Tokenizing Everything Institutional Betting on the RWA Track Enters the ‘Golden AgeTokenizing Everything Institutional Betting on RWA Track Golden Age.
Source: Coindesk; Translation: LianGuaiBitpushNews Mary Liu
The biggest misconception about cryptocurrencies for outsiders is that they are not “real” because they lack the support of tangible assets in the real world. They are highly speculative, and the fluctuating prices can lead to losses for inexperienced investors. Some even seem absurd, with the prices of meme coins and NFTs like Bored Ape Yacht Club reaching millions of dollars.
You don’t have to agree with these assessments (I don’t completely agree myself). But whether you accept them or not, these are some of the reasons why most banks, financial institutions, governments, and billions of “ordinary people” have not yet bought into cryptocurrencies.
However, what if the next generation of cryptocurrencies is not made up of “magical internet money” that they have never heard of, but instead consists of “tokenized” stocks, bonds, cars, and things that people truly care about in the real world?
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Consumers, including skeptics on Wall Street, are starting to pay attention to the tokenization of real-world assets (RWA), and this interest has quietly surged during the crypto bear market. Lucas Vogelsang, CEO and Co-founder of Centrifuge, said that tokenization can “create liquidity for illiquid things in today’s world,” and the company has already tokenized over $400 million worth of RWAs.
While most cryptocurrencies are a new type of asset—from Bitcoin to Ethereum to Dogecoin—tokenization puts assets from the “real” world on the blockchain, combining the advantages of blockchain with real-world assets.
Almost anything can be tokenized. Art, real estate, luxury goods, wine bottles, cars, carbon credits, as well as financial instruments like treasury bonds and stocks—they can all be put on the chain.
Allan Pedersen, CEO of the Monetalis Group, dedicated to RWA tokenization, said, “We are working to tokenize everything and then see if we can eliminate all costs of the underlying systems.” Pedersen mentioned that they have tokenized $1.2 billion worth of treasury bonds and used them as collateral on MakerDAO.
Even intellectual property can be tokenized. Sid Powell, CEO and Co-founder of Maple, said, “Imagine someone running a YouTube channel, making some cooking videos.” Maple tokenizes the assets and converts them into collateral. Now imagine that this witty and charismatic YouTuber has attracted a large audience and earns $50,000 a month from YouTube ad revenue.
The creator can tokenize the copyright and sell it to financial intermediaries. Powell explained, “We purchase the tokenized rights from them. We have the right to all royalty streams from their YouTube cooking videos.” If the annual licensing fee is valued at $600,000, a financier can purchase it for $550,000 (allowing for some built-in earnings), providing the chef with a loan against these future income streams.
Powell said that this model is already popular in the field of large music companies and private equity companies, but smaller companies cannot use it. Tokenization makes these tools more inclusive. Morgan Krupetsky, Director of Institutional and Capital Market Development at Ava Labs, said: “Tokenization has the potential to democratize access to the capital market for borrowers. Smaller transaction sizes and lower investment thresholds will be feasible.”
Even more traditional business projects such as “grain transportation” can benefit from tokenization.
Another assumption: the shipper wants to transport grain across the ocean. Typically, the shipper would obtain financing from a bank. They use the grain as collateral for the loan. Powell believes that this is something that is very suitable for the blockchain because it involves cross-border finance. He thinks the current system is similar to Blockbuster Video and Netflix. He said, “If I am Blockbuster, currently in Brazil, and I want to serve customers in Bulgaria, I have to set up a Blockbuster branch in Bulgaria. If I am Netflix, then this person only needs an internet connection.”
Back to grain transportation. The shipper can now obtain capital not only from banks in Brazil or Bulgaria but also from anywhere on the planet through tokenization. Powell said, “It turns the global financial market into a single settlement center.”
Perhaps ordinary people don’t care about shipping grain. But legal professionals in the financial field can do mathematical calculations, they can imagine various possibilities, and they can foresee a thorough transformation of the financial market. A report from Boston Consulting Group suggests that by 2030, the tokenized RWA market could expand to $16 trillion. This is a very abstract numerical image. So, we can make a comparison like this: consider the current market value of Bitcoin is $600 billion, what if the market value of Bitcoin is $16 trillion? Each Bitcoin will be worth $800,000!
Welcome to the world of profitable RWA.
Advantages of private equity and stock tokenization
Tokenization is not a new technology; it is just gaining new adoption and popularity. Tokenization has been around since 2017, which corresponds to the modifications made by early adopters a few years before NFT entered the mainstream (such as CryptoPunks, Rare Pepes), and now they are having a good time.
Infrastructure has been improved, entry has become easier, institutions are curious about tokens, and surprising economic forces stimulate adoption. Financial advisor Adam Blumberg wrote in a CoinDesk column: “With rising interest rates, many RWA options offer double-digit returns through interest, without the volatility risk of cryptocurrencies. They can provide low-risk loans in markets that traditional finance cannot or is unwilling to enter, while maintaining efficient processes.”
Although FTX and a series of events in 2022 have damaged the image of cryptocurrencies, banks and governments have quietly—almost secretly—entered into the tokenization of RWAs.
The Monetary Authority of Singapore is currently tokenizing bonds; they are collaborating with DBS Bank and JPMorgan. Gold is being tokenized. Research from Bank of America (BoA) found that the tokenized gold market alone exceeds $1 billion because “tokenized gold offers exposure to physical gold, 24/7 real-time settlement, no management fees, and no storage or insurance costs.”
Tokenization of certain assets is not something new–for example, tokenization of treasury bonds–but Krupetsky said they can reduce costs in areas such as authentication, underwriting, asset monitoring, and fund payments because these processes have always been “heavy, manual, and time-consuming.” This is part of the reason why banks and companies are interested.
A recent report from Ernst & Young found that “institutions see wide prospects for tokenization and hope to invest in tokenized assets faster in the next two years, as well as tokenizing their own assets.” A survey conducted by the company found that 57% of institutional investors want to invest in tokenized assets.
What is the appeal of tokenization to TradFi?
Let’s start with private equity funds. Philipp Pieper, co-founder of Swarm, another startup tokenizing RWA, said, “Blockchain can replace the entire fund, smart contracts can do what fund managers usually do, but it will lower by 100 to 200 basis points.”
For more exclusive “closed-end” private equity funds, tokenization can make operations smoother. Suppose a private equity fund called Annoyingly Wealthy Group jointly acquires a company. They invest in this company for at least five years. When can they sell and book profits? Members of Annoyingly Wealthy may not agree on timing.
After the fifth year, some may want to take a chance and hope the company (which they now own) continues to grow. Some may think “the top has arrived” (because the company is at its peak value now, so they should sell at a high price). Some may simply want to use the funds for other things. As described by Pieper, through tokenization, you can establish a “smart contract-based secondary market” for funds, which provides them with a “structured way to partially reduce or increase risk based on what they see.”
For those not involved in high-end finance, the inner workings of stock funds may be unfamiliar. Making the lives of wealthy venture capitalists more comfortable may not have been Satoshi Nakamoto’s original vision. On the other hand, these innovations attract important participants in traditional finance, and these are exactly the influencers needed for widespread adoption of blockchain and cryptocurrencies–whether you like it or not.
Centrifuge CEO Vogelsang said, “We are to some extent dependent on large lending institutions” entering this field. He said that currently, there are not enough early adopters of DeFi to expand the space to $100 trillion, which is what he sees as the ultimate market potential. Vogelsang stated, “This money will come from pension funds, banks, and existing companies, so the most important work is to familiarize them with this technology and make them understand it, so they will start using it.”
Even stocks can be tokenized. You may find this strange, even somewhat meaningless, because buying and selling stocks seems quite easy and cheap, with platforms like Jiaxin Wealth Management/Robinhood offering zero commission options. But there are benefits beneath the surface.
Sologenic tokenizes securities such as stocks, ETFs, and commodities. Co-founder Bob Ras said, “You can’t buy a small portion of Tesla, Amazon, or Netflix, but when you tokenize them, users can buy a small portion of these stocks.”
Ras acknowledges that through the Robinhood app, users can actually buy partial stocks of Tesla or Amazon, but he said this is only because Robinhood itself holds a large amount of popular stocks and allows users to buy partial shares within the app. (Whether users buy into this is yet to be seen.)
Settlement is instant when you buy or sell tokens. This is important in trading. In the current financial system, even in large Wall Street companies, it still takes two to three days for a transaction to fully settle. This comes at a cost. Banks, hedge funds, and trading desks all want to deploy funds immediately once they are available – tokenization can make their funds work faster.
Tokenization can even eliminate intermediaries in US dollars. It is common for investors to exchange one asset, such as Tesla stocks, for another, such as Walmart stocks. This can be done faster in the case of tokenization. In a process called “cross conversion” mentioned by Ras, users can directly exchange Tesla tokens for Walmart tokens. Ras said that users can find and create their own trading pairs on decentralized exchanges. Furthermore, because they have never been sold in US dollars, they are not subject to capital gains tax. (Of course, future regulations may fill this loophole.)
If stock tokenization does become cheaper, more efficient, and ultimately becomes the new norm, its impact could change Wall Street in unimaginable ways. Stocks can be traded 24/7, just like cryptocurrencies. Typically, most trades occur between 9:30 and 10:30 a.m. Eastern Time, and all US companies follow the established rhythm of the US stock market from Monday to Friday for profit reporting, communication, and financial decisions (such as stock buybacks). Tokenization – if it becomes mainstream – could disrupt all financial markets.
Pieper refers to tokenization as “FinTech 2.0”. He believes that tokenization is the natural evolution of ETFs (Exchange Traded Funds), which were created in the early 1990s. ETFs changed the stock market; tokenization can do the same. ETFs allow investors to invest in a basket of thematic assets, such as airlines, healthcare, or energy. Through tokenization, this portfolio can become “atomized”, creating arbitrary combinations of stocks, cryptocurrencies, and other asset classes yet to be invented, “putting users at the core of financial instrument design”. Tokenization creates liquidity pools that can generate profits.
If you are wary of the word “profit”, it is understandable. It was the promise of high returns that led to the collapse of companies like Celsius in 2022. The then CEO of Celsius, Alex Mashinsky, confidently told users that Celsius had successfully achieved “double-digit or low double-digit returns” due to being “much less risky than banks”. (Subsequently, the company filed for bankruptcy, and the New York Attorney General accused Mashinsky of fraud.)
Let’s look back again. In 2008, banks profited from complex financial schemes (which they did not fully understand at the time, including bundled subprime mortgages). We all know what happened next – bad loans, banks on the brink of collapse, and an economic crisis. So, if we create a clever new loan and debt system through RWA, are we just repeating history and increasing the likelihood of a financial crisis?
Vogelsang acknowledges that this technology “may create many dangerous toxic products,” but he believes that the essence of these DeFi tools is to achieve transparency and reduce the possibility of collapse. Vogelsang says, “Many of the problems in 2008 were that people didn’t really understand what it (subprime bundled sales) was, nobody really knew. Retail users didn’t know, and nobody really knew.”
Tokenization is transparent. Assets and liabilities are visible. Daniela Barbosa, Executive Director of the Hyperledger Foundation, said, “Detailed information about asset ownership, transfer, and transactions can be recorded on the blockchain, providing verifiable and auditable history. This transparency enhances trust and reduces fraud.” Therefore, theoretically, with this transparency, it should be easier to identify systemic risks.
Of course, the key word here is theoretically. Many things in the cryptocurrency field “sound” transparent and risk-free, as Terra’s investors are well aware.
The current question for the trillions of dollars in value in all cryptocurrencies is, “Does the U.S. Securities and Exchange Commission consider it a security?” One happy benefit of tokenizing real-world securities is that there is no dispute about whether the so-called token is a security. It simply is. Pieper said, “Some other projects have built in false utility to make it look like it’s not a security.” Therefore, Swarm (and many other tokenization projects) is currently only available to accredited investors.
That being said, attracting “qualified investors” is not the end goal of tokenization. Its supporters believe they can help ordinary people, such as small business loans. Private credit is a market with poor liquidity for small companies, which provides an advantage for large companies. Vogelsang said, “When Google issues bonds, you can easily buy and trade them,” which is one of the reasons why they only pay a slightly higher premium than the yield on government bonds, so based on today’s rates, the premium could be 6%. What about small businesses? Due to the lack of a liquid market for the loan, there are few options, and a 15% interest rate is required. This means charging customers more fees, giving Google a huge advantage.
Vogelsang said: “Tokenization has indeed changed everything and created a fair competitive environment.” He admits that we will never reach a point where Google and small businesses pay the same interest rates – the risk of lending to small businesses is greater than lending to Google – but creating liquidity helps narrow the gap, “which is the motivation for founding Centrifuge.”
Maple founder Sid Powell has a similar view. He believes that the tokenization of RWAs is a way to provide real benefits to the general public, which can help the crypto industry recover from its reputation for speculation and gambling. “An important theme of RWAs is how on-chain lending actually touches real-world businesses and helps them grow?”
Pieper said: “Perhaps the most popular tokenization project is one that we take for granted – cash. Cash is being tokenized. It’s called stablecoin. It’s a real-world asset that is being replicated on the chain and made tradable.” Central Bank Digital Currencies (CBDCs) are essentially tokenized versions of central bank currencies that exist on distributed ledgers, reducing the cost and significantly shortening the time of cross-border transactions and settlements.
Since the launch of Tether in 2014, the tokenization of cash has been happening and could have a global impact. Pedersen pointed out that “the world currency market is a currency market denominated in US dollars” and that “all of these US dollar-denominated collateral is located in ‘many different places.’ The exact size is unknown. No one has transparency.” Pedersen describes the pool of US dollar-denominated collateral as “completely dark,” so when the system fails, it “destroys the entire world every time.”
On the contrary, what if the US dollar market is collateralized on the blockchain? Pedersen believes that “you will start to have a transparent world currency market and central banks will know what is happening,” which will help prevent the next financial crisis.
These benefits of tokenization – the absence of downside risk from cryptocurrency price speculation – are why many believe its adoption is inevitable. Krupetsky of Ava Labs predicts: “More and more assets will be tokenized to the point where we no longer distinguish between tokenized and non-tokenized assets,” just as we “no longer distinguish between marketing and digital marketing,” it’s all marketing.
Perhaps if the world truly becomes tokenized, “real-world assets” will shed the cumbersome “real world” and become true assets.
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