Source: Coindesk; Compilation: BitpushNews Mary Liu
What are the biggest misconceptions about crypto by laymen: Cryptocurrencies like Bitcoin aren’t “real” because they’re not backed by real-world hard assets; Suffer losses; some are even ridiculous, Meme coins and BAYC those “little pictures” sold for millions of dollars at one point.
You don’t have to agree with these claims (I don’t think so, at least not quite.) But whether you take it or not, these are the facts that most banks, financial institutions, governments, and billions of “normal people” still haven’t bought crypto part of the reason.
But what if the next generation of cryptocurrencies consisted not of “magic internet money” they’ve never heard of, but of cryptographic “tokenization” of stocks, bonds, cars, and real things people actually care about? ?
Consumers – including skeptics on Wall Street – are starting to pay attention to the tokenization of real world assets (RWA: Real World Assets Tokenization), and this interest has quietly spiked during the crypto bear market. Tokenization can “create liquidity for things that are illiquid today,” said Lucas Vogelsang, CEO and co-founder of Centrifuge, which has tokenized more than $400 million in RWA.
While most cryptocurrencies are entirely new assets—from Bitcoin to Ethereum to Dogecoin—tokenization puts assets from the “real” world on-chain, bringing the benefits of blockchain to life. Combine with real world assets.
The tokenized “object” can be almost anything. Art, real estate, luxury goods, wine bottles, cars, carbon credits, and financial instruments like treasury bills and stocks — they can all be on-chain.
Allan Pedersen, CEO of the Monetalis Group, which is working on the tokenization of RWA, said: “We are trying to turn everything into a token, and then we will try to see if we can remove all the costs of the underlying system”. Pedersen said they have tokenized $1.2 billion in treasury bills and used them as collateral on MakerDAO.
Even intellectual property can be tokenized. “Imagine someone who runs a YouTube channel and he makes some food videos,” said Sid Powell, CEO and co-founder of Maple, which tokenizes assets and then turns them into collateral. Now imagine that this funny and charismatic YouTuber has amassed a massive audience and earns $50,000 a month in YouTube advertising revenue.
Creators can tokenize that copyright and sell it to financial intermediaries. “We bought the token rights from them. We own the rights to all the royalty streams of their YouTube cooking videos,” Powell explained. If the annual royalties are worth $600,000, the financier can buy the rights for $550,000. Purchase (allowing for some built-in earnings), which provides the chef with a loan against these future earnings.
That model, already popular with big music companies and private equity firms, isn’t available to smaller companies, Powell said. Tokenization makes these tools more inclusive. Morgan Krupetsky, director of institutional and capital markets business development at Ava Labs, said: “Tokenization has the potential to democratize access to capital markets for borrowers. Smaller deal sizes and lower investment barriers will be feasible.”
Even more traditional business projects like “grain shipments” can benefit from tokenization.
Another hypothesis: Shippers want to ship grain across oceans. Typically, shippers obtain financing from banks. They used food as collateral for their loans. Powell believes that this is something that is very suitable for the chain because it involves cross-border finance. He sees the current system as similar to Blockbuster Video and Netflix. “If I’m Blockbuster and I’m in Brazil and I want to serve customers in Bulgaria, I have to set up a Blockbuster branch in Bulgaria, and if I’m Netflix, the person just needs to have an internet connection,” he said.
Back to grain shipping. A transporter can now not only get a loan from a bank in Brazil or Bulgaria, but also find capital from anywhere on the planet through tokenization. “It turns the global financial markets into one clearing house,” Powell said.
Maybe ordinary people don’t care about delivering food. But litigators in finance can do the math, they can imagine possibilities, and they can foresee radical transformations in financial markets. A Boston Consulting Group report suggests that the tokenized RWA market could balloon to $16 trillion by 2030. This is a very abstract digital image. So here’s an analogy: Consider Bitcoin’s current market cap of $600 billion, what if Bitcoin’s market cap is $16 trillion? Each bitcoin will be worth $800,000!
Welcome to the lucrative world of RWA.
Advantages of private equity and stock tokenization
Tokenization isn’t a new technology; it’s just finding new adoption and love. Tokenization has been around since 2017, which echoes early adopters who modified NFTs years before they hit the mainstream (like CryptoPunks, Rare Pepes), and now they are coming at a good time.
Infrastructure improves, onboarding becomes easier, institutions get curious about the token, and surprising economic forces spur adoption. Financial advisor Adam Blumberg wrote in a CoinDesk column: "As interest rates rise, many RWA options offer double-digit returns through interest without the risk of cryptocurrency volatility. risk lending and keep the process efficient.”
While the events of FTX and 2022 have battered the crypto image, banks and governments have quietly — almost secretly — dabbled in the tokenization of RWA.
The Monetary Authority of Singapore is currently tokenizing bonds; they are working with DBS and JPMorgan. Gold is being tokenized. Research by Bank of America (BoA) found that the tokenized market for gold alone is more than $1 billion because “tokenized gold offers exposure to physical gold, 24/7 real-time settlement, no management fees, no storage or insurance costs."
Some tokenization projects are nothing new – such as the tokenization of treasury bills – but Krupetsky said they can cut costs in certification, underwriting, asset monitoring and disbursement of funds, because this kind of red tape “has traditionally been is burdensome, manual and time-consuming”. That’s part of the reason banks and corporations are interested.
A recent report by Ernst & Young found that “institutions see tokenization as promising and expect to invest in tokenized assets and tokenize their own assets more rapidly over the next two years.” A study conducted by the firm The survey found that 57% of institutional investors want to invest in tokenized assets.
**What is the appeal of tokenization for TradFi? **
Let me talk about private equity funds first. Philipp Pieper, co-founder of Swarm, another startup that tokenizes RWA, said: “Blockchain can replace the entire fund, and smart contracts can do what fund managers usually do, but at a lower rate of 100 to 200 basis points.”
For more exclusive “closed-end” private equity funds, tokenization can make doing business much smoother. Suppose a private equity fund called Annoyingly Wealthy Group syndicates to acquire a company. They invest in the company for at least five years. When can they be sold for profit? Members of Annoyingly Wealthy may not agree on a time.
After the fifth year, some may want to try their luck and hope that the company (which they have now) will continue to grow. Some may think that “the top has come” (since the company is now at the peak of its value, they should sell at a premium). Some may just want to use the funds for other things. With tokenization, as Pieper describes it, you can create a “smart contract-based secondary market” for funds, which gives them a way to “partially reduce risk or increase risk based on what they see.” structured way".
For those who don’t work in high-end finance, the inner workings of equity funds may be unfamiliar to them. Making life more comfortable for wealthy venture capitalists may not have been Satoshi’s original vision. Then again, these innovations have attracted significant players in traditional finance, and these are the influencers that blockchain and cryptocurrencies need for widespread adoption — whether you like it or not.
“We are somewhat dependent on the big lenders” getting into the space, said Vogelsang, Centrifuge’s chief executive. He said there aren’t enough early adopters in DeFi today to grow the space to $100 trillion, which he sees as the ultimate market potential. “The money will come from pension funds, banks and existing companies, so the most important job is to familiarize them with the technology and make them understand it so they start using it,” Vogelsang said.
Even stocks can be tokenized. You may find this odd and even a bit pointless, since buying and selling stocks seems to be fairly easy and cheap, with Charles Schwab/Robinhood both offering zero-commission options. But there are benefits beneath the surface, too.
Sologenic tokenizes securities such as stocks, ETFs, and commodities. Bob Ras, co-founder of the company, said, “You can’t buy a fraction of Tesla, Amazon, or Netflix. When you tokenize, users can buy A fraction of those stocks.”
Ras acknowledged that through the Robinhood app, users can actually buy some shares of Tesla or Amazon, but he said that is only because Robinhood itself holds a large number of popular stocks and allows users to buy some shares from within the app. (Whether users buy in will only tell.)
When you buy or sell tokens, settlement is instant. This is important in trading. In the current financial system, trades still take two to three days to fully settle, even at big Wall Street firms. This comes at a price. Banks, hedge funds, and trading desks are eager to deploy money as soon as it is available — and tokenization can put their money to work faster.
Tokenization could even remove the middleman for dollars. It’s common for investors to swap one asset (like Tesla stock) for another (like Walmart stock). This can be done much faster with tokenization. In a process Ras calls a “cross-swap,” users can swap Tesla tokens directly for Walmart tokens. Users can find and create their own trading pairs on the decentralized exchange, Ras said, plus, because they’re never sold in U.S. dollars, they don’t pay capital gains taxes. (Of course, it is possible that future regulation will close this loophole.)
If stock tokenization is indeed cheaper, more efficient, and eventually scales to become the new normal, the impact could change Wall Street in unimaginable ways. Stocks can be traded 24/7 like cryptocurrencies. Typically, most trading occurs between 9:30 am and 10:30 am ET, with all US businesses making earnings reports, communications and financial decisions (such as dividend buybacks) according to the established rhythm of the US stock market Monday through Friday . Tokenization - if it goes mainstream at all - could disrupt all financial markets.
Pieper calls tokenization “Fintech 2.0.” He sees tokenization as a natural progression of ETFs (exchange-traded funds), which were created in the early 1990s. ETFs changed the stock market; tokenization can do the same. ETFs allow investors to invest in a basket of thematic assets, such as airlines, healthcare or energy. Through tokenization, this portfolio can become “atomized,” creating arbitrary combinations of stocks and cryptocurrencies, among other asset classes that have yet to be invented, “putting users at the heart of financial instrument design.” Tokenization creates liquidity pools that earn yield.
If you’re wary of the word “earnings,” you’d be forgiven. It’s the promise of high yield that’s causing companies like Celsius to crash in 2022. Celsius CEO at the time, Alex Mashinsky, confidently told users that Celsius had managed to achieve “high single-digit or low double-digit” returns due to being “significantly less risky” than banks. (The company subsequently filed for bankruptcy, and the New York attorney general accused Mashinsky of fraud.)
Let’s go back further. In 2008, banks made profits by trading baroque financial schemes they didn’t fully understand at the time, including bundled subprime loans. We all know what happened next, bad loans, crumbling banks, and a collapsed economy. So if we create a clever new system of lending and debt through RWA, are we just repeating history and increasing the likelihood of a financial crisis?
Vogelsang acknowledged that the technology “could create a lot of dangerous bad products,” but argued that the essential nature of these DeFi tools is to enable transparency and reduce the likelihood of crashes. “A lot of the problem in 2008 was that people didn’t really understand what it (subprime bundling) was, nobody really knew. Retail users didn’t know, and nobody really knew,” Vogelsang said.
Tokenization is transparent. Assets and liabilities are there for all to see. Daniela Barbosa, executive director of the Hyperledger Foundation, said: “Details of asset ownership, transfers, and transactions can be recorded on the blockchain, providing a verifiable and auditable history. This transparency both enhances trust and reduces fraud. ’ So, in theory, with that kind of transparency, it should be easier to spot systemic risk.
Of course, the key word here is theoretical. Many things in the cryptocurrency space “sound” transparent and risk-free, and Terra’s investors are well aware of this.
Regulatory Concerns
The multi-trillion-dollar question in all cryptocurrencies right now is: “Does the SEC consider it a security?” There is no dispute whether a coin is a security. That’s the way it is. “Some other projects have fake utility built in to make it look like they’re not securities,” Pieper said. As a result, Swarm (and many other tokenization projects) are currently only available to accredited investors.
That said, attracting “accredited investors” is not the end of the road for tokenization. Its proponents think they can help ordinary people, such as small business loans. Private credit is an illiquid market for small firms, which helps larger ones. “When Google issues a bond, you can buy and trade it very easily,” Vogelsang said, "which is one of the reasons they pay only a slight premium over Treasury yields, so at today’s interest rates, the premium is probably 6 %. If it is a small business? Since there is no liquid market for this loan, there are few options and a 15% interest rate is required. That means charging customers more, giving Google a huge advantage.
“Tokenization really changes everything and levels the playing field,” Vogelsang said. He conceded that we’ll never get to a point where Google and small businesses pay the same interest rates — lending to small businesses is riskier than lending to Google — but creating liquidity can help bridge the gap, “that’s the motivation for starting Centrifuge”.
Maple founder Sid Powell has a similar view. He sees the tokenization of RWA as a way to provide real benefits to ordinary people, which could help the crypto space recover from its reputation for speculation and gambling. “One of the big themes of RWA is how can on-chain lending actually reach real-world businesses and help them grow?”
“Probably the most popular tokenized project is the one we take for granted — cash,” Pieper said. “Cash is being tokenized. It’s called a stablecoin. This is a real-world asset that is being replicated on-chain and then becomes tradable. "A central bank digital currency (CBDC), essentially a tokenized version of central bank money that exists on a distributed ledger, will reduce the cost and time of cross-border transactions and settlements dramatically.
The tokenization of cash has been happening since the launch of Tether in 2014, and could have global ramifications. Pedersen noted that “the world money market is a dollar-denominated money market” and that “all this dollar-denominated collateral is sitting in “many different places.” Nobody knows its exact size. Nobody has transparency,” Pedersen described the dollar-denominated collateral pool as “completely dark,” so that when the system fails, it “wrecks the world every time.”
Conversely, what if the USD market is the collateral placed on the blockchain? According to Pedersenr: “You will start to have a transparent world money market where central banks will understand what is going on” which will help avoid the next financial disaster.
These benefits of tokenization — without the downside risk of cryptocurrency price speculation — are why many see its adoption as inevitable. Ava Labs’ Krupetsky predicts that “more and more assets will be tokenized to the point where we no longer differentiate between tokenized and non-tokenized assets,” just as we “no longer differentiate between marketing and digital marketing,” It’s all marketing.
Perhaps if the world truly becomes tokenized, “real world assets” will ditch the clunky “real world” and become real assets.
