RWA is on the rise, and traditional institutions are eager to try.

Real-world asset (RWA) tokenization has become one of the most powerful applications of blockchain technology globally, promising greater efficiency and security for financial markets in the digital age.

Benjamin Stani, the business development director of a certain organization, stated that as on-chain yield compression and rising Federal Reserve interest rates occur, there is a significant divergence between on-chain and off-chain rates, and RWA may bridge this gap. He pointed out that while the stablecoin market is a cornerstone of the crypto ecosystem, the underutilization of these stable assets has always been an issue, which RWA can address. This has become a disruptive force in 2023, unlocking the potential of this asset class and fundamentally changing the way value is created, transferred, and stored.

The drive for "risk-free real-world yield has shifted the industry focus towards the tokenization of regulated financial instruments," with treasury bonds, real estate, precious metals, and artworks seen as the most viable tokenized assets.

The short-term treasury bond token (STBT) launched by a certain institution has received a very positive response, raising $123 million in just over five months. Stani pointed out that driven by the Federal Reserve's interest rate hikes, people are looking for risk-free rates while avoiding the hassles of traditional trading execution and settlement, and STBT meets this demand. As the industry develops, the same logic applies to other real-world assets.

As tokenized government bonds are widely adopted in the industry, exploring other liquid listed securities in a similar form does not differ much from a conceptual perspective. In short, RWA can extend to real estate, corporate bonds, and fine wines. The RWA industry is expected to become a major theme in the digital asset ecosystem in the coming years, adding hundreds of billions of dollars to the market.

RWA will greatly enrich the scale and variety of on-chain available assets. With the expectation of a continued rise in risk-free interest rates, it is anticipated that in the coming quarters, various institutions will adopt tokenized notes due to economic incentives, while there will be further DeFi innovations in market products.

Although RWA is still in the early stages of the tokenization cycle, interest from both native cryptocurrency and traditional financial participants is growing.

Stani said: "There have been some notable advancements in the industry, including the successful use of DeFi in the wholesale financing market by the Monetary Authority of Singapore's Project Guardian, experiments with foreign exchange trading and government bond trading, as well as a major bank testing tokenized funds on the Ethereum public network. The adoption rate of RWAs is rising rapidly. Ongoing innovations in clearing strategies and smart algorithms are driving this momentum, with significant progress expected by the end of the year."

Advantages and Disadvantages of Tokenization

One of the biggest benefits of tokenization is the democratization of financial markets by eliminating intermediaries, speeding up transaction times, and reducing costs, while also opening up investment opportunities that were previously available only to high-net-worth individuals.

Before the emergence of RWA, the main limitations of the market were concentrated on user experience, particularly in terms of liquidity. Tokenization has the potential to fundamentally change the financial landscape, create new revenue streams, and even establish entirely new markets.

Compared to traditional lending, on-chain lending has several key advantages over real-world assets, including greater international accessibility, the availability of crypto financial tools, and a more democratic decision-making process. These factors help make loans more inclusive, transparent, and facilitate a broader range of borrowers and lenders, while also promoting the stability of the lending ecosystem and reducing risks. As the industry evolves, we may see a convergence between traditional finance and DeFi, paving the way for a smarter and more programmable global economy.

One of the biggest obstacles to RWA at present is regulatory uncertainty. The legal framework is struggling to keep up with the rapid development of tokenization technology. This is particularly evident in the area of RWA infrastructure integrated with DeFi, where regulators must confront blockchain scalability issues to accommodate the capacity of traditional financial markets.

To help overcome this barrier, Stani suggests adopting a gradual regulatory approach, focusing on establishing a comprehensive framework fully compatible with DeFi standards. Such a framework must strictly enforce risk management protocols to enhance transparency and security. The success of Singapore's pioneering stablecoin regulation illustrates the power of clear and strong guidelines. They not only protect investors but also create a favorable environment for issuers and financial institutions to innovate and explore new investment channels.

The technical aspect is actually easier to upgrade and develop because there are already viable solutions. The bottleneck is more in the regulatory and compliance areas; we need to clarify what constitutes a security and how to handle on-chain property off-chain. Some jurisdictions are more advanced than others, and naturally, we will see the push for innovation in the more progressive jurisdictions.

The biggest obstacle may be that the internal compliance team wants to apply the same framework to these new asset classes, while it is clear that many things have lower relevance on-chain (such as retaining audit trails) and are even unfeasible (such as reversing transactions).

Currently, issues related to regulatory compliance have led to delays in the adoption of RWA, but Stani stated that these obstacles will ultimately be overcome, allowing RWA to thrive globally.

Conclusion

The future demand for on-chain deep liquidity is strong, especially for large protocols. Although STOs have limitations and licensing requirements, there will be some flexibility in using securities as underlying assets for other products. The industry is exploring these possibilities in pursuit of innovation.

Once RWA achieves sufficient scale within the industry, the ultimate outcome will be a merger of the traditional financial world and the cryptocurrency realm into a single financial domain, which will be astonishing and different from the past bull market trends.