Traditional institutions are eager to give it a try, and RWA has finally become popular

Source/kitco

Compiled/Squidward

Tokenization of real world assets (RWA) has become one of the most powerful use cases of blockchain technology globally as it promises to bring greater efficiency and security to financial markets in the digital age.

To get a deeper understanding of what’s in store for RWA in 2023, kitco editors spoke with Benjamin Stani, Director of Business Development at Matrixport.

"With the compression of on-chain yields and the increase in U.S. Federal Reserve (FED) interest rates, there is a big divergence in on-chain and off-chain interest rates," Stani said. "RWA may be able to bridge this gap".

He pointed out that while the stablecoin market is the cornerstone of the crypto ecosystem, the underutilization of these stable assets has been a lingering problem, and RWA can solve this problem. This has become a disruptive force in 2023, unlocking the potential of the asset class and fundamentally changing how value is created, transferred and stored. "

The push for “risk-free real-world yields has shifted the industry’s focus to the tokenization of regulated financial instruments,” with Treasury bills, real estate, precious metals and art seen as the most viable assets for tokenization.

The launch of Matrixdock’s tokenized Treasury Bills (STBT) has received a very positive response, raising $123 million in just over five months, with Stani noting that this was driven by the U.S. Federal Reserve’s (FED) interest rate hikes. People want bonds that have a risk-free rate and avoid the hassle of traditional trade execution and settlement. STBT meets this need, and as the industry develops, the same logic will apply to other real-world assets.

**As tokenized Treasuries become widely adopted by the industry, exploring other liquid listed securities in a similar format would not be much different from a conceptual perspective. **In short, RWA can be extended to real estate, corporate bonds and fine wines. The RWA industry is expected to be a major theme in the digital asset ecosystem in the coming years, adding tens of trillions of dollars to the market. "

RWA will greatly enrich the scale and types of assets available on the chain. With the expectation that risk-free interest rates will continue to rise, it is expected that in the next few quarters, various institutions will adopt tokenized notes due to economic incentives, and at the same time, market products will There is further DeFi innovation. **

While RWA is still in the early stages of the tokenization cycle, interest is growing from cryptocurrency native as well as traditional financial players.

Stani said: “There have been some noteworthy developments in the industry, including the Central Bank of Singapore’s Project Guardian successfully using DeFi for wholesale funding markets, conducting trials for FX trading and government bond trading, and Deutsche Bank testing a proxy on the Ethereum public network. Tokenized funds. RWA adoption is rising rapidly. Continued innovation in liquidation strategies and smart algorithms is driving this momentum, with significant progress expected by the end of the year.”

01. Advantages and Disadvantages of Tokenization

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

Before the birth of RWA, the main limitations of the market focused on user experience, especially liquidity. Tokenization has the potential to completely change the financial landscape, create new revenue sources, and even brand new markets. We can get a glimpse of the complexity from this visualization provided by PwC of the typical combination of external parties and service providers in a traditional securitization.

Source/PwC

The orange box above the dotted line represents the main parties: the debtor (the mortgage borrower), the originator (the lender who created the mortgage), and the investor (the buyer of the pooled mortgages). The core function of securitization is to pool the cash of the underlying debtors, carve it up, and distribute the cash to investors.

The cost of each step is cumulative, and the cost is expected to increase by 1% over the entire process of securitization. This may seem insignificant, but even a 0.50% reduction in the interest rate on a $500,000 mortgage can save $2,500 per year. This is a significant expense for most people.

Compared to traditional lending, on-chain lending offers several key advantages over real-world assets, including greater international accessibility, access to crypto financial instruments, and a more democratic decision-making process. These factors help make lending more inclusive, transparent and accessible to a wider range of borrowers and lenders, while also promoting stability in the lending ecosystem and reducing risk. As the industry develops, we may see the merger of TradFi and DeFi, creating the conditions for a smarter, more programmable global economy.

**One of the biggest obstacles to RWA currently is regulatory uncertainty. **Legal frameworks are struggling to keep pace with the rapid development of tokenization technology. This is particularly evident in the area of RWA infrastructure integrated with DeFi, where regulators must face blockchain scalability issues to accommodate TradFi market capacity. "

To help overcome this obstacle, Stani recommends a progressive regulatory approach focused on establishing a comprehensive framework that is fully compatible with DeFi standards. Such frameworks must strictly enforce risk management protocols to enhance transparency and security. The success of Singapore’s groundbreaking stablecoin regulation illustrates the power of clear, strong guidelines. They not only protect investors but also create a conducive environment for issuers and financial institutions to innovate and explore new investment channels.

The technical part is actually easier to upgrade and develop because there are already feasible solutions. The bottleneck appears more in supervision and compliance. We need to clarify what securities are and how to handle on-chain property rights off-chain. Some jurisdictions are more progressive than others, and it is natural that we will see a push for innovation in progressive jurisdictions.

The biggest hurdle may be internal compliance teams looking to overlay the same framework on these new asset classes, and obviously many things will be less relevant on-chain (like retaining an audit trail) or even unachievable (like reversing transactions).

Issues related to regulatory compliance are currently causing delays in RWA adoption, but Stani says these obstacles will eventually be overcome, allowing RWA to flourish globally.

02. Conclusion

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

Once RWA achieves sufficient scale within the industry, the end result will be the union of TradFi and the cryptocurrency world into a single financial sector, which, unlike the bull run trends of the past, will be stunning.