Bringing RWA Tokenization to the Masses

In the rapidly evolving crypto landscape, the tokenization of real-world assets (RWAs) is emerging as the cutting-edge frontier, captivating investors and industry pioneers alike with its burgeoning potential and surging investments. 

What RWA tokenization means is putting traditional assets on a blockchain. This is a way of representing ownership of an asset through a token. The assets involved could be anything from stocks, bonds, gold, and commodities to treasuries, debt, real estate, art, intellectual property, and much more.

This trend takes place in the intersection of digital assets and traditional finance. The digitization transition marks an evolution of how assets are handled and traded. Traditionally, the whole process of managing assets involves intermediaries and a ton of complex paperwork making it all time-consuming and cumbersome. Not to mention, many traditional assets are often inaccessible to retail.

Tokenization of real-world assets offers increased efficiency and faster settlements. But this isn't all. By tokenization of traditionally illiquid assets, it creates liquidity and transforms the investment landscape. Converting the assets into digital tokens enables these assets to be fractionalized, removing the need for significant capital for investment. 

Moreover, when tokenizing assets like collectibles and fine art, which have been once accessible to only a select group of investors, it makes them accessible to those who couldn't previously invest in them. Tokenization also makes such assets easily tradeable on digital platforms. This way, tokenization democratizes investment and reduces entry barriers. Moreover, it gives an average investor new avenues for portfolio diversification and wealth generation. 

All these benefits make tokenization really attractive, hence the growing interest in the trend. Amidst the ongoing bull market, Reid Simon, Head of Credit at San Francisco-based Securitize, reported seeing a rise in interest and demand for its services. Securitize is a regulatory-compliant asset tokenization firm that enables the issuing and trading of digital asset securities. 

Simon said that the combination of crypto and private credit is attracting a host of new investors.  

If we look at the numbers, the tokenization of the 1.6 trillion market that is private credit currently has $607.5 million in active loans. This has increased significantly since the beginning of last year, when this value was about $255 million. However, the numbers are nowhere near the $1.5 bln high in May 2022, according to data from rwa.xyz.

Meanwhile, tokenized treasuries have reached $719 million, down from a $769.6 million high last week but up from $108.65 million recorded at the end of Jan. 2023. This growth has been the result of crypto firms seeking to earn a steady yield.

While the sector has been gaining a lot of traction, it is not issue-free. In an interview with Kitco Crypto earlier this month, Simon of Securitize said, there is a regulatory burden that comes with migrating assets like securities on-chain. With the US being the “most liquid and strongest market to issue securities in,” if one wants to tap this market, they have to follow the rules.

Another “big friction point” he noted during the interview was that “there isn't a ton of utility at the moment,” which restricts the flow of more high-quality assets to the on-chain. For this dynamic to change, he said, investors need to be offered utility, “whether it's liquidity, leverage, or even compostability.”

As for the future of RWA tokenization, while he does believe that we are heading towards a future where all assets will be represented on-chain, “right now, there's not a whole lot of reasons for everything to be tokenized.” 

While challenges remain, mainstream institutions are increasingly exploring the RWA tokenization concept, in part driven by crypto receiving a boost in legitimacy following the launch of the first spot Bitcoin ETF in the US. So, let's take a look at the recent development in the space, paving the way for RWA tokenization's mass adoption.

Click here to learn how tokenization is at the center of crypto resurgence.

BlackRock Onboards the Tokenization Train

BlackRock (BLK), an asset management giant, announced the creation of the BlackRock USD Institutional Digital Liquidity Fund this week. The fund will be incorporated in the British Virgin Islands, according to the document filed with the US Securities and Exchange Commission (SEC).

The fund will be launched in partnership with Securitize, in which BlackRock also made a “strategic investment” whose deal terms haven't been revealed.

Securitize, which has a broker-dealer as well as an ATS license, recently launched its new Securitize Credit subsidiary to bring on-chain yields to crypto by leveraging private market returns. The platform is already working with the likes of Hamilton Lane, KKR, and others on tokenized funds. 

For BlackRock's fund, Securitize will act as a tokenization platform and a transfer agent, while BNY Mellon will be the custodian, with Coinbase, BitGo, Fireblocks, and Anchorage Digital Bank NA also participating in the ecosystem. 

Talking about this “latest progression” in the company's digital assets strategy, BlackRock's Head of Digital Assets, Robert Mitchnick, said, “We are focused on developing solutions in the digital assets space that help solve real problems for our clients.”

Based on the Ethereum blockchain, the fund will trade under the ticker BUIDL. It will be fully backed by the US Treasury bills, cash, and repurchase agreements (short-term borrowings). The fund will offer a yield that will be paid out every day to BUIDL holders. For this, the first transfer was made about two weeks ago, and the Ethereum address hosting it has 100 BUDIL tokens. 

The new fund will only be available to institutional investors with the minimum investment accepted set by the Wall Street mammoth at $100K.

With this move, BlackRock is getting deeper into the crypto market after listing its spot Bitcoin exchange-traded fund (ETF) in January this year. The ETF has already amassed a whopping $15.63 billion under management. 

The world's largest ETF manager with $3.5 trillion in assets under management (AUM) has also filed for an Ether ETF. In an interview earlier this year, BlackRock CEO Larry Fink said that Bitcoin and Ether ETFs are “stepping stones towards tokenization, and I really do believe this is where we're going to be going.”

BlackRock is not the only traditional financial (TradFi) institution experimenting with RWA tokenization, as banks like JPMorgan, Bank of America, HSBC, Morgan Stanley, and Citi are also involved in this trend. 

This increased participation from TradFi comes from private wealth management firm Bernstein, which estimates that 2% of the global money supply could be tokenized on the blockchain over the next five years. Citigroup projects the market to be worth $5 trillion by 2030.

However, a report called “Beyond the Hype of Real World Assets” by Outlier Ventures in January set much bigger targets for the market, estimating a $10 – $15 trillion total addressable market (TAM) by the end of this decade. Even then, these figures are seen on the low side if better price discovery is enabled via tokenization. 

Meld to Launch Tokenized Services for Retail 

This week, the regulated bank Meld also announced its plan to provide borrowing and lending services against tokenized assets for retail in the near future. This feature would allow investors to “ape more into Bitcoin.”

The crypto-friendly bank has also signed a memorandum of understanding (MoU) with Swarm Markets. The decentralized finance (DeFi) platform is licensed by Germany's financial regulator BaFin. Just last December, Swarm launched its permissionless RWA trading platform.

“A powerful alliance, opening up the predicted trillion dollar real-world asset (RWA) market to retail inventors,” said Meld on X (previously Twitter). “MELD RWAs, powered by Swarm, will be integrated into the MELD Lending & Borrowing Protocol, giving users the ability to borrow against RWA assets such as $AAPL or $TSLA stock.”

Meld, which recently secured its virtual asset service provider (VASP) license in Lithuania, is also in partnership with the layer-1 blockchain of the same name. 

It is using Swarm's platform as a means of offering on-chain lending and borrowing for RWA assets. 

“Our partnership with Swarm opens up infinite opportunities to create exciting types of RWAs and cryptocurrencies around themes like AI, DeFi, gaming, and NFTs.” 

– MELD CIO Gediminas Kiveris

This will open up cross-asset margin opportunities for retail investors, something they can't access through traditional methods. The collaboration with Meld could see a large retail user base use tokenized RWAs through a licensed banking service. Already, 75,000 prospective customers have signed up with Meld for early access to the platform.

In addition to these big developments in the tokenization sector, this week, MANTRA, a project focused on the Middle East, got closer to securing licenses from VARA, the Dubai crypto regulator. The regulatory approval will help the project build and host several compliance-minded tools for issuing and trading RWAs.

For this, MANTRA raised funding led by Shorooq Partners, GameFi Ventures, Forte Securities, Three Point Capital, Hex Trust, and Virtuzone. 

In addition to RWA tokenization, MANTRA will be offering fiat on/off ramps, decentralized ID (DID) / Soulbound NFTs, the MANTRA Token Service SDK, a native DEX, launchpad, and compliance modules.

Yet to be launched, MANTRA's network will be built on Cosmos, which doesn't have a specific app chain for trading such assets at the moment either. It will use Tendermint as the consensus protocol and will form the first zone on the Cosmos Hub. Moreover, MANTRA Chain will offer a multi-chain dApp ecosystem, CosmWasm integration for dApp development, and compatibility with IBC tokens across various networks. 

Once live, the platform will focus on the “crypto native” crowd, those who are already familiar with crypto, DEXs, and on-chain borrowing and lending, said founder John Patrick Mullin. It will also be available in a compliant environment, ensuring adherence to regulatory standards. 

More Development in the Tokenization Sector

Besides BlackRock, Meld-Swarm collaboration, and MANTRA, the RWA tokenization trend has been making much more progress. This includes the launch of the Libre fund tokenization protocol and enabling access to a USD money market fund invested in BlackRock Treasury ETFs.

Libre is a joint venture of Alan Howard's incubator Webn and Laser Digital, the digital asset arm of Nomura. The B2B protocol brings together accredited investors, wealth advisors, and asset managers. It has already partnered with asset managers Hamilton Lane and Howard's Breven Howard.

For tokenization, Libre is using a feeder fund, a Singapore Variable Capital Company (VCC). It also uses its own L2 linked to Polygon and an MVP of the Libre Gateway that enables Polygon users to access the protocol. Libre plans to integrate with other blockchains as well.

“Libre's objective is to provide unprecedented access to top-tier alternative investments complemented by provisioning scalable value-add services, such as the money market facility that we have launched, followed by our collateralized lending service targeted for later this year.” 

– Libre's CEO and founder, Dr. Avtar Sehra

Meanwhile, last week, Today Digital Asset announced the results of its pilot with 45 institutions, which utilized 22 different DLT applications, including registries for funds, bonds, and cash, along with trading and margin management on the Canton Network.

The trial participants included Goldman Sachs, Cboe Global Markets, BNY Mellon, Broadridge, DRW, BNP Paribas, Standard Chartered, EquiLend, Oliver Wyman, Visa, Paxos, Baymarkets, BOK Financial, Nomura, Commerzbank, DTCC, Wellington Management, Fiùtur, Harvest Fund Management, IEX, Northern Trust, Pirum, State Street, and Generali Investments. Microsoft acted as a supporting partner, and Deloitte as an observer.

Launched last July, the network aims to provide DLT interoperability to address the issues created by numerous institutional permissioned blockchains that work in silos. Canton solves this problem by connecting these financial systems while “abiding by the current regulatory guardrails.” The Canton Network only supports applications using Digital Asset's DAML smart contract language and its own blockchain. 

Even Ripple has been adopting this trend and partnered with the Axelar Foundation last month to facilitate the tokenization of RWAs.

Conclusion

As we noted, real-world asset tokenization is a real trend that is growing at a steady pace. It is actually expected to be a trillion-dollar opportunity, with institutions and banks coming in to be an early participant in this revolution. However, for RWA tokenization's potential to be fully realized, it will take time, collaboration, technological advancement, utility, and regulatory clarity.