the past – they have not recognized their own ecological position, and they are not focusing on the irreplaceable advantages of RWA, but trying to use asset tokenization to replace the market of asset securitization.

Simplified process of asset digitization

Another advantage of RWA is the ability to simplify the cumbersome transaction process in the real world, thereby improving capital efficiency. RWA does have this advantage, but we need to clarify which simplification of processes is brought by blockchain technology and which have already been achieved in the wave of asset digitization.

For example, Bitcoin has achieved global payment functionality similar to the SWIFT system using blockchain technology, and Uniswap has implemented the listing and trading functions of centralized exchanges on the blockchain with just 500 lines of code. However, the efficiency revolution brought by RWA today has already been achieved in the wave of digitization, but it is simply being moved to the blockchain again.

When they were telling the story of RWA, it seems like they forgot about the wave of informatization, so it is necessary for us to trace back the history.

Intel launched the first commercial CPU in 1971, marking the formal arrival of informatization. The wealth created by society began to transform from material form to information form, and this wave also swept through the financial industry.

Nasdaq was established in 1971. At that time, it was not yet an exchange, but a quotation system that integrated over-the-counter trading information. You can think of it as a platform for comparing prices across the network. Although the functionality was simple, it was already quite disruptive compared to the popular paper tape quotation machines ten years ago (by the way, paper tape quotation machines were also very disruptive compared to the earlier practice of modifying prices on blackboards). This was a leap in capital efficiency brought about by technological revolution.

With the continuous advancement of the wave of informatization, the financial industry has more information tools. For example, the adoption of electronic trading systems allows investors to complete the entire process from price discovery to trade execution on their own, without the need to specifically call or fax their brokers to operate (thus ordinary traders can trade dozens or even hundreds of times a day, which was only possible for institutional professional traders in the past). This is another leap in capital efficiency brought about by technological revolution.

Let’s take a look at how RWA is being touted today to improve capital efficiency—they directly compare it with assets that have not undergone informatization transformation, so of course they will come to conclusions that are beneficial to them, but most of the efficiency improvements can be achieved with traditional financial technology, without the need for blockchain (for example, for RWA projects in real estate, spending a few thousand dollars to develop a small application is enough).

Tokenization of assets without intermediaries

Reviewing the securitization and wave of informatization, it is not difficult to find that most of the functions of RWA have been filtered out. Now let’s take a look at how many assets in the real world need to be tokenized.

Note that it is first necessary to select a part of assets in the real world that are suitable for securitization, then select a part of the securitized assets that require informatization, and then select a part of the informatized assets that need to be tokenized.

Citigroup’s report believes that almost anything of value can be tokenized, and predicts that there will be $4 trillion to $5 trillion of tokenized digital securities by 2030, and the trade finance transaction volume based on distributed ledger technology (DLT) will reach $1 trillion.

If it’s not pretending to be ignorant (such as the top 10 annual predictions by China International Capital Corporation), or financial workers just trying to meet KPIs, then Citigroup is also just like that. Because securitization is the function that makes traditional assets divisible and tradable, and informatization is the function that reduces transaction costs, neither of which is the credit of RWA.

The real role of RWA lies in the decentralization of transactions. For traditional financial markets, the ownership and trading of assets usually require authentication and supervision by intermediary institutions, which consume a lot of time and cost. RWA can reduce the demand for intermediary institutions, after all, even the most classical blockchain like Bitcoin can meet basic transaction needs.

However, this is not a problem to be solved at the technical level, but a problem to be solved by policy. In fact, if RWA is benchmarked against a trillion-dollar market, the certification and regulation of intermediary institutions required by traditional financial markets, RWA cannot be simplified, and none of them can be reduced.

Therefore, for real-world assets, there is no motivation to tokenize. The application scenarios listed by those who promote RWA, such as carbon credit limits and real estate, are similar to the projects of the metaverse in small counties. As for the analysis of the challenges that the multi-chain ecosystem will bring to the RWA market in the future, it can be regarded as a joke of groundless fears.

Of course, as a believer in the crypto industry, I firmly believe in the future of tokenization. But common sense tells me that everything needs to follow the historical process. Now, the majority of real assets do not need tokenization, but securitization and informatization. The market for tokenization is definitely not as big as they claim.

Legal System: From Regulation to Law Enforcement to Legislation

After sorting out the changes in financial instruments, you will find that the real driving force behind RWA cannot rely on mature traditional assets, but on the black and gray industries (legal aspects, such as DeFi).

However, for those who advocate the trillion-dollar narrative of RWA, the future seems bright, after all, more and more countries and regions have expressed their support for RWA. This is not only a lack of knowledge in financial history, but also a lack of knowledge about the operation and maintenance of power, which is why they are attracted by grand narratives.

The operation of the financial system cannot be separated from the cooperation of the legal system, and the legal system here is in a broad sense, including legislation, law enforcement, compliance, regulation, etc. The modern financial system is multi-level, and the corresponding legal system is the same.

Due to the complexity and limitations of length and level, this article does not explain in detail (but the next article will provide a more in-depth and specific explanation with domestic law firms). However, we can briefly explain from regulation to law enforcement to legislation.

The most common interaction between ordinary people and the legal system is at the regulatory level. The trillion-dollar narrative of RWA largely involves securitization and informatization, and these areas have already established very clear regulatory norms.

Whether it is the common law system of England and the United States, the civil law system of continental Europe, or the Islamic customary law in the mountains of Afghanistan, any local government must first ensure that it does not disrupt the order. Therefore, although some places have blacklist systems (nothing is allowed except what is explicitly listed in the blacklist), and some places have whitelist systems (nothing is allowed except what is explicitly listed in the whitelist, and even what is explicitly allowed requires layers of approval), they have all formed their own financial regulatory systems.

If RWA extends its reach to these regulated areas, there are only two possibilities – either it is allowed, but with the same high threshold as traditional finance, or it is not allowed and becomes part of the underground economy. So whether it is allowed or not, there is no need for large-scale real-world assets to be done as RWA.

Some people may argue that countries/regions like Hong Kong, Malta, and Salvador are open, but what is the difference between the RWAs they do, which run on a blockchain (or a consortium chain), and traditional finance?

However, if you intend to evade regulation, you may not necessarily be enforced unless it causes disputes (such as jumping off a building for rights protection), or the confiscated income of law enforcement agencies can cover their expenses.

If RWA wants to fundamentally solve the problems of regulation and law enforcement, it must be addressed at the legislative level. But the resources needed to promote legislation (from legal to financial market gears) are far from proportional to the market size of RWA.

Crypto practitioners often have no knowledge of the world on the other side of the Great Firewall (even domestic practitioners feel guilty when seeing police officers), and their understanding of the need for legislative confirmation for RWA seems as simple as opening a massage parlor in a red-light district and needing to give bribes. In short, they use their limited life experience to understand the institutional structural level of the game, so they may make common-sense errors.

Here is a very simple but extremely effective test to identify a “tǔ gǒu” (a Chinese slang referring to someone with limited knowledge or understanding) – Do you believe that Zhou Gongzi (a fictional character) from Jiangxi is real? The answer is that anyone who believes that the background of Zhou Gongzi constructed in his WeChat Moments is true can be basically judged as having no knowledge of the power system. Due to the length of the text, the specific reasons are not explained in detail, but in short, Zhou Jie’s level of attention and understanding is from the perspective of someone who has not had contact with privileges, which is why he can make the same “tǔ gǒu” believe.

Therefore, those who advocate the trillion-dollar narrative of RWA, if they are not pretending to be ignorant, are basically “tǔ gǒu”.

In 2019, a traditional asset trading exchange confidently told me that they should be the first to obtain a license for a digital currency exchange in China, not Huobi or OKEx (there were rumors of licensing at that time). However, the reality proved to be far from the truth. I believe that they, who have been running an exchange in Beijing for many years, did not lie at that time. They must have communicated with the regulatory authorities, but at most, they only communicated with the director who decides whether to approve the stamp. This position carries a lot of power, but has no decision-making space, let alone pushing for legislative matters.

Therefore, even experienced insiders will underestimate the difficulty of financial regulation, largely due to their lack of understanding of financial history and their reliance on short-term successful experiences to make decisions.

Because there are indeed many cases of industry regulation (such as mobile payments, Internet medicine) that first form industry rules through self-discipline norms, and finally transform into regulatory rules or even laws. However, the problem is that this competition that creates established facts and obtains legal recognition afterwards only exists at the channel end. RWA involves mapping real assets to the digital world and circulation, requiring the reconstruction of the entire institutional structure (from upstream to downstream, from business to regulation).

Only countries/regions such as Hong Kong and Dubai, which are mainly focused on external markets, can announce their embrace of RWA without any psychological burden, after all, they won’t surprise anyone even if they open a casino.

Now, the institutions that advocate the trillion-dollar narrative of RWA are hoping for a policy shift. However, those policies that layout Web3 at best only create a small highlight in their governance agenda, and their weight will not be significant. Just like Hong Kong’s so-called Web3 policy, it is only a small part of the governance agenda of Secretary Li Ka-chiu, but it seems like Hong Kong is going all in on Web3 in the crypto industry.

The momentum of Hong Kong’s RWA is largely due to the active embrace of technocratic bureaucrats for the sake of KPI, and then being used as a life-saving straw by the crypto industry. They jointly distort partial signals and blind the peripheral crypto market. In fact, the energy that Hong Kong officials can use to promote this matter is similar to that of a division chief in Beijing—they have no decision-making space at all, let alone promoting it at the legislative level.

Let’s predict the future direction of Hong Kong’s RWA. The institutions in the crypto industry are like stall owners who have grown organically in the black market. Faced with competition pressure, they choose to leave and rely on the accumulated experience of setting up stalls to be recruited to the corners of large shopping malls to perform stall displays. It seems to be an upgrade from setting up stalls in the black market to being a decorative booth in the mall, but the autonomy of operation is also handed over to the mall, achieving a transition from stall owner to employee.

In other words, if the transactions of RWA still follow the traditional financial system (payment system, clearing and settlement system, etc.), then it is like a booth in a large shopping mall that has been decorated, rather than a truly free and independent stall.

Technological Cycle: From network layer to application protocol layer to application layer

Looking back at financial history, the conclusion is that RWA does not have such great market potential. Analyzing the legal system, the conclusion is that RWA does not have such a large survival space. Now, let’s analyze from the technological cycle of the crypto industry, at what stage the industry is in, and at what stage RWA is in.

Since the birth of Bitcoin, the crypto industry has evolved very complexly. The general evolutionary path starts from the most basic public chain (which includes the network layer, data layer, consensus layer, incentive layer), then to the most basic application layer protocol based on the public chain (various smart contracts that are used infinitely and also monetize “access”), and finally to the true application.

However, public chains are also constantly iterating, from the earliest Bitcoin to Bitcoin-based sidechains, to Ethereum and later Polkadot and Cosmos, and now the public chains based on ZK concepts, applications based on different public chains are diverse. However, whether it is a public chain, an application layer protocol, or an application, the ones that truly have vitality are those reconstructed with the logic of crypto, rather than directly copying things from the Internet.

At this stage, it can only be said that the most basic public chains have been established. As for application layer protocols based on public chains (i.e., those key components that can achieve “minimal functionality”), there are currently not many, for example, in the social field, Lens is still exploring its direction, and various applications based on protocols are still far from reaching their full potential.

So at what stage does the trillion-dollar narrative of RWAs happen? It happens when the infrastructure of blockchain is very well-developed. Obviously, it’s not now, and it’s not even the next bull market.

Of course, this article is not completely pessimistic about RWAs, but rather emphasizes that the trillion-dollar narrative of RWAs is unreliable. RWAs still have opportunities in the crypto industry, and that is to reconstruct real-world assets with the logic of crypto, giving them irreplaceable functions through blockchain (rather than doing securitization or informationization, which already have better solutions).

For example, Maple Finance and Helix for corporate lending, Solve Protocol for exploring decentralized bonds, their functionality can only be achieved with “crypto is necessary”. This is the direction where RWAs can truly take root in the crypto world, rather than simply borrowing directly from the already mature traditional finance.

The evolutionary path of RWAs in this direction will be similar to the transformative wave of informationization in the financial industry during the Web2 era – not only transforming the form of assets but also the business models, organizational structures, and even business strategies of the financial industry. More importantly, it directly gives rise to new wealth and creates new wealth empires.

Summary

This is the most challenging article I have ever written. Many times, a small judgment reflects the knowledge and experience of the whole world.

The popular trillion-dollar narrative of RWAs today largely targets the market of traditional asset securitization and securitized asset informationization. Moreover, it requires confirmation at the legislative level to proceed smoothly, a cost that is almost impossible to achieve (if there are resources to promote legislation, doing RWAs would be a waste).

Therefore, we still need to look at RWAs from the perspective of the original evolutionary logic of the crypto industry, which is currently in the stage of building application layer protocols. Just as in the Web3 social field, what is needed is key components that can achieve “minimal functionality” like Lens. The future elites will emerge from here.

As for the trillion-dollar narrative of RWAs, it is currently far from mature. Financial informationization only developed after the implementation of the “Information Superhighway Plan” back then, and blockchain is still in its early stages.

In the crucial moment when technological innovation in the crypto industry stagnates, the narrative of RWA is certainly very tempting. Just as Moses told the Israelites who were working as slaves in Egypt that he was chosen by God to lead them to the promised land flowing with milk and honey, RWA is the promised land of the crypto industry. However, the RWA narrative is obviously more cunning, because even Jesus had to feed five thousand people with five loaves and two fish, and yet people believe in the RWA hype without question.

Therefore, the size of industry volume does not represent correctness, and in many cases, it may be more effective as a contrarian indicator. I even think this applies not only to the crypto industry, but also to the traditional financial industry. For example, Zhongzhi, which recently collapsed, actually had its fate sealed three years ago, and yet there were still high-net-worth individuals rushing into it, indicating that there are still many opportunities in this era.

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