Creating Virtual Avatars for Rolex and Pokémon Card! What is RWA?
To explore the preparations needed for tokenization of real-world assets (RWA) in Taiwan, the Financial Supervisory Commission recently announced the establishment of the “RWA Tokenization Working Group” in collaboration with CSDC and six interested financial institutions, including Taishin Bank, Taipei Fubon Bank, CTBC Bank, Cathay Securities, Cathay Asset Management, and Yuanta Financial Holdings. The group will jointly study related promotion matters.
But what exactly is RWA, and why is it of concern to the Financial Supervisory Commission?
Let’s start with a real-life example. In June 2023, a hundred-year-old Rolex watch was “tokenized” for the first time, allowing its owner to borrow over NT$400,000 by using it as collateral. This is not just a hypothetical scenario; it actually happened.
And it’s not just watches; even a piece of artwork or a luxury mansion can be divided into several tokens, allowing multiple people to “co-own” them. This technology is called “Real World Asset Tokenization” (RWA) and is one of the most discussed blockchain applications in 2023.
RWA refers to the process of tokenizing tangible and intangible assets in the real world, such as watches, real estate, wine, trading cards, and bonds, creating a virtual counterpart in the blockchain world that is linked to the value of the original asset.
The scope of real-world assets is vast, covering both tangible and intangible assets.
RWA tokens can be “homogeneous” or “non-homogeneous.” For example, a Rolex watch can be transformed into an indivisible token or divided into multiple tokens.
By leveraging the transparent and traceable nature of blockchain, RWA can lower the investment threshold for high-value commodities, create higher liquidity, efficiency, and transparency, and reduce the risk of human error and counterfeit products.
According to a report on “Tokenizing Real World Assets” by Binance, the world’s largest cryptocurrency exchange, although RWA is still in its early stages of development, its adoption rate and total value locked (TVL) are continuously growing. It is expected to reach a market size of $16 trillion (approximately NT$480 trillion) by 2030, accounting for about 10% of global GDP.
These numbers demonstrate the immense potential and prospects of asset tokenization, and RWA will be the key to unlocking the next bull market.
But why has RWA gained popularity? Behind it is a history of blockchain development.
In the early days of blockchain technology, various companies were eager to find “killer applications.” From 2016 to 2017, global experiments were conducted in various areas, such as supply chain traceability, anti-counterfeiting, and logistics.
In 2021, the focus shifted to “value” and “asset circulation.” The term “Real World Assets” emerged in the blockchain field, but it was still a relatively general term.
It wasn’t until 2022 when a comprehensive 70-page report on RWA, titled “An Unreal Primer on Real World Assets (RWAs),” was published that the term “RWA” gained widespread market consensus.
The RWA vertical information platform “RWA.xyz” was also established. Mainstream exchanges like Binance and traditional banks have subsequently released industry reports on RWA.
Major players in the cryptocurrency industry, such as Coinbase, the issuer of the popular stablecoin USDC, and Aave, the largest decentralized lending platform, announced in September this year that they would form the “Tokenized Asset Coalition” (TCA) to encourage the tokenization of more traditional financial assets and further promote the application of blockchain technology in the financial sector.
RWA has officially become an established and independent track.
Although RWA has gained more attention in the past year, it is actually a result of the development of blockchain technology.
RWA has become popular because, as analyzed by Gao Zaijun, the chairman of the Blockchain Lover Association, during a bull market, investors tend to put their assets on the blockchain to quickly respond to opportunities for making money while enjoying the stable returns of real assets. Combining the real and virtual aspects of assets has become a solution.
Where can RWA be applied?
RWA can be broadly categorized into two types: financial instruments (bonds, real estate, stocks, etc.) and cultural items (baseball cards, Pokémon cards, etc.), and there are already many applications in these areas.
Category 1: Financial Instruments
Financial instruments are currently the fastest-growing area for RWA, with most applications related to “tokenizing US treasuries.”
According to data from the RWA.xyz platform, as of early November 2023, the market size of tokenized US bonds has reached $750 million, nearly seven times its growth since the beginning of this year.
US treasuries are considered “risk-free assets” issued by the US government. With the steady increase in interest rates, treasury yields have surpassed those of decentralized finance (DeFi). Investors can invest in tokenized treasury bonds and enjoy real-world yields.
Apart from US treasuries, Michael Hsu, the head of the US Office of the Comptroller of the Currency, mentioned during the Fintech Week event in November 2023 that asset tokenization can address the issue of “complex fund and security flow risks.”
Milano Hub, under the Bank of Italy, announced in July this year that it will support the development of an institutional-grade security token ecosystem within six months, helping traditional financial institutions integrate into the tokenized asset ecosystem and execute transactions through decentralized financial channels in a secure and regulated manner.
In the field of “real estate,” according to data from Galaxy Digital, the value of tokenized real estate assets increased by $90 million (102% growth) to $178 million from January 1 to September 30, 2023.
A survey conducted by research and consulting firm Celent and BNY Mellon revealed that 91% of institutional investors are enthusiastic about investing in tokenized assets. As many as 97% of respondents believe that tokenization has the potential to completely change the asset management field.
Category 2: Cultural Items
The recent opening of the first Pokémon Center in Taiwan, the “Pokemon Center Taipei,” introduced limited edition commemorative cards such as “Pikachu in Taipei.”
In October this year, Magic Eden, a well-known NFT trading platform, collaborated with the Collector project in the Solana ecosystem to tokenize classic Pokémon cards, sparking enthusiastic discussions in the community.
What are the benefits and challenges of RWA?
Three major advantages: cost, efficiency, transparency
The benefits of tokenizing real-world assets lie in three aspects: “cost, efficiency (time), and transparency.”
Without the involvement of intermediaries such as banks and brokers, tokenization can accelerate transaction speed. All transaction information is recorded on the blockchain, ensuring transparency.
Tokenization also allows for asset fractionalization, enabling more people to participate in investments. Expensive artworks and real estate can be tokenized, allowing ownership to be distributed among investors, making it easier to enter high-threshold markets with smaller amounts.
Challenges: trust, compliance, infrastructure
Ensuring the credibility of real-world assets
RWA involves tokenizing real assets, and the reliability of real asset information is crucial. If the initial information is unreliable, the tokenized assets will also be untrustworthy.
There are various ways to enhance information reliability. For example, Circle, the issuer of the stablecoin USDC, has enlisted Deloitte, one of the Big Four accounting firms, to conduct asset reserve audits. Similarly, Tether, the issuer of USDT, has partnered with the fifth-largest accounting firm, BDO.
Regulatory compliance in different countries
RWA also involves regulatory and compliance issues. Despite the borderless nature of the blockchain world, regulatory requirements still need to be adapted to different countries.
Huang Chaoqiu pointed out that since token issuance is straightforward, various products have emerged in the market. For example, celebrities or athletes issue tokens representing “future revenue rights,” which require new regulations to govern them.
Infrastructure needs to be improved
In the traditional financial system, various organizations and roles, such as insurance companies and investors, cooperate with each other. In the blockchain ecosystem, these roles may need to be redefined and coordinated. The maturity of the ecosystem and infrastructure issues will be crucial to ensuring the stable development of the tokenized market.
Among them, stablecoins used for transactions are critical infrastructure. Stablecoins need to be widely adopted to facilitate smooth trading of tokenized assets. However, there is still some way to go before stablecoins can be fully commercialized, and the acceptance of the market will be affected if the infrastructure is not well-established.
“While trying to build the 31st floor without completing the first 30 floors, it is bound to be challenging to stabilize the structure, and that is where the risk lies,” Huang Chaoqiu said. “There are still many challenges to overcome to achieve the ideal state, and if these challenges cannot be overcome, they will become risks.”
Although RWA will not experience explosive growth, it is an irreversible trend that will continue to develop steadily and generate significant value. At this stage, what is needed is time and a healthy mindset.
Proofreading Editor: Gao Jingyuan
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