RWA heralds the next wave of blockchain innovation in tradfi

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In the future, all tradable assets will be tokenized. If this sounds like a wildly ambitious prediction, you should carefully consider the large funds in traditional finance (tradfi) that are driving the rise of real-world asset (RWA) tokenization.

Larry Fink, CEO of BlackRock, the world’s largest asset manager, believes that tokenization of securities will herald the “next generation” for trading markets. Bernstein Private Wealth Management predicts that tokenization could reach a total market size of $5 trillion by 2028, driven by the launch of central bank digital currencies (CBDCs), stablecoins, private markets funds, securities and real estate.

Earlier this year, BlackRock launched its first tokenized fund, the BlackRock USD Institutional Digital Liquidity Fund (BUIDL). Launched on Ethereum, BUIDL allows investors to earn returns in US dollars through subscriptions to the fund through Securitize Markets. BNY Mellon provides interoperability between the digital token and tradfi markets for the BUIDL fund. Early ecosystem participants in BUIDL include Anchorage Digital Bank, BitGo, Coinbase, and Fireblocks, among other market participants and infrastructure providers in the digital token space.

According to data from RWA.xyz, BUIDL is now the largest tokenized treasury fund and its market cap has surpassed $500 million. RWA.xyz highlights a growing trend in using tokenized treasuries as collateral across various financial ecosystems, indicating that tokenized treasuries are finding practical applications.

The overall tokenized treasury market has also witnessed impressive growth, with the total market cap skyrocketing from $572.40 million to $1.79 billion, marking a 212.72% YoY increase. According to data from CoinGecko, there has been an 11.7% increase in the total market cap of RWA-related assets in the past 24 hours.

BlackRock’s BUIDL launch follows Franklin Templeton’s launch of the Franklin OnChain US Government Money Fund (FOBXX) last year, which was the first tokenized money market fund deployed on the Stellar blockchain. The fund invests at least 99.5% of its total assets in US government securities, cash, and repurchase agreements fully collateralized by government securities or cash.

Meanwhile, Edinburgh-based Abrdn is launching a tokenized money market fund, the first of its kind in the UK, in 2023, the Aberdeen Standard Liquidity Fund (Lux)—Sterling Fund. The UK Treasury has set up a Technology Working Group to examine how blockchain technology could be applied to asset management. The Technology Working Group has published a plan for regulated funds in the UK to put their holdings on the blockchain. These guidelines will allow asset managers authorised by the UK’s Financial Conduct Authority (FCA) to tokenise funds, provided that fund managers continue to provide valuations and settlements through the same processes and timeframes.

Michelle Scrimgeour, chief executive of Legal & General Investment Management and chair of the task force, described the publication of the Technology Task Force’s report as a milestone in the implementation of tokenization in the U.K. funds sector. “Fund tokenization has the potential to revolutionize the way our industry operates, enabling greater efficiency and liquidity, improved risk management and the creation of more tailored portfolios,” she said in an interview.

In a further innovation, Jiritsu, a layer-one blockchain RWA platform backed by gumi Cryptos Capital, Republic Capital, Polymorphic, Tokentus, and Susquehanna, has integrated with the BlackRock ecosystem to enhance RWA validation. This integration aims to revolutionize how RWAs are managed and validated. Jiritsu’s technology extends the concept of proof of reserves to include Bitcoin Exchange Traded Funds (ETFs) and the exact value backing any RWA.

BlackRock and Franklin Templeton’s decision to form joint ventures with established participants in the digital token space demonstrates tradfi’s desire to leverage web3’s expertise to deliver secure and scalable solutions for RWA.

Assets that appear on balance sheets in traffi markets and can be tokenized include financial assets such as bonds and stocks, tangible assets such as land, real estate and commodities, and intangible assets such as Intellectual Property (IP).

Since financial assets and many intangible assets are digital in nature, blockchain is ideal for representing and securing ownership of the underlying digital asset. Furthermore, the integration of on-chain transparency will empower decentralized finance (defi) solutions by providing detailed insights into synthetic assets, options, and asset flows.

In a report titled “Tokenization: Digital asset déjà vu,” McKinsey & Co. outlined how tokenization could increase levels of automation in liquidity markets through the programmability of digital tokens and the capacity to embed code into digital tokens and the ability to interact with smart contracts.

Proponents of RWA argue that it has the potential to democratize historically less accessible investment opportunities by providing increased liquidity, proof of ownership, and transparency. Moreover, tokenization could enable digital and non-digital assets currently sitting on financial institutions’ balance sheets to be tradable and liquid 24 hours a day, seven days a week.

The drivers for tokenization on Tradfi are many. Tokenization provides trading opportunities for companies and high-net-worth individuals who will benefit from greater liquidity for their assets. Meanwhile, institutional investors benefit as capital providers and have a much wider range of options to choose from when investing in financial assets. Furthermore, the promise of smart financial contracts that include payment obligations and cash flows of all parties to the financial contract will result in efficient price discovery and post-trade automation. This will allow for the creation and rebalancing of risk-return adjusted portfolios at currently unattainable cost levels.

There is a huge pent-up demand for exposure to blockchain-based applications in the tradfi space, as evidenced by the launch of a number of Bitcoin ETFs this year. Tokenized assets look set to bring increased transparency, liquidity, and accessibility to tradfi markets, facilitating fractional ownership and liquidity that could democratize access to high-quality investment assets. RWA could be a catalyst for the next wave of innovation as blockchain proves to be a highly resilient and adaptable technology for the evolution of tradfi markets.

Arthur Firstov

Arthur Firstov is the London-based chief operating officer (CBO) at Mercuryo, a global payments infrastructure platform. He holds an MBA in blockchain management from EU Business School and an MBA in global banking and finance from the University of Birmingham. Arthur has played a key role in helping Mercuryo build partnerships with over 300 companies in the digital token space, including Binance, MetaMask, Ledger, Jupiter and Trust Wallet. Arthur’s first foray into the digital token and blockchain world came in 2018, when he began exploring the first cryptocurrency exchanges and wallets. Arthur began his career in the financial sector as a sales professional for payment solutions providers and banking systems. He was responsible for building long-term relationships between financial firms and their target customers and partners, securing exceptional business sales and helping launch new products. He has since become a seasoned business leader with over seven years of experience in sales, customer relations and B2B partnerships. Arthur has been deeply involved in creating the first digital payment use cases with some of the largest players in the decentralized finance space. Arthur believes passionately in the power of blockchain technology to revolutionize business and finance.