As real-world assets move on-chain, token adoption will grow

While critics wrote off much of the initial hype surrounding the real-world asset (RWA) market, the sector has been on a tear for the past year or so. In fact, The Boston Consulting Group expects global illicit asset piracy to be a $16 trillion industry by the end of the decade.

Various asset classes hit a record high of $2.75 billion in August, according to the latest data. And while the scale has slipped since then, it still stands at a respectable $2.49 billion as of September 30.

According to a joint study by research and consulting firm Celent and American bank behemoth Binny Mellon, 91% of institutional investors are interested in investing in tokenized assets, and 97% agree that tokenization will revolutionize asset management.

Matthijs de Vries, co-founder of AllianceBlock – a firm building a decentralized tokenized market – told Cointelegraph that these types of statistics give an indication of the impact institutional-level investments are having on the industry.

“This trend is expected to drive massive growth in the tokenized RWA industry, especially as more liquidity flows into the space, leading to a sustained bull market at the peak of low capital flight.

Why the sudden increase in demand?

From an external perspective, RWAs seem to be on the rise due to improved regulatory transparency in certain jurisdictions (such as Switzerland) and successful pilot projects.

Decentralized finance (DeFi), the unsustainable product that has led to the collapse of many major crypto projects in 2022, has prompted investors to look for sustainable and real products – for example, available in tokenized RWAs.

He explained: “Investors now demand clear explanations of where these products come from, making branded RWAs more attractive due to their transparent source of production and recognition among traditional players.

“Investors are starting to realize that if you can't easily explain where the product comes from, it will fail at some point. With tokenized RWAs, the source of the product can be easily explained to crypto natives and new participants.

Real estate is an area where tokenism has made a huge impact. As things stand, it is the largest asset class in the world, worth an estimated $613 trillion by 2023.

Between Q1 and Q3 2023, the value of real estate on the chain grew by 102 percent, or about $90 million.

The tokenized aggregate value of assets, which in some cases represent distributed claims on real estate, reached $178 million as of September 30. Realty, the token real estate provider, holds the lion's share of the market. A substantive, real estate-focused RWAs co-issuer, it has outperformed its peers. The total value of Tangible Tokens grew from $100,000 to $64 million in the first three quarters of 2023.

Bernard Lau, co-founder and CEO of blockchain-based real estate investment company Labs Group, told Cointelegraph that simulating real estate is the best use for this technology today. Due to its stability and real estate value, Lau believes that real estate is a very solid investment that stands out from others.

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“In the past, many investors from low economic backgrounds found themselves out of the real estate game because of the very high entry barrier,” he said. “And as many find themselves out of this equation, they start investing in stocks and bonds. However, now that individuals are able to invest in fractional homes, buildings or resorts, more people can participate, fueling the growth we're seeing in the market.

Beyond property investment

While real estate is undoubtedly a popular use case for tokenization, de Vries believes that this space will face many challenges going forward – primarily due to different laws and regulations in different jurisdictions. In his view, tokenization translates seamlessly into asset classes such as exclusive collections, diamonds, luxury watches, classic cars, securities and carbon credits.

In addition, the impact of tokenization can be actively felt in the field of traditional finance, especially in relation to popular instruments such as bonds, stocks and exchange-traded funds (ETFs). Adam Levy, co-founder of Backed, a platform for real-world assets – told Cointelegraph that this transition was natural:

“The market wants a stable product. In a bear market, fixed income products provide this. Globally, interest rates have increased, and everyone wants to use this risk-free product. Although the S&P 500 is up 17% year-to-date, we don't see much interest in tokenized stocks right now. However, we have seen growing demand for non-USD fixed income products in particular.

Angular Protocol recently released its first stable euro offering using bC3M, a euro-denominated fixed income ETF. Similarly, Backed has launched three euro worth products as part of its financial reporting. “We are looking at GBP and BRL ETFs next,” Levy added.

Tokenized US Treasuries

In recent months, the value of tokenized US Treasury bills, bonds and money markets has risen to $685 million. In particular, interest in tokenized Treasurys is growing among digital asset enthusiasts, with the yield on US government bonds – the supposedly risk-free interest rate – now eclipsing the yield offered by most DeFi offerings.

In the year In 2023 alone, the market saw the debut of several new players, such as OpenEden, Ondo Finance and Maple Finance – each presenting their own blockchain-centric Treasury products aimed at savvy investors, digital asset enterprises and decentralized organizations.

Because of these rapidly emerging trends, Bernstein Personal Wealth Management researchers in 2015 By 2028, 2% of the global money supply – in stablecoins and central bank digital currencies – could be tokenized, bringing the sector's value to $5 trillion.

UBS's and JPMorgan's tokenization venture

Earlier this month, banking behemoths UBS and JPMorgan made major strides in asset tokenization, unveiling platforms to create seamless interactions between traditional financial assets and blockchain technology. UBS, for example, announced a live pilot of a tokenized variable capital company (VCC) fund under the moniker Project Guardian, led by Singapore's central bank.

This effort, part of the broader VCC umbrella, aims to bring a variety of real-world assets to the blockchain. UBS Asset Management – through its in-house UBS Tokenize service – has overseen the token market fund by participating in activities such as redemptions and fund subscriptions.

Thomas Keagie, head of UBS Asset Management in Singapore and Southeast Asia, said the project is a significant step towards solving the complexities of fund tokenization, which hopes to increase market liquidity and customer access.

JPMorgan has launched its blockchain-based token platform – the Tokenized Collateral Network (TCN) – with asset management colossus BlackRock among its inaugural clients. The platform, designed to convert traditional assets into digital equivalents, has made its first trade, converting money market fund shares into digital tokens.

This pioneering transaction between JPMorgan and BlackRock saw assets transferred to Barclays Bank used as collateral for an over-the-counter derivatives exchange between entities.

After conducting its first internal testing in May 2022, TCN now boasts a growing pipeline of customers and transactions, with plans to accelerate traditional settlements on the blockchain. In a statement, Tyrone Loban, head of Onyx Digital Assets at JPMorgan, highlighted the platform's potential to increase efficiency by unlocking the capital used in ongoing transactions as collateral.

More interesting developments around the area

Untangled Finance, a marketplace for tokenized RWAs, recently launched on the Silo Network with a $13.5 million venture capital injection led by London-based Fasanara Capital to move tokenized personal loans to the blockchain.

The platform — which is expected to expand into the Ethereum and Polygon ecosystem via the ChainLink cross-chain interoperability protocol — aims to further grow the current $550 million private credit market on DeFi rails to a $1 trillion valuation of the conventional personal credit market.

Moreover, by the end of 2022, asset manager Wisdomtree has unveiled nine digital currencies that it successfully launched earlier in the year. The funds allow the transfer agent to maintain a secondary record of shares on the Stellar or Ethereum blockchains.

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In the year In February 2023, Hong Kong's central bank issued a $100 million green or sustainable investment bond. Meanwhile, in April, French investment bank Crédit Agricole CBB and Swedish bank SEB agreed to develop blockchain-based bonds.

Finally, on September 8, the United States Federal Reserve released a comprehensive working paper that examines asset tokenization and risk-based assets. In short, the document includes five basic elements of tokenization like StoryCoins: blockchain, reference asset, valuation mechanism, storage or custodianship, and redemption procedures.

Therefore, it will be interesting to see how this nascent market evolves and grows, as more and more individuals, major market players and investors continue to understand the enormous technological and financial benefits held by tokenized RWAs.