Debunking the Myth: Real World Asset Tokenization Isn't Real

Jonathan Stoker Feb 02, 2024, 23:20pm 193 views

Debunking the Myth: Real World Asset Tokenization Isn't Real

Exploring the Tokenization of Real World Assets in the Crypto Sphere

Tokenization, especially in relation to real world assets or RWAs, is currently being viewed as the up-and-coming trend in the crypto world. However, this is not a new phenomenon. Rather, it's another version of security tokens-a concept in the crypto world that hasn't gained much attention since 2018. Dave Hendricks, the co-founder and CEO of Vertalo, argues that while many are promoting tokenization, the hype is mostly misplaced. However, he acknowledges that the underlying intention is positive.

The Hype and Misconceptions Surrounding Tokenization

Neither security tokens, tokenization, nor RWAs exist in isolation-they represent different stages in the same tech continuum. Referring to the Gartner Hype Cycle, it's not unusual for trends to rise and fall. Many of the current advocates for tokenization are former followers of decentralized finance, or DeFi.

Tokenization: A Complex Concept in Finance

While influential figures in traditional finance and CEOs view tokenization as an inevitable evolution in finance, tokenizing every financial asset is not as straightforward as it may seem. The process is often misunderstood by both supporters and critics.

The Journey of Tokenization in the RWA Assets Industry

The tokenization of the RWA assets industry started in late 2017, with companies such as Vertalo launching one of the first fully compliant, Reg D/S equity tokenizations in March 2018. However, the obstacles encountered led to a shift from issuing tokenized equity to providing enterprise software aimed at enhancing the digital asset ecosystem.

Tracking the Progress of NFTs and DeFi

Since the launch of tokenization, trends of non-fungible tokens (NFTs) and DeFi have expanded and then contracted significantly. NFTs and DeFi were more user-friendly applications of tokenization technology. For example, NFTs enabled the purchase of computer-generated art represented by a tradeable token on easily available marketplaces like OpenSea. However, the recent decline of OpenSea's investment from $120 million to $13 million suggests that the hype around NFTs may be waning.

The Shift Towards RWA

Similarly, the once thriving DeFi market has cooled off, with many projects now turning their focus towards RWAs. This includes notable DeFi entities such as MakerDAO and Aave. Teams now often highlight their association with large, traditional financial institutions, reflecting the trend towards embracing RWA.

The Reality of RWA Tokenization

The truth is that while tokenization has potential to solve issues related to private assets, it also presents new challenges. Many proponents of RWA tokenization do not address these issues, as most RWAs being tokenized are simple debt or collateral instruments that do not need to meet the same compliance and reporting standards as regulated securities.

Tokenization and the Future of Financial Assets

When industry leaders like Larry Fink and Jamie Dimon discuss the tokenization of every financial asset, they are not referring to crypto-collateral RWAs. Instead, they are discussing the tokenization of real estate, private equity, and eventually public equities.

The Complexities of Tokenization

After more than seven years of experience in building a digital transfer agent and a tokenization platform, it's clear that mass financial asset tokenization is complex. Moreover, tokenization alone does not turn a profit, and becomes a competitive race to the bottom in terms of fees due to the number of suppliers offering the same service.

The Importance of Ledger in RWA Tokenization

Along with tokenization, fiduciary responsibilities must be considered when dealing with RWAs. This is where distributed ledgers, which offer immutability, auditability and trustability, come into play. They form the foundation for irrefutable ownership and allow an accurate record of all transactions. This trust is vital for finance professionals and their clients to adopt the vision of leaders like Fink and Dimon.

Before diving into the hype-cycle, it's essential to consider what has happened previously and what needs to happen next. Missteps could lead to another version of the NFT hype.

Edited by Jonathan Stoker

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