Investments

From real estate and digital art to government bonds, tokenizing real-world assets is no longer a thing of the future.

While critics wrote off much of the initial hype surrounding the tokenized real-world asset (RWA) market, the sector has been on a tear over the past year or so. In fact, Boston Consulting Group expects the tokenization of global illiquid assets to be a $16 trillion industry by the end of the decade.

A variety of asset categories are actively being tokenized and garnering investments, with recent data suggesting that the total value of tokenized real-world assets reached an all-time high of $2.75 billion in August. And while the metric has slipped since then, it still stands at around a respectable $2.49 billion as of Sept. 30.

As per a joint survey by research and advisory firm Celent and American banking behemoth BNY Mellon, 91% of institutional investors are interested in putting their money into tokenized assets, with 97% agreeing that tokenization stands to revolutionize the realm of asset management.

Matthijs de Vries, co-founder of AllianceBlock — a firm building a decentralized tokenized market — told Cointelegraph that these types of statistics give a glimpse into the impact that institutional-grade investments have on the industry.

“This trend is expected to result in exponential growth in the tokenized RWA industry, particularly as more liquidity flows into the space. This will lead to a more sustainable bull market with less capital flight at its peak,” he added.

Why the sudden spike in interest?

From the outside looking in, the tokenization of RWAs seems to be gaining momentum due to improved regulatory clarity in specific jurisdictions (such as Switzerland) and successful pilot projects.

De Vries said the unsustainable yields in decentralized finance (DeFi), which led to the collapse of many major crypto projects in 2022, have prompted investors to seek sustainable, real yields — such as the ones available with tokenized RWAs.

He elaborated: “Investors are now looking for transparent explanations of where these yields come from, making tokenized RWAs more attractive due to their clear yield sources and increased recognition from traditional players.”

“Investors have started to realize that if you can’t easily explain where the yield comes from, it’s probably going to collapse at some point. With tokenized RWAs, the source of the yield can be easily explained to crypto natives and new participants.”

Real estate is one area in which tokenization has had a significant impact. As things stand, it is the largest asset class in the world, with an estimated $613 trillion value in 2023. 

Between Q1 and Q3 2023, the value of on-chain real estate grew by 102%, or approximately $90 million.

The aggregate value of assets tokenized, which in some cases represent fractionalized claims on real estate, stands at $178 million as of Sept. 30. RealT, an issuer of tokenized real estate, holds the lion’s share of the market. Tangible, a fellow issuer of real estate-centric RWAs, witnessed the most growth among its peers. The total value of Tangible’s tokens soared from a mere $100,000 to an impressive $64 million over the first three quarters of 2023.

Bernard Lau, co-founder and CEO of blockchain-based real estate investment company Labs Group, told Cointelegraph that tokenizing real estate is probably the best use for this technology today. Due to its stability and tangible asset value, Lau believes real estate stands out from others as a very solid investment.

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“Previously, many investors from lower economic backgrounds found themselves left out of the real estate game due to the entry barrier that was just too high,” he said. “And since many found themselves out of this equation, they turned to investing in stocks and bonds. However, now that individuals can invest in fractions of houses, buildings or even resorts, more people can participate, fueling the growth we observe in the market.”

Beyond property investments

While real estate has undoubtedly been a popular use case for tokenization, de Vries believes this space could face numerous challenges moving forward — primarily due to differing laws and registries across different jurisdictions. In his view, tokenization translates more seamlessly within asset classes like exclusive collectibles, diamonds, luxury watches, classic cars, securities and even carbon credits.

Moreover, tokenization’s influence can also be actively felt within the realm of traditional finance, especially in relation to popular instruments such as bonds, stocks and exchange-traded funds (ETFs). Adam Levi, co-founder of Backed — a platform for tokenized real-world assets — told Cointelegraph that this transition is a natural one:

“The market needs stable yields. In a bear market, fixed-income products provide this. Globally, interest rates are up, and everyone wants to capitalize on this near-risk-free yield. We have not seen much interest in tokenized equities at the moment despite the S&P 500 being up around 17% year-to-date. However, we’ve particularly seen growing demand for non-USD-denominated fixed-income products.”

Angle Protocol recently launched the first yield-bearing stable euro using bC3M, a tokenized euro-denominated fixed-income ETF. Similarly, Backed has launched three euro-denominated products as part of its financial repertoire. “We are exploring GBP and BRL ETFs next,” Levi added.

Tokenized U.S. Treasurys

In recent months, the valuation of tokenized U.S. Treasury bills, bonds and money markets has scaled up to a whopping $685 million. The allure of tokenized Treasurys has been growing among digital asset aficionados, especially since the yield on U.S. government bonds — broadly perceived as a risk-free interest rate — has now overshadowed the yields delivered by most DeFi offerings.

During 2023 alone, the market has seen the debut of several new players, such as OpenEden, Ondo Finance and Maple Finance — each unveiling their own blockchain-centric Treasury products aimed at adept investors, digital asset enterprises and decentralized autonomous organizations.

Owing to these rapidly emerging trends, researchers at Bernstein Private Wealth Management believe that by 2028, about 2% of the global money supply — via stablecoins and central bank digital currencies — could be tokenized, bringing the sector’s valuation to $5 trillion.

UBS’s and JPMorgan’s tokenization ventures

Earlier this month, banking behemoths UBS and JPMorgan made significant strides in asset tokenization, unveiling platforms to facilitate seamless interaction between traditional financial assets and blockchain technology. UBS, for example, announced the live pilot of a tokenized variable capital company (VCC) fund under the moniker Project Guardian, steered by Singapore’s central bank.

This endeavor, part of a broader VCC umbrella, aims to usher various real-world assets onto the blockchain. UBS Asset Management — via its in-house UBS Tokenize service — has already conducted a controlled pilot of the tokenized money market fund, engaging in activities such as redemptions and fund subscriptions.

According to Thomas Kaegi, head of UBS Asset Management in Singapore and Southeast Asia, the project is a pivotal step toward deciphering the intricacies of fund tokenization, hoping to bolster market liquidity and accessibility for clients.

JPMorgan rolled out its blockchain-based tokenization platform — the Tokenized Collateral Network (TCN) — with asset management colossus BlackRock among its inaugural clientele. The platform, designed to transform traditional assets into digital counterparts, executed its first trade by transmuting shares of a money market fund into digital tokens.

This pioneering transaction between JPMorgan and BlackRock saw the assets transferred to Barclays Bank serving as collateral for an over-the-counter derivatives exchange between the entities.

The TCN, having undergone its maiden internal testing in May 2022, now boasts a burgeoning pipeline of clients and transactions, aiming to expedite traditional settlements on the blockchain. In a statement, Tyrone Lobban, head of Onyx Digital Assets at JPMorgan, emphasized the platform’s capacity to unlock capital for utilization as collateral in ongoing transactions, thereby increasing efficiency.

More noteworthy developments surrounding the space

Untangled Finance, a marketplace for tokenized RWAs, recently launched on the Celo network after receiving a $13.5 million venture capital injection, spearheaded by London’s Fasanara Capital, to transfer tokenized private credit to the blockchain.

The platform — anticipated to expand to the Ethereum and Polygon ecosystem via Chainlink’s Cross-Chain Interoperability Protocol — aims to elevate the present $550 million worth of private credit on DeFi rails closer to the traditional private credit market’s massive $1 trillion valuation.

Moreover, in late 2022, asset manager WisdomTree unveiled nine digital, tokenized funds, adding to the one it started successfully earlier in the year. The funds allow the transfer agent to keep a secondary record of shares on the Stellar or Ethereum blockchains.

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In February 2023, Hong Kong’s central bank offered an inaugural $100 million tokenized green, or sustainable investment, bond. Meanwhile, in April, French investment bank Credit Agricole CIB and Swedish bank SEB agreed to develop a blockchain-based platform for tokenized bonds.

Lastly, on Sept. 8, the United States Federal Reserve released a comprehensive working paper delving into asset tokenization and risk-weighted assets. In brief, the document states that tokenization, akin to stablecoins, embodies five fundamental constituents: a blockchain, a reference asset, a valuation methodology, storage or custodianship, and redemption procedures.

Therefore, as more and more individuals, major market entities and investors continue to understand the immense technological and financial advantages possessed by tokenized RWAs, it will be interesting to see how this yet nascent market evolves and grows.