Posted: Jan 24, 2024 12:10 PM Updated: Jan 24, 2024 12:12 PM
In today’s context, one of the most thriving areas of intersection between traditional and decentralized finance is occupied by real assets. But why are they thriving, and what does decentralization through blockchain have to do with it?
What is a tokenized real-world asset?
Tokenized real assets are virtual investment vehicles created on the blockchain, linking tangible assets to digital vehicles, bridging the gap between traditional and digital markets. The underlying assets responsible for the value of a virtual good can vary, including real estate, precious metals, works of art, or collectibles. Their ownership is not recorded on paper like a traditional legal deed, but on a chain.
Available estimates suggest that the tokenized RWA market could reach US$10 trillion by 2030, with bull market tailwinds fueling growth. Even in a bear market scenario, the market could grow to $3.5 trillion.
Advantages of RWA
If we put the RWA scenario in perspective, the growth figures do not seem outrageous.
Accessing ownership of real-world assets through on-chain vehicles has several benefits, including removing intermediaries from the system. The shift to a decentralized environment based on blockchain eliminates the need for traditional participants such as law firms, brokers, or banks. The move to a disintermediary system offers several benefits. It’s fast, efficient, affordable, transparent and highly accountable, revolutionizing the way asset transactions are handled.
Echoing this sentiment, Aman Arman, senior marketing executive at Planet ReFi, a platform that aims to leverage the RWA paradigm to mobilize people around the greater cause of environmental sustainability, said:
“The future of tokenization looks promising to say the least. What is traded and what is not – tokenization has proven to be beneficial in both cases. The benefits are multidimensional. This improves the liquidity of assets, enables fractional ownership, shortens settlement times, reduces asset transfer and transaction costs and, above all, increases the security of the process.”
Large TradFi players looking to leverage RWA
The validity of Aman Arman’s statement is evident from the interest of large traditional finance world players in tokenized RWA.
A joint survey conducted by research and advisory firm Celent and US banking giant BNY Mellon found that 91% of institutional investors are interested in investing their money in tokenized assets. Even more encouraging, 97% agree that tokenization could revolutionize the way we know asset management.
In a recent Defiant interview about 2024 predictions, Felix Xu, CEO and co-founder of ARPA Network, spoke about the growing number of major financial institutions overseeing pilots exploring tokenization: “There is already a growing number of TradFi companies such as JPMorgan Chase and Goldman. Sachs, BlackRock and Fidelity are gradually recognizing the benefits of this technology,” Xu said. “Although primarily focused on credit markets, there is growing potential for tokenization to expand its reach to other asset classes, including stocks, art, automobiles, commodities and real estate.”
For example, US banking giant JP Morgan has set up a RWA tokenization platform with BlackRock as one of its major customers. The tendency of large banks to leverage the power of tokenized RWA is well explained by Gaurav Dubey, CEO of TDeFi.
Commenting on this trend, Dubey said: “Tokenization of real-world assets in general is something that most big players in traditional financial markets have been eager to adopt in the cryptocurrency world for quite some time. “They realized the inherent versatility of RWAs, which can represent many physical and traditional assets, including currencies, commodities, stocks, bonds, real estate, and more.”
JP Morgan’s tokenization application, known as Tokenized Collateral Network, began by helping convert shares of one money market fund into digital tokens which can then be transferred to Barclays Bank as security for OTC derivatives exchanges between the two companies.
In the future, tokenized RWA will grow further as solutions like JPMorgan’s TCN enable capital to be unlocked and used as collateral in ongoing transactions. It simplifies and expands the traditional settlement process, providing efficiencies. Collateral can move at almost instantaneous speeds.
The future of real-world asset tokenization
The future of tokenized real-world assets could become more promising if we can remove some of the bottlenecks that still exist. For example, the RWA world must operate under a consistent and homogeneous tokenization spectrum.
A strong framework regarding legality, oversight mechanisms, etc. must be put in place. In fact, RWA tokenization can only succeed when there is a strong and efficient ecosystem. It helps increase liquidity and movement. Finally, issues related to cybersecurity, data and information privacy must be addressed.
But with institutional investors showing interest and big companies like JP Morgan, Barclays, BlackRock, and BNY Mellon becoming stakeholders in the system in one way or another, RWA is only going to get bigger and better in the future.
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About the author
Gregory, a digital nomad from Poland, is not only a financial analyst but also a valuable contributor to various online magazines. With his extensive experience in the financial industry, his insights and expertise have been recognized by numerous publications. Making effective use of his spare time, Gregory is currently devoted to writing books on cryptocurrency and blockchain.
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Gregory, a digital nomad from Poland, is not only a financial analyst but also a valuable contributor to various online magazines. With his extensive experience in the financial industry, his insights and expertise have been recognized by numerous publications. Making effective use of his spare time, Gregory is currently devoted to writing books on cryptocurrency and blockchain.