Real World Asset (RWA) Tokenization – Partnering with Banks

Dr. Yishuang Sherry Xu | 19 May 2023

WHAT IS RWA TOKENIZATION?

Tokenization of Real World Asset (RWA) refers to the process of converting real world assets, such as property or commodities, into digital tokens that can be traded on blockchain networks. This allows for the creation of fractional ownership, meaning that investors can buy and sell shares of an asset, rather than owning it outright. This can open up new investment opportunities for individuals and institutions, while also providing liquidity and transparency in traditionally illiquid markets.?

NEW OPPORTUNiTIES FOR THE BANKS

As the financial industry continues to evolve and innovate, many banks are exploring new ways to leverage blockchain technology to provide more efficient, secure, and cost-effective services to their clients. Banks are uniquely positioned to play a key role in this emerging field, as they have the expertise and infrastructure to manage the complex legal and regulatory requirements of asset tokenization. Additionally, banks can offer their clients access to a wider pool of potential investors, as well as providing custody and security services for digital assets.

Whilst it is argued that banks are losing their position and market share in the coming digital age, I believe that there are various ways in which banks are getting involved in the tokenization of real world assets, including the benefits and challenges of this approach.?

THE PROCESS OF TOKENIZING RWA

It involves creating digital tokens that represent ownership or rights to a real-world asset, such as property, stocks, bonds, commodities, or other types of financial instruments. Here are the general steps involved in tokenizing an asset:?

Choose the asset: The first step is to identify the asset that you want to tokenize. This could be any type of real-world asset that has value and can be represented digitally.

Establish ownership: The next step is to establish ownership of the asset and ensure that all legal and regulatory requirements are met. This may involve working with lawyers, auditors, and other professionals to ensure that the asset is properly registered, licensed, and compliant with relevant laws and regulations.

Create a smart contract: Once ownership of the asset is established, a smart contract is created that defines the terms of the tokenization. This includes the number of tokens to be issued, the price per token, and the rights and obligations of the token holders.

Issue the tokens: With the smart contract in place, the tokens are issued on a blockchain network, such as Ethereum. The tokens can be purchased by investors in exchange for cryptocurrency or fiat currency.

Trade the tokens: Once the tokens are issued, they can be traded on secondary markets, such as cryptocurrency exchanges. The value of the tokens is typically determined by supply and demand, as well as the underlying value of the asset that they represent.

Manage the tokens: Finally, the tokens are managed and tracked on the blockchain network. This includes updating the smart contract to reflect changes in ownership or rights, as well as ensuring compliance with regulatory requirements.?

THE MECHANISM OF TOKENIZING RWA

From the tokenization process, we can tell how the mechanism of tokenization works:?

The core of the mechanism tokenizing RWA is asset selection as not all types of assets are suitable for tokenization. The smart contract creation involves not only the technical skills of blockchain network but also the terms of the tokenization.?Tokens are issued, managed and tracked on the blockchain network once the tokenization is completed. At this point, the tokens can be traded on the secondary markets and the value of the tokens is usually determined by supply and demand as well as the underlying value of the asset that they represent.

BANK’S ROLE IN TOKENIZING RWAS

Some claims that digital assets and tokenization are going to be the end of banks, but it is unrealistic to expect that such financial institutions will be relegated to the past. And yet, while banks are likely to remain strong, banking as we know it today is likely to change for the better. There are several elements of banking that could undergo operating and business model changes over the next couple of decades, largely inspired by digital assets and their underlying design principles. Banks can play several roles in tokenizing assets, depending on the specific context and regulatory environment. Here are some of the ways that banks can be involved in tokenizing assets:

Custody services: Banks can provide custody services for digital assets, including tokens. This involves securely storing and managing the assets on behalf of investors or token holders.

Asset digitization: Banks can facilitate the digitization of assets, such as real estate, art, or commodities, by providing custody and security services for the underlying assets, as well as creating and managing the digital tokens that represent ownership of those assets.

Issuance services: Banks can act as issuers of digital tokens, either on their own behalf or on behalf of other companies or organizations. This involves creating and distributing the tokens on a blockchain network. Token issuance and distribution: Banks can act as token issuers and distributors, creating and distributing digital tokens to investors or customers. This can enable fractional ownership and increase liquidity for illiquid assets, as well as provide new investment opportunities for customers.

Trading services: Banks can provide trading services for digital tokens, including offering liquidity and market-making services. This involves facilitating the buying and selling of tokens on secondary markets. Settlement services: Banks can provide settlement services for transactions involving digital tokens. This involves ensuring that the tokens are properly transferred between buyers and sellers, and that payments are processed correctly.

Advisory services: Banks can also provide advisory services for tokenizing assets, helping customers to identify the most appropriate assets to tokenize, advising on the legal and regulatory implications, and providing guidance on best practices for token issuance and management.

Compliance and regulation: Banks can play a role in ensuring compliance and regulation for tokenized assets, by providing know-your-customer (KYC) and anti-money laundering (AML) checks, as well as complying with local and international regulations and standards. Compliance services: Banks can help to ensure that tokenization activities comply with relevant regulations, such as anti-money laundering (AML) and know-your-customer (KYC) requirements. This involves conducting due diligence on investors and ensuring that transactions are properly recorded and reported.

HOW TO GET INVOLVED

This tokenization process can be carried out either by partnering with technology providers or by using solutions of their own.?

Partnering with Technology Providers: There are many cases where financial institutions have partnered with companies that offer tokenization solutions. In 2019, Santander issued a tokenized $20M bond on the Ethereum blockchain with the help of tokenization solution provider Nivaura. This bond will remain on the blockchain until maturity, with the investment and quarterly coupons tokenized as securities.

Also in 2019, German banking conglomerate VR Bank partnered with Lition to develop a solution to process syndicated loans on Lition's proprietary blockchain infrastructure. The security tokens are to be issued using Tokeny's T-REX (Token for Regulated EXchanges) standard.

In 2021, Tokai Tokyo Financial Holdings and ADDX collaborated on security token issuances by Japanese real estate companies and banks. These future deals will be tokenized on the ADDX platform before being distributed by Tokai Tokyo to sophisticated investors in Japan. Additionally, Japanese investors will be able to trade digital securities on the ADDX secondary exchange through Tokai Tokyo.

Building Own Solutions: In 2022, HSBC announced plans to launch a DLT-based bond tokenization platform called HSBC Orion that enables the tokenization of both bonds and the currency used for settlement.

Another example is JP Morgan. The company has been exploring the potential of blockchain technology since at least 2015, when it first began experimenting with the Ethereum blockchain. In 2016, the company launched Quorum, an enterprise-grade blockchain platform based on Ethereum, which was specifically designed to meet the needs of financial institutions. In 2019, JP Morgan announced the creation of Onyx, a new business unit focused on blockchain technology. Onyx was launched to build and develop JP Morgan's blockchain-based products and services, including its digital currency, the JPM Coin.

In the same year, JP Morgan launched Onyx by JP Morgan, which is a blockchain-based platform for wholesale payments transactions, helping to transform the way that money, information and assets are moving around the world. Since then, Onyx has been working on a number of projects and initiatives. One of its main focuses has been on payment processing, and it has developed several blockchain-based payment solutions, including Liink, a platform that enables real-time cross-border payments, and Interbank Information Network (IIN), a network that allows banks to share information and resolve payment-related issues. Onyx has also been exploring other use cases for blockchain technology, such as supply chain management, trade finance, and digital identity. The company has collaborated with other firms and organizations, such as the Enterprise Ethereum Alliance and ConsenSys, to advance the development and adoption of blockchain technology.

Overall, banks can play a critical role in the tokenization of RWAs by providing infrastructure and services that facilitate the creation, issuance, trading, and management of digital tokens. While the space is still in its early stages, banks are actively exploring ways to leverage blockchain technology and digital tokens to transform traditional asset management and investment models. ■

The Author

Dr. Yishuang Sherry Xu is a Lecturer in Real Estate at 英国曼彻斯特大学 . Dr. Xu’s research interests focus on various aspects of real estate economics and finance, such as Real Estate Investment and Finance, Digitalization of Real Estate, Sustainable Development of Real Estate, etc.

She has expertise in econometrics and financial modeling, property valuation, and investment appraisal. Dr. Xu has also contributed to multiple UN Sustainable Development Goals.?

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official position of Proptech Institute, including its directors, employees and affiliates.

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