The tokens represent ownership, enabling the assets to be traded on-chain, which offers benefits such as improved efficiency and increased liquidity. The tokenization of RWAs is thought to represent a huge financial opportunity and one of the more compelling uses for blockchain technology.
Why tokenize RWAs?
There are several reasons to tokenize real-world assets. Many markets are still relatively inefficient in how they operate, for instance, by only trading during set hours or having a heavy dependence on paper trails. Some asset transfers can involve multiple intermediaries, such as agents or brokers, which increases fees and transaction times. In contrast on-chain RWAs enable peer-to-peer transactions on a 24/7 basis, with a transparent and immutable trail of events.
Stablecoins are a perfect example of these benefits, enabling crypto users to send and receive US dollars across borders at any time without needing to enter the banking system.
Tokenization also supports fractionalized ownership of higher-value items, where an asset such as a house or a work of art can be represented as multiple tokens owned by different parties. While it's possible to achieve fractionalization using a centralized database, a blockchain can help to make the process more trustless and verifiable. In turn, this could make fractional investments in higher-value items more accessible.
The long-term benefits for the global markets will depend on the extent of adoption and network effects. In a scenario where many different assets within a given global market are traded using a unified, widely accessible, on-chain architecture, then the efficiency benefits could also lead to increased liquidity, if the market can attract more investment as a result.
Although the segment is still relatively new, analysts believe that the value in on-chain RWAs will grow to trillions of dollars over the coming years. The extent to which organizations may be willing to collaborate on interoperability or adopt public blockchains is still emerging, although early experiments indicate a high degree of cooperation between institutions and central banks.
Types of RWAs
Theoretically, any type of RWA could be tokenized. However, developments are already underway for several asset classes, both financial and non-financial.
Stablecoins such as Circle’s USDC or Tether’s USDT are the most widespread examples of tokenized RWAs. Although US dollar-pegged stablecoins are the most popular, there are issuances pegged to other currencies, such as EUR Coinvertible (EURCV), which is pegged to the euro.
Funds and money markets
JPMorgan has been one of the frontrunners when it comes to tokenization, having launched its own Onyx digital asset tokenization platform in 2021. The platform has now been used to settle hundreds of billions of dollars' worth of transactions of the banks tokenized money markets.
In 2023, asset manager Franklin Templeton launched the first US-registered mutual fund on public blockchain architecture using the Polygon platform.
Precious metals and commodities
Commodities, such as gold, represent low-hanging fruit for tokenization since they are often traded for their speculative value, which doesn’t require taking physical custody. HSBC operates a digital platform for foreign exchange and precious metal trading, and in late 2023, it announced the first trades of tokenized gold, where the underlying metal is stored in its vaults in London.
Tokenization offers significant opportunities for the real estate market since real estate is a highly illiquid asset, and the market is inefficient, with each transaction typically taking weeks or even months. In 2023, the Israel Land Authority, the country’s land registry, announced efforts to develop a digital land registry.
Art, antiques, and collectibles
Not to be confused with NFT art or collectibles, physical works of art, antiques, and real-world collectible items such as memorabilia can also be tokenized. In December 2023, an art tokenization platform called 10101.art collaborated with an art gallery in Dubai to launch the pre-sale of tokens representing a piece by Banksy called “Turf War.”
Online marketplace eBay has also filed a patent for the development of a platform for tokenizing collectibles.
Physical infrastructure such as roads or power plants require huge investments and, with long development periods, can take many years to yield returns, making them unattractive to many large investors. However, the World Bank published a report in 2023 that investigated the possibility of using tokenization to facilitate infrastructure financing, potentially opening up investing to a far larger pool where there may be more community or local commercial interests in seeing projects completed.
What are the risks or challenges of tokenizing RWAs?
Regulation is one of the key challenges of asset tokenization, particularly for highly regulated markets such as real estate, where there are stringent requirements such as notarization and physically signed contracts. However, this isn’t necessarily a roadblock, provided that issuers and regulators are willing to work together to determine how tokenization can satisfy regulators’ objectives. For instance, in late 2023, the first legal on- and off-chain real estate transaction was concluded under EU law when a project called Blocksquare successfully executed the sale of a parking lot in Ljubljana, Slovenia.
Regulation can also extend to areas such as tokenholder rights and liabilities. For example, a tokenized stock should theoretically confer all the same rights and obligations as the paper certificate.
Many of the other challenges and risks of tokenized RWAs are the same or similar to those in the broader digital asset space, requiring the same mitigations. Reliable and secure custody solutions are a must-have to ensure safe asset storage. Smart contracts and blockchain networks should be robust enough to withstand attacks, and measures such as code audits and bug bounties help to reduce issues with vulnerabilities or software faults.
Even though it’s theoretically possible to tokenize all kinds of RWAs, if there isn’t sufficient demand from investors and traders, then low liquidity remains a risk factor.
The high level of institutional interest and investment in RWAs, along with the potential scale of the economic opportunity, means the segment seems well-positioned for future growth over the coming years. However, favorable regulation that supports the adoption of tokenized RWAs without compromising on established market protections will be vital in facilitating growth.
RWA tokenization essentials
- Real-world assets (RWAs) are physical assets represented as tokens on a blockchain.
- Tokenizing RWAs brings benefits, including efficiency, fractionalized ownership, and improved liquidity.
- Many institutions and entities are now exploring on-chain RWAs, tokenizing assets such as funds, commodities, real estate, and art, among others.