17. Digital Alchemy: Tokenisation & Real World Assets

Real-world assets (“RWAs”) refer to tangible assets or financial primitives that exist in the physical world. This can include cash, corporate debt, metals (such as gold and silver), insurance and real estate which has already been explored here.

Tokenisation results in the creation of tokens each representing a fraction or share of ownership of the underlying asset. These tokens are secured and recorded on the blockchain, providing transparency, immutability, and accessibility to the asset’s ownership and transaction history.

This enables investors to trade these tokens on digital asset marketplaces, effectively bridging the gap between traditional finance (“TradeFi”) and digital assets. This can then serve as collateral in the DeFi industry. Boston Consulting Group predicts that $16 trillion worth of assets, most of which are illiquid will be tokenised by 2030.

However, this begs the question, are DeFi, RWA and tokenisation just another buzzword amongst a whole host of others in the blockchain space? If not, why haven’t we seen more real-world examples? Is this just a bubble waiting to pop, akin to the dot-com bubble in the early 2000s?

What do the giants within traditional finance think?

Larry Fink, CEO of Blackrock who runs the largest asset management company with over $7 trillion under management seems to think differently. He went as far as describing the tokenisation of securities as “the next generation for markets”.

Furthermore, as recently as 21-Mar-24, Blackrock launched their first RWA tokenised fund on the Ethereum Network. The Blackrock USD Institutional Digital Liquidity Fund is represented by the blockchain-native BUIDL token, fully backed by cash reserves, US Treasury bills and repurchase agreements, distributing yield directly on the blockchain.

The CEO of Goldman Sachs, David Solomon, echoed a similar sentiment, highlighting the potential of DeFi to enhance transparency and mitigate risks within the financial system. Furthermore, Goldman Sachs developed its Digital Asset Platform using a private, permissioned blockchain infrastructure called Canton, through which it issued a €100 million 2-year digital bond.

“Tokenisation allows more assets to be used as collateral, by representing ownership interests in the assets as tokens. It enables the mobility and velocity for these assets that the market has been demanding by removing the settlement friction that exists today” - Global Head of JP Morgan Trading Services

JP Morgan even launched the Onyx Digital Assets network which enables the tokenisation of traditional assets, such as US Treasurys and money-market products, utilising the Polygon blockchain to trade tokenised cash deposits. By 2022, Onyx processed over $300 billion worth of repo transactions, providing short-term borrowing in fixed income through the exchange of cash for tokenised collateral.

HSBC often known for being a banking giant, is also one of the world’s largest precious metals custodians and one of just four clearers in the London market. In November 2023, HSBC launched their own blockchain platform for the tokenisation of physical gold held in its London vault. The tokens can be traded by institutional investors through HSBC Evolve, the bank’s digital platform for FX and precious metal execution.

What are some of the limitations we face in traditional finance?

Taking into consideration that there are trade-offs with each approach, some limitations that we often end up taking for granted include:

• Banking Access Restrictions: In many regions, individuals without a fixed address, government-issued ID, or a credit history are often unable to open bank accounts. For example, refugees may find themselves entirely excluded from the banking system making it harder to secure employment.
• Market Access Control and Trading Restrictions: The Robinhood-GameStop saga highlights how centralised platforms can abruptly restrict market access. In early 2021, the Robinhood trading app suddenly restricted the purchase of GameStop shares only allowing these shares to be sold conveniently protecting institutional investors from massive losses as a result of a ‘short squeeze’.
• Restricted Trading Hours: The New York Stock Exchange (“NYSE”) operates from 9:30 AM to 4:00 PM ET on weekdays, restricting trading opportunities for those in different time zones, while in crypto, the market never sleeps.
• Slow International Money Transfers: Remittances can take several days and incur high fees. For example, sending money from the US to countries like Mauritius or the Philippines through traditional banking channels can be both costly and time-consuming.
• Intermediary Costs: Small businesses often face significant fees for payment processing services. For instance, credit card processing fees can range between 1.5% to 3.5% per transaction, significantly impacting the margins of SMEs.
• Financial inclusion: In many developing countries, farmers are unable to access banking services due to remoteness and lack of formal identification, limiting their ability to secure insurance against environmental risks, and bringing about broader implications for regional food security and economic development.

Debt tokenisation

Debt tokenisation involves converting traditional debt instruments such as bonds into digital tokens that are then traded on blockchain-based platforms. The aim of this is to increase liquidity, reduce settlement times and enhance transparency within the debt market.

In October 2023, the World Bank was the first issuer of Euroclear’s New Digital Securities Platform. Powered by distributed ledger technology (“DLT”), Euroclear’s D-FMI enables the creation, issuance, and settlement of fully digitalized international securities. This is building on prior work carried out by the World Bank which issued the world’s first blockchain bond “bond-i” a few years ago.

Other notable examples include the:

1. Philippines government → announced its first offering of tokenised treasury bonds towards the end of 2023, stating that it wanted to “provide the proof-of-concept for the wider use of DLT in the government bond market”, found here.
2. European Investment Bank (EIB) → issued its first euro-denominated digital bond using a public blockchain in 2021 and its first euro-denominated ‘digitally native’ bond using a private ledger in November 2022.
3. Hong Kong Monetary Authority → announced a successful issuance of $102 million worth of tokenised green bonds in February 2023 and outlined their intention for a wider use of tokenisation technology. In February 2024, an offering of HK$6 billion worth of two-year digital green bonds was announced.
4. Swiss city, Lugano → issued a 6-year bond of up to $108 million during the start of 2023, on the Zurich-based SIX Digital Exchange platform. Moody’s gave the bond an ‘Aa3’ rating explaining that “the use of blockchain technology will not add materially higher risks compared to a traditional issuance”.
5. Hitachi, Japan → issued a 5-year $69 million digital green bond in December 2023, creating the green credential tracking solution in conjunction with JPX, the Tokyo Stock Exchange owner. JPX brought together 64 organisations including many of Japan’s biggest securities companies, banks and asset managers to help.

Several projects have begun offering access to US Treasury securities, the largest and most liquid government bond market globally. For example, Franklin Templeton, a $1.4 trillion investment giant, launched its on-chain US Government Money Fund which has grown to $309 million in assets as of September 2023, investing in US government securities, cash and repurchase agreements.

RWA Crypto Project #1 - Ondo Finance

Ondo Finance is a start-up which launched a tokenised RWA platform in 2023, led by former Goldman Sachs alumni. More recently, Ondo brought on board the former head of digital assets at Goldman Sachs as president and COO, as well as the former chief compliance officer of EDX Markets as their chief risk and compliance officer.

Ondo’s platform seeks to facilitate access to traditional securities and associated exchange liquidity for on-chain investors and protocol developers. Part of its mission is to address the challenges faced with ‘status-quo’ tokenisation relating to fragmented liquidity and slow settlement times which hinder efficient trading and redemption processes for tokenised assets.

It now offers tokenised US treasury and bond offerings with three share classes initially investing in bond ETFs by BlackRock and Pimco. Compared to traditional brokerages, Ondo offers compatibility with smart contracts, distribution and settlement on the same rails as crypto assets and 24/7 settlement when needed.

RWA Crypto Project #2 - Centrifuge

Centrifuge is one of the most prominent players in the RWA space, allowing investors and businesses to unlock liquidity by minting an NFT on Centrifuge that represents the asset they want to use as collateral.

Centrifuge which has been audited by several crypto audit companies such as Consensys Diligence already works with multiple high-profile partners such as AAVE and MakerDAO.

They have also launched liquidity pool testnets on Arbitrum, Base, Polkadot and Ethereum, allowing investors to have their own private pool or be mixed in with other assets to create a single pool. As of the end of 2023, they had over $500 million worth of loans making them a market leader in the RWA lending space surpassing Maple Finance and Goldfinch.

In Mar-24 they also launched a new platform connecting on-chain and off-chain investment portfolio data for asset managers and investment funds. On their website, they claim that this will help to:

1. Reduce yield spreads by 25 bps
2. Improve liquidity by 5.3%
3. Save up to 150 bps running the fund

RWA Crypto Project #3 - Paxos

Another asset class which can be tokenised are commodities, such as gold, silver, oil, wheat etc… Gold is the most popular and has historically been used as a store of value, possessing a market capitalisation of around $12 trillion.

“Our aim is to make it possible to move any assets anywhere, instantly, therefore democratising access to a new, global, frictionless economy” - Paxos

Paxos Trust Company was founded in 2012 and later went on to create Paxos Gold (“PAXG”), an ERC-20 token on the Ethereum blockchain. Their rationale was that within the traditional market, investors have no access to high-quality gold products that are easy to purchase, transport, store and trade.

Even simpler alternatives such as ETFs and derivatives are not comparable to PAXG as they are not backed by physical gold, thus, you do not actually own the gold meaning there is no store of value involved. Therefore, this digital gold creates an opportunity to generate interest in what has always been a yield-less asset

Furthermore, in Aug 2023, PayPal partnered with Paxos to launch a stablecoin (“PYUSD”). This is backed by US dollar deposits, short-term US treasures and similar cash equivalents that can be redeemed 1:1 for $, and is issued by Paxos Trust Company.

Conclusion

While the cryptocurrency sector only has a market cap of around $2.4 trillion, the value of tokenisation lies in the fact that we will be able to bring assets such as derivatives (c. $12 trillion), gold (c. $12 trillion), US Treasuries (c. $25 trillion) and equities (c. $100 trillion) on-chain.

While we are still in the early stage of this, tokenisation has the potential to significantly bridge the gap between real-world assets and the digital world.

Thank you for your time. Feel free to share.

DISCLAIMER

This is not medical, financial, or legal advice. Please consult a relevant professional prior to commencing anything outlined above, these are simply my own personal opinions.