The fire of RWA finally “burned”

Real World Asset (RWA) tokenization has emerged as one of the most powerful use cases for blockchain technology globally as it promises to bring greater efficiency and security to financial markets in the digital age.

To gain more insight into where RWA might be headed in 2023, Kitco spoke to Benjamin Stani, Director of Business Development at Matrixport.

“With on-chain yield compression and rising U.S. Federal Reserve (FED) rates, there is a big divergence between on-chain and off-chain 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 always been a lingering problem, and RWA can solve this problem. 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 push for “risk-free real-world yields has shifted the industry’s focus toward the tokenization of regulated financial instruments,” with treasuries, real estate, precious metals and art seen as the most viable assets to tokenize.

The launch of Matrixdock's tokenized short-term treasury bills (STBT) received a very positive response, raising $123 million in just over five months. Stani pointed out that driven by the interest rate hike by the US Federal Reserve (FED), people want to obtain risk-free interest rates while avoiding the hassles of traditional transaction execution and settlement. STBT meets this demand. As the industry develops, the same logic will apply to other real-world assets.

As tokenized treasuries gain widespread industry adoption, exploring other liquid listed securities in a similar format will not be much different from a conceptual perspective. In short, RWAs can extend to real estate, corporate bonds, and fine wine. The RWA industry is expected to become 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 variety of assets available on the chain. With the expectation of continued high risk-free interest rates, it is expected that institutions will adopt tokenized notes due to economic incentives in the coming quarters, and there will be further DeFi innovations in market products.

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

Stani said: “There have been some notable developments in the industry, including the Singapore central bank’s Project Guardian’s successful use of DeFi for wholesale funding markets, conducting trials for foreign exchange trading and government bond trading, and Deutsche Bank testing tokenized funds on the Ethereum public network. RWA adoption is increasing rapidly. Continued innovation in clearing strategies and smart algorithms is driving this momentum, and significant progress is expected before the end of the year.”

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 that were previously only available to high net worth individuals.

Before the advent of RWA, the main limitations of the market were centered around user experience, especially liquidity, and tokenization has the potential to revolutionize the financial landscape, creating new revenue streams and even entirely new markets. We can get a glimpse of the complexity of this from a visualization of the typical mix of external parties and service providers in traditional securitization provided by PwC.

Source: PricewaterhouseCoopers

The orange boxes above the dotted line represent the main parties: the obligor (mortgage borrower), the originator (lender who creates the mortgage), and the investor (buyer of the pooled mortgage). The core function of securitization is to pool the cash of the underlying obligors, divide it up, and distribute the cash to the investors.

The costs of each step are cumulative, and are 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, which is a significant expense for most people.

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

One of the biggest obstacles for RWAs right now is regulatory uncertainty. Legal frameworks are struggling to keep up with the rapid pace of tokenization technology development. This is particularly evident in the area of ​​RWA infrastructure integrated with DeFi, where regulators must confront blockchain scalability issues to accommodate the TradFi market capacity.”

To help overcome this obstacle, Stani recommends a progressive regulatory approach focused on building a comprehensive framework that is 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, 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 part is actually easier to upgrade and develop because there are already viable solutions. The bottleneck is more in the area of ​​regulation 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, where many things are less relevant on-chain (such as preserving audit trails) or even impossible (such as reversing transactions).

Issues related to regulatory compliance are currently causing delays in the adoption of RWAs, but Stani said these barriers will eventually be overcome, allowing RWAs to flourish around the world.

Conclusion

The demand for deep on-chain liquidity is strong in the future, especially for large protocols. While 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 has enough scale within the industry, the end result will be the union of the TradFi and crypto worlds into a single financial universe, which , unlike past bull run trends, will be amazing.