Tokenization of Real World Assets: Breakthroughs in 2024

Author: Finextra; Source: Didi Technology Information

Since its launch in 2017, digital asset tokenization Has yet to take off in a meaningful way, limited to stablecoins and NFTs.

However, this situation is fundamentally changing. Tokenization, the process of converting real-world assets (RWA) into digital tokens on a blockchain network, is currently gaining momentum, attracting significant interest from financial institutions in recent years and attracting both retail and institutional capital by 2023 investors' attention.

Tokenization is increasingly hailed as a revolutionary breakthrough in the financial world, bringing the advantages of blockchain technology to traditional assets.

In this blog, we explain the basics of tokenization. We will explore the underlying mechanism of actual asset tokenization and the work of tokenization. Principle, sharing our thoughts on the main use cases and what it might mean for the future.

Why might RWA tokenization take off?

RWA tokenization is on the rise for several reasons. On the one hand, higher interest rates in the current cycle are improving the economics of certain tokenization use cases. Tokenized real-world assets are becoming a means of hedging against market volatility.

The current high-yield environment gives tokenization a different meaning, as an opportunity to digitize financial assets such as sovereign bonds, money market funds and repurchase agreements.

Currently, certain real-world asset classes have limited liquidity and high barriers to entry, making them difficult to access. Many of these assets face transferability and divisibility restrictions.

We are also witnessing a shift in the way governments and regulators around the world view real-world assets. Jurisdictions around the world are being forced to consider regulatory changes in order to be able to benefit and/or launch their own real-world assets to meet their own needs.

More importantly, many financial services firms have significantly enhanced their digital asset teams and capabilities since tokenization debuted five years ago. As these digital asset teams mature, we may see tokenization increasingly used in financial transactions.

What is asset tokenization?

Blockchain allows existing real-world assets (RWA) and capital to be "tokenized." At its core, this practice converts tangible physical assets into digital tokens so that they can be easily traded, transferred, and managed using distributed ledger technology.

These tokens act as digital certificates of ownership, able to digitally represent a large number of assets and combine information and assignable digital rights, all in a programmable Connect with automated means 

Once generated, these tokens will be recorded in the blockchain to ensure immutability and tamper-proof integrity.

FromStablecoins and NFTs

Tokenization can create many types of tokens. Most of the tokens that exist today include stablecoins and NFTs. What happens in the crypto space is so-called utility tokens.   

An example is a stablecoin, which is a cryptocurrency that is pegged to the value of a real-world stable asset and is designed to be fungible or Copiable. They are designed to reduce the volatility associated with other cryptocurrencies. They are mainly used for DeFi transactions.

Another type of token is an NFT - a non-fungible token, or token that cannot be copied - that people can buy and sell digital proof of ownership. They can include art and collectibles, concert tickets, loyalty programs, certificates, digital twins, tokenized versions of intellectual property, and can include more distinctive assets such as sports teams, horse racing, artwork, and even sharing Celebrity reputation.

TowardsTokenization of real-world assets  strong>

But this situation is fundamentally changing. The tokenization trend of real-world financial assets is becoming increasingly evident. Especially since this year, some established financial giants have embraced the concept of tokenizing real-world assets, including securities, stocks, investment funds, payment settlements, real estate and commodities.
The RWA asset tokenization process involves multiple steps such as asset procurement, digital asset issuance and custody, distribution and trading, as well as asset services and data verification.

What has happened now?

Major financial institutions are exploring tokenized financial instruments on the blockchain, demonstrating growing confidence in decentralized networks.

Traditional financial giants including BlackRock, Fidelity, Bank of New York Mellon, JPMorgan Chase, Goldman Sachs, UBS and HSBC are already using the zone Blockchain tokenizes a range of real-world assets.

These institutions are beginning to not only tokenize assets for operational purposes and savings such as repurchases and collateral management, but are now integrating tokenized products with their own Customer base as buyers.

JP Morgan has already developed tokenized funds, and we may soon see the development of more structured instruments, including from new revenue streams such as private credit asset.

HSBC noted that it plans to launch digital asset custody services for institutional clients, focusing on tokenized securities issued on third-party platforms, such as private and/or or public blockchain compatible tokenized bonds or tokenized structured products.

This growing trend in favor of tokenization is also supported by governments around the world. This is by reforming regulations to better accommodate the tokenization of real-world assets. In Asia, for example, governments and policymakers such as Hong Kong and Thailand are actively adapting their use in real-world assets, seeking to unlock new revenue streams and reduce costs. Regulators in Japan, the UK and Switzerland have also said they will test tokenization of fixed income, foreign exchange and asset management products.

What might tokenization of RWA bring?

Tokenization, once met with skepticism, is now seen as a viable option for governments and financial institutions around the world. They are now more aware of the benefits of tokenization, including the ability to run operations 24/7 and provide 24/7 data availability.

With blockchain, tokens can be transferred directly (within minutes) between parties without the need for intermediaries (clearing, settlement and custody), thus Reduce transaction costs and increase asset liquidity in credit markets.

Since tokenized assets are recorded on the blockchain, this provides a transparent and immutable tokenized record of ownership, which will also enhance security, Support self-sovereign identity solutions and enhance data privacy.

Blockchain offers instant transaction settlement and a higher degree of automation (via embedded code that only activates when certain conditions are met), with lean efficiency The model replaces redundancy and protects data while facilitating automated procedures including audit and compliance to minimize counterparty risk.

Tokenization can also make these assets (which have historically had high investment barriers) into fragments, making them accessible to many people across borders. Democratic access to unreachable assets. By reducing barriers to entry, many people who are currently unbanked will be able to invest.

TokenizationDifferent RWA use cases

Financial AssetsTokenization of financial assets such as bonds, stocks and shares allows these assets to be segmented. As a result, their exposure to investors around the world has increased significantly.

Other benefits include fractional trading of these assets, resulting in larger liquidity pools and a wider range of investors. Tokens can be traded on a decentralized network, which is cheaper, faster and more secure than traditional methods of exchanging assets. Additionally, tokenization use cases for financial assets enable efficient processing of daily issuances, increase secondary liquidity through more investors, and reduce costs.

Investment FundsWe are also seeing growing interest from private equity and treasury funds. Tokenization use cases for funds may apply across the entire value chain and support the entire lifecycle of diversified investments. Better portfolio diversification and lower transaction costs are possible.

Fund managers may benefit from greater flexibility and control over asset allocation. They may realize improvements in operational efficiencies, allowing easier access for investors with global reach through diversification.

Lower entry barriers, better price discovery, improved liquidity, and lower issuance and service costs through digitalization.

The tokenization process also makes it easier to track and serve investors, and allows for built-in compliance, near-instantaneous and low-cost transactions via smart contracts Transfers and Settlement.

Payment Settlement Delivery to Payment (DvP) settlement of token-based transactions in securities or other financial assets can be automatically synchronized through the use of smart contracts carried out without the need for intermediaries such as CSD. This can bring a number of important benefits, including real-time settlement and reduced costs. Real Estate Tokenization of real estate assets has traditionally been complex and slow. Tokenization involves converting ownership into digital tokens on a blockchain network. Real estate tokenization has the potential to revolutionize the traditional real estate investment landscape. This allows for fractional ownership and more efficient title transfers due to near-instant settlement.

Tokenization also provides greater transparency, reduces transaction costs, and eliminates intermediaries, making real estate investing more accessible to a wider range of investors . It also makes transactions easier on global markets, providing a safer and more streamlined method for raising and investing in real estate projects.

Where is the market for tokenized real-world assets heading?

Industry experts believe that tokenization could be a big thing as traditional financial institutions continue to adopt blockchain technology. Banks and financial giants are increasingly exploring the use of tokenized financial instruments within institutional decentralized finance frameworks.

The market for tokenization of real-world assets is expected to reach trillions of dollars by 2030. This growth highlights the growing recognition and adoption of tokenized assets. However, predictions of the scale of the tokenization opportunity vary.
It is estimated that by 2030, Citigroup’s tokenized digital securities trading volume will reach $5 trillion and Boston Consulting Group will reach $16 trillion. That would mark a significant increase from the current value of about $300 billion. Looking at traditional securities markets, the Boston Consulting Group estimates that tokenized securities assets will account for about 10% of global GDP by 2030.

Asset Manager 21.co predicted in a recent report that the market value of tokenized assets could reach 10 by 2030 in a "bull market" scenario trillion US dollars, and will reach US$3.5 trillion in a "bear market" scenario.

Challenges: Obstacles and Countermeasures

Despite all these positives, the introduction of tokenization also brings with it a number of challenges that can serve as barriers to widespread development and adoption.

Regulatory issues, a lack of standardized processes, and reluctant incumbents pose challenges to the widespread use of tokenized RWA across the globe. There are other barriers such as technical bottlenecks, current infrastructure limitations and interoperability that limit its adoption.

Legal and Regulatory BarriersMost tokenization efforts face significant legal and regulatory hurdles during their initial issuance, as many management The law in this area is still new, and many major jurisdictions still lack a clear legal framework for tokenization. Due to regulatory ambiguity, multiple platforms are often required to handle tokenized assets in different jurisdictions.

Interoperability issues and lack of standardization

and exist Interoperability issues and lack of standardization. Most institutions rely on private blockchains, which mostly do not communicate with other blockchain platforms. Private networks may make future interoperability more difficult. One possible outcome could be dispersion of cross-chain liquidity and challenges for investor entry, particularly in secondary markets.

Missing Granularity

Tokenization So Far Another weakness of the industry is the actual product distribution and capital pooling. Currently, most tokenizations of financial assets are simply digital representations of reserves held by companies. It ignores the granularity at which various assets actually exist, such as their financial obligations, liabilities, or cash flows.

Incomplete real-time settlement

Another obstacle is, Some of these platforms only settle the transaction portion on-chain, not the cash portion, so the real-time settlement process is incomplete.

Reluctant IncumbentBusiness

As with any new technology, it's common that those in power may be reluctant to see progress. For example, the pension fund or asset management industry. On the funding side, some parties are already making huge profits from existing inefficiencies. Also in the asset management industry, existing businesses impose administrative burdens when transferring assets, particularly those investments that are tax-protected.

Lack of expertise andskills New technologies bring new challenges. Expertise on tokenization remains scarce, and knowledge is not widely available. This can be quite challenging for anyone who wants to harness and unlock the full potential of such innovations.

Addressing barriers

Wide adoption needs to be overcome Significant barriers, particularly related to the complexity of integration into existing real-world systems. Appropriate safeguards should be put in place to protect investors and the economy as a whole. Tokenized real-world assets may also require the creation of robust, scalable infrastructure designed to integrate with the traditional financial ecosystem rather than attempt to replace it.

However, over the past 2023, we have made incredible progress in overcoming these issues. Europe’s establishment of the world’s first comprehensive cryptocurrency regulatory framework, MiCA, and the rest of the world’s more relaxed regulatory stances to ensure security and build trust, are paving the way for easier adoption of tokenization in financial infrastructure. Flat road. Given the large number of solutions entering the market, interoperability issues are increasingly being addressed, including the establishment of tokenized protocol standards.

RWA Tokenization: a transformative and disruptive force

The tokenization of real-world assets is itself a great opportunity to cross the boundaries between the virtual and real financial worlds. It became a major transformative force in redefining the legitimacy of the blockchain industry in the global financial landscape.

By ensuring complete and immutable visibility of transactions, blockchain solidifies its trustworthiness and creates a solid bridge between the two worlds. bridge.

It opens the door for closer integration between cryptocurrencies and traditional asset classes, including fiat currencies, stocks, government bonds and real estate.

The future of tokenization is expected to be dynamic and transformative, as it has the potential to revolutionize various industries. The use of security tokens that comply with regulatory frameworks has the potential to disrupt various financial markets and industries, changing the way financial transactions are performed today.

With no or less need for intermediaries, it could significantly reduce the existing layers of operations - trading, clearing, settlement, custody and reporting. It could also cause significant disruption to traditional financing technologies and methods and change the structure of traditional financial services and global capital markets.

The tokenization of real-world assets firmly expands opportunities to automate and simplify back-office operations, replacing legacy systems with cost-effective, instant settlement.

Forward-looking

Tokenization has the power to revolutionize A wide range of industries that offer significant opportunities to shape the future of finance and investing, with the potential to have considerable impact on the global economy. Tokenization is reshaping and revolutionizing the way many institutions fund, trade and manage financial assets. In addition to bringing significant efficiency gains to the entire process, it also opens up the potential to create new revenue streams.

2024 will be a breakthrough year for RWA tokenization.

I wish everyone a happy 2024!