Tokenizing the World: The Future of Real World Assets is on the Blockchain

Sooner than later, we will tokenize the whole world. 

Tokenizing the World: The Future of Real World Assets is on the Blockchain

Sooner than later, we will tokenize the whole world. 

Creating Security Tokens that represent Real World Assets is the next frontier. Be it physical assets, like Real Estate, or traditional financial assets like stocks and bonds, Real World Assets will find their way to the blockchain. And unlike the majority of cryptocurrencies, these Security Tokens will be fully compliant and backed by something really valuable. We can all see it. This will happen.

The questions, then, are “how?” and “when?”

The Very Real Advantages of Tokenization

We at Smartblocks have already discussed this, but it bears repeating. Tokenization opens investing to retail investors, a whole new group of people ready to get in a game that has traditionally been out of their reach. In the crypto world, the investment can be minimal, and the only requirement is an Internet connection. That access will bring never-before-seen liquidity to conventionally illiquid assets and markets. Not only that, it will open a secondary market for all of those Real World Assets, and it will do so in a marketplace that’s open 24/7, 365 days a year. 

The tokenization of Real World Assets will create a more inclusive market, benefiting both the buyer and the seller. 

With such compelling advantages, what’s standing in the way? Regulation. For all of this to happen, the powers that be have to issue clear rules for the fast-moving crypto world to follow. When will this happen? That’s the million-dollar question. Bear this in mind, though: since the blockchain is an immutable public ledger, it brings transparency and efficiency with it. Regulators will have access to all of the transactions in real-time, something they could only dream of in traditional finance. 

Not to mention that blockchains are credibly neutral and permissionless, which means that the settlement layer is not controlled by anyone in particular. Plus, the processes don’t need brokers or intermediaries of the traditional kind. This reduces the administrative burden and also permits the previously mentioned always-open nature of these new marketplaces. 

Traditional Bankers on Real World Assets Tokenization

We’re not alone in this, virtually every major financial institution is on the case. Noone wants to miss out on their piece of the pie. It’s like the American bank Citi said in its “Money, Tokens, and Games” report

“Tokenization of financial and real-work assets could be the killer use case driving blockchain breakthrough with tokenization expected to grow by a factor of 80x in private markets and reach up to almost $4 trillion in value by 2030.”

They arrive at these numbers by estimating the Total Addressable Market (TAM) size as follows:

“... assuming 1% of corporate and quasi-sovereign bonds, 7.5% of real estate funds, 10% of private equity and venture capital funds and $1 trillion of securities financing and collateral activity are tokenized. Accompanying the tokenization of securities will be the trade finance market, which could see up to $1 trillion of volumes based on distributed ledger technology (DLT), or around 8%-10% of global trade finance volumes, by 2030.”

The numbers seem big, but the percentages are modest. The “$4 trillion in value by 2030” figure could definitely happen. That number could be low, even. Just read what the institutional clients of investment banking company BNYMellon answered to their 2022 Global survey:
“91% of respondents expressed interest in investing in tokenized products Benefits of tokenization include removing friction from transfer of value (84%) and increasing access for mass affluent and retail investors (86%). Every asset manager surveyed with more than $1 TN assets under management (AUM) is interested in investing in tokenized products.”

Another giant, Forbes, sees an even bigger Total Addressable Market:

“Tokenizing real-world assets allows DeFi to tap into some of the largest financial markets. Global real estate was valued at $327 trillion in 2020 and non-financial corporate debt at over $87 trillion in 2022. These are colossal markets to which tokenization can bring enhanced liquidity and new investors.”

Which Real World Assets are Already in the Blockchain?

In the previously quoted Forbes article, Maple Finance’s CEO Sidney Powell puts forward a very interesting use case for Real World Assets tokenization: “DeFi lending is capped as long as we only accept Bitcoin or Ethereum as collateral. Being able to accept tokenized real estate or security over the property of a company reduces the risk for crypto lenders and investors because it makes it possible for businesses in the real world to use DeFi.”

So, what Real World Assets can we use as collateral right now? According to Coindesk, major institutions worldwide are experimenting with the technology. For example, they quote Goldman Sachs’ Mathew McDermott at the Financial Times Crypto and Digital Assets Summit: "We are actually exploring NFTs in the context of financial instruments, and actually there the power is actually quite powerful. So we work on a number of things." Besides that, Coindesk features a number of projects in this article:

  • On the CBDC front, JPMorgan used Polygon to tokenize and use a digital version of the Yen and the Singapore dollar.
  • Asset Manager WisdomTree used Ethereum and Stellar to tokenize nine digital funds.
  • The Hong Kong central bank is already offering a $100 million “tokenized green, or sustainable investment, bond.”
  • French bank Credit Agricole CIB and Swedish bank SEB are developing a “blockchain-based platform for digital bonds.”
  • Also in Europe, “Berlin-based crypto exchange Swarm launched tradable, tokenized U.S. stocks and bonds via its DeFi platform.”

That’s just the beginning, however. According to the Financial Times, “A joint study by Hamburg Commercial Bank and the Frankfurt School Blockchain Center think-tank, published in September, suggested an estimated 41 companies in 17 countries, including the US, Germany and Switzerland, had been trialing tokenization of property.” That article features the innovative characteristics of a project near and dear to my heart:

“Investors in PAX Gold, built as a token on the Ethereum blockchain, own the underlying gold without having to worry about storing the precious metal themselves. Paxos says on its website that holders of PAX Gold can see on its website the serial number and purity of each gold bar to which their tokens are allocated.”

Needless to say, Tetraguard, the world's first decentralized crypto ETF, includes PaxG. And PaxG is an excellent example of Real World Assets tokenization that’s already up and running.

The Players at this Stage

As we already established, financial institutions worldwide are already experimenting with RWA tokenization, but, who is providing the technology? At the time of writing, these are the main players in this nascent game: 

  • Maple Finance defines its business as: “On Maple, credit professionals manage fast-flowing lending businesses where pooled capital is lent to a wide range of institutional borrowers to fund business growth and operations.”
  • Pismo promises: “Unlock new lending potential to your business—embedding into customer journeys to provide the best user experience, in a fast and scalable way.”
  • At Goldfinch, “[Y]ields come from real-world lending, and investments are collateralized off-chain, which makes them distinctly different from the highly volatile DeFi lending you may be familiar with.”
  • TrueFi brings “collateral-free lending on-chain, maximizing capital efficiency for borrowers and earning rates for lenders.”
  • Centrifuge doesn’t hesitate to claim, “As the first protocol to bring real-world assets on-chain, we’re building a better financial system.”

Possible Problems With Real World Assets Tokenization

Of course, the main problem with all of this is regulation. As Citi puts it in the previously quoted “Money, Tokens, and Games” report: “The legal plumbing also needs to be altered to enable smart legal contracts that will provide a whole new set of rails for global commerce and finance to run on. Regulatory considerations are also necessary to allow adoption and scalability without hindering innovation.”

However, that might not be the main challenge. As crypto people, we might have a blind spot. The advantages of Real World Assets tokenization might not be obvious to others. Read what the financial types at Citi think about the whole ordeal:

“The challenge with the mainstream narrative on tokenization is if each benefit is looked at in isolation, it probably does not offer a lot of delta. It does not answer the question of “So what?” Do investors really want 24x7 bond trading? Settlement failures in U.S. equities are not a particular problem. For private funds, use of emails with an excel template works well given infrequent trades. We do not really think investors care about secondary liquidity, as they have not asked for it. ”

Since the traditional system works just fine for them, financial types might not yet see the immense benefits that asset tokenization brings. That’s why articles like this one are important, they highlight the more inclusive and profitable world that we could create. Of course, we established that the higher-ups at the biggest financial institutions are already informed and playing the game. However, if we could get the message to the financial middle management, the regulators would have to listen to our concerns and set clear rules. 

In other words, it would be game, set, and match.

About SmartBlocks

Mark Fidelman

Here at SmartBlocks, we believe it’s time to democratize currency and make it available to anyone, anywhere, anytime.