Developments come along in the investing world all the time. For instance, when the shipping container came to be in 1956, it didn’t look like much more than a steel box. It ultimately wound up redefining global trade, allowing cargo to move from ships to trucks to trains without the need to repack.
Dominating crypto news, the tokenisation of real-world assets has a similar feel. The goal is to transform ownership records, imprinting paperwork of ownership into a digital token that can run on the code of its given blockchain. The promise is that it will reduce barriers into the world of digital assets, including everything from real estate to U.S. Treasuries to stocks.
But what does all of this mean for retail investors? What does it mean for the average investor who has at least continued dabbling in cryptocurrency and digital assets? Read on to find out how the tokenisation of real-world assets may be the next major transformation for the investment world.
What are Real-World Assets?
A real-world asset (RWA for short) is generally used as a term within the Web 3.0 ecosystem to describe a traditional financial asset. Real-world assets include physical assets, things like infrastructure, commodities like oil and gold, equipment, real estate, and more. It also comprises investments based on certain financial instruments. This includes private equity, accounts receivable, private credit, bonds, stocks, U.S. Treasuries, and so much more.
What Does it Mean to Tokenise Those Assets?
This is where things can be somewhat confusing to someone who is new to the space. Tokenisation means creating a digital representation, typically a token, of the rights over a specific asset. These tokens are created on a distributed ledger technology (DLT) platform, more often than not a blockchain.
By utilising this DLT platform, real-world assets – real estate, artwork, bonds, stocks, etc. – are then tokenised and created within that blockchain. It not only gives users more clearly defined ownership over the asset but also creates the potential for fractional ownership within that blockchain as well.
Blockchain technology is meant to be totally decentralised, removing traditional middlemen like banks and other financial institutions. More importantly, the transactions within that blockchain can be verified without the use of one of the aforementioned centralised entities.
Tokenisation of real-world assets also ensures total immutability. This means totally tamper-proof and reliable record-keeping that cannot be altered after the transaction has been completed. Perhaps most importantly of all, this process can be completely programmable, using a series of self-executing smart contracts in order to streamline settlement, compliance, and governance processes.
Why Has Interest in Tokenised Assets Been Growing?
The real question is, “Why has the tokenisation of assets been on the upswing?” For starters, it creates an innovative path to investment for both retail and institutional investors by allowing them to use traditional assets for blockchain-based protocols.
Consumers are able to maintain a greater control over their financial life while still participating in the digital assets ecosystem. Even better, it means being able to stay outside the constrictive measures of the traditional banking system, something that is inherently attractive to those interested in digital investment.
More importantly, it gives retail investors the ability to invest in a growing marketplace while also garnering greater protections than existed before. Prior barriers to investing in digital assets and currencies have been lowered, creating the potential for greater involvement on the part of retail investors than ever before.
Big Moves Made by Institutional Players
As mentioned above, the tokenisation of real-world assets provides enhanced liquidity, programmable compliance, and fractional ownership, among other things. This gives both individual investors and institutions the ability to trade, hold, or use those assets within their specified decentralised finance (DeFi) environments.
More importantly, the move to tokenisation is meant to bridge the gap between blockchain and traditional finance. What institutional investors see, however, is the chance to unlock trillions in capital that would have otherwise remained locked up. Institutions are able to create faster settlements, provide broader access, implement new financial instruments, and create more efficient capital flows by blending off-chain and on-chain spheres.
Though tokenisation has been in the works for some time, the attention being paid by major institutions in the traditional finance space is creating major ripples. With greater demand and regulatory clarity, the RWA tokenisation space is seeing greater movement in proposed standards, product launches, and overall on-chain value.
The Biggest Institutional Players in RWA
While there has been some interest in the tokenisation of real-world assets for some time, movement by major institutional players has really raised the profile of the market. These are the biggest players involved and bring infrastructure investment, scale, and credibility to an already growing market.
Brickken. Though it is a startup, this European company has already tokenised more than $250 million in real-world assets across more than a dozen countries. Brickken has recently begun expanding into Asia and North America in an effort to scale operations and asset coverage.
DBS, Franklin Templeton, Ripple. While it is interesting that these institutions are pursuing RWAs, their involvement in tokenised stablecoins as well as money-market funds (primarily for institutional clients) continues to grow. These tokenised assets, more than anything, have been created to serve as lending collateral.
Goldman Sachs & BNY Mellon. These companies have an eye towards tokenised money market funds. LiquidityDirect from BNY Mellon has integrated with GS DAP (Goldman’s private blockchain) in order to give institutional clients the ability to redeem and subscribe to money market funds in tokenised versions.
The Biggest Advantages to Real-World Asset Tokenisation
Though it is clear that there are inherent advantages to real-world asset tokenisation for institutional investors, it may remain to be seen what they are for retail investors. As it stands, there are a quartet of reasons why the tokenisation of real-world assets is the wave of the future.
Improved liquidity. Assets that were previously only available at certain financial levels can now be split into smaller pieces via fractional ownership. This lowers barriers and enhances liquidity for assets all at once.
Cost savings. At the end of the day, everyone is looking to save money while investing in digital assets. By automating the process (and reducing the need for previously needed intermediaries), there are serious operational cost savings to be had.
Transparency. Because these assets are tokenised onto distributed ledgers, they are then verifiable to anyone who has access to that ledger. This helps to enhance regulatory compliance and to mitigate potential fraud. Smart contracts are put into place in order to enforce the necessary protocols, regulations, and laws without the need for intervention. Record-keeping has become exponentially simplified while also enhancing data disclosure.
The Wave of the Future
It is becoming apparent that investors big and small are moving toward tokenised assets. As more institutions get involved, it becomes a safer, more secure, trusted means of investing in both the digital and physical worlds.
