RWA Tokenization

The creation of a new financial model known as DeFi (decentralized finance) has set the scene for a novel manner of doing business; however, the majority of tokens were not tied to anything of value, making them susceptible to a number of issues such as a much higher volatility.

Cue tokenization of real world assets: a process within which traditional off-chain assets are brought on-chain, with the most prevalent example being fiat-backed stablecoins. This went on to become a dominant trend with various asset classes following after.

This new method sees the perfect marriage of traditional assets and blockchain, offering a myriad of potential benefits - such as improved liquidity, efficiency, and financial inclusivity to name a few - whilst adapting to a new emerging technology that is set to change the business landscape once more; so much so that the TVL for U.S. Treasury Bill-related products alone has soared from $100 million at the beginning of 2023 to a current total value of $784 million during the crypto winter per DigiFT research report.

Why tokenize TradFi assets

One of the main benefits of the tokenizing of off-chain assets is the ability to fractionalize the underlying asset, enhancing its liquidity. This aspect, however, is not always relevant. With Treasury Bills, for example, liquidity is already a prominent feature. So why tokenize traditional finance assets when the capital market is already highly liquid?

The answer lies in the user base: US Treasury Bills, traditionally, can be invested in by US citizens for as little as $100. Investors from overseas will not find the same ease of access, considering the hussle of opening a brokerage account.

Blockchain technology is the key to expanding the reach of traditional finance assets beyond geographical boundaries. The on-chain tech aids a seamless and inclusive global market where investors from around the world can access and participate in the ownership of traditional financial assets that were once excluded from their reach.

Moving towards mass adoption

Much like the transformative impact of the internet, tokenization has the capacity to revolutionize the way we perceive and engage with assets, ushering in a new era of business models. This, in the finance circles, has been defined as a ‘killer use case’ by the likes of Citigroup, and is speculated to be the gateway to mass adoption of cryptocurrencies and blockchain tech.

Though risks are still present, we are seeing momentum in the usage of RWA tokens mainly stemming from:

  • Investors in emerging markets: in an effort to combat hyperinflation which plagues areas such as India, Africa, or South America, users have started turning to blockchain technology, driven by the demand for secure assets as a refuge for deploying funds.

  • Investors in established markets: whereas hyperinflation is not an issue in these markets, individual investors have the opportunity to generate tangible returns on their pledged assets by serving as providers of liquidity. It is speculated that eventually retail investors will have the capability to loan out their collateral at a mutually agreed-upon interest rate, a privilege currently exclusive to institutional entities in the conventional financial framework.

  • Traditional financial institutions: as a new business model emerges, traditional finance institutions are adapting by swapping credit risk for smart contract risk. By making trading more efficient through the deployment of smart contracts, the level of automation that code provides enables traders to optimize their time and experiment with new strategies, structures, and options.

  • Stablecoin issuers: with the growth of tokenized short-term US Treasury Bills having exploded to over $600 million in 2023 alone, coupled with the most recent demand for yield-bearing stablecoins, it is no surprise issuers are now turning towards highly liquid tokenized fixed-income products like U.S. Treasury Bills.

  • Onchain Treasuries: tokenized traditional fixed-income assets have become increasingly popular among Web3 companies or DAOs. It provides them with a means to deploy their idle capital to passively earn with low risk exposure.

RWA sector projections

The overall market sentiment certainly echoed the need to move on-chain, with a recent EY market survey on tokenization reporting that 57% of institutional investors showed interest in investing in tokenized assets, with 40% interested in starting this year or the next.

In May 2023, a study jointly released by Boston Consulting Group (BCG) and investment company ADDX projected that asset tokenization's worth is poised to hit $16 trillion by 2030. This figure represents a substantial 10% of the worldwide gross domestic product (GDP). Such a forecast surpasses the $9.6 trillion total assets under management (AUM) within global exchange-traded funds (ETFs) reported by the conclusion of 2022, significantly overshadowing the existing valuation of security tokens, as indicated in the report, which stands at $310 billion.

Citigroup also stated in its March 2023 report that they ‘forecast $4 trillion to $5 trillion of tokenized digital securities, 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’.

Per the same report, alongside the digitization of securities, the trade finance sector may experience volumes reaching as high as $1 trillion through the adoption of distributed ledger technology (DLT) by 2030. This equates to approximately 8%-10% of the overall global trade finance volumes.

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