Source: Coindesk
Translation: LianGuaiBitpushNews Mary Liu
What is the biggest misunderstanding about cryptocurrencies for outsiders? It is that cryptocurrencies like Bitcoin are not “real” because they lack the support of physical assets in the real world; they are highly speculative, and the fluctuating prices may cause losses for inexperienced investors; some even seem absurd, with meme coins and BAYC’s “small pictures” being sold for millions of dollars.
You don’t have to agree with these evaluations (I don’t think so, at least not entirely). But whether you accept them or not, these are part of the reasons why most banks, financial institutions, governments, and billions of “ordinary people” have yet to buy cryptocurrencies.
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However, what if the next generation of cryptocurrencies is not made up of “magical internet currencies” they have never heard of, but of encrypted “tokenized” stocks, bonds, cars, and things that people really care about?
Consumers – including skeptics on Wall Street – have started paying attention to the tokenization of real-world assets (RWA), and this interest has quietly surged during the crypto bear market. Lucas Vogelsang, CEO and co-founder of Centrifuge, said that tokenization can “create liquidity for today’s illiquid things,” and the company has tokenized more than $400 million worth of RWAs.
While most cryptocurrencies are a new type of asset – from Bitcoin to Ethereum to Dogecoin – tokenization puts assets from the “real” world on the chain, combining the advantages of blockchain with real-world assets.
Almost anything can be tokenized. Artworks, real estate, luxury goods, wine bottles, cars, carbon credits, and financial instruments such as treasury bonds and stocks – they can all be put on the chain.
Allan Pedersen, CEO of the Monetalis Group, dedicated to RWA tokenization, said, “We are working hard to turn everything into tokens and then try to eliminate all costs of the underlying system.” Pedersen said they have tokenized $1.2 billion worth of treasury bonds and used them as collateral on MakerDAO.
Even intellectual property can be tokenized. Sid Powell, CEO and co-founder of Maple, said, “Imagine someone running a YouTube channel, and they make some cooking videos.” Maple tokenizes the assets and then turns them into collateral. Now imagine that this witty and charming YouTuber has attracted a large audience and earns $50,000 a month from YouTube ad revenue.
The creator can tokenize the copyright and sell it to a financial intermediary. Powell explained, “We buy tokenized copyrights from them. We have the right to all the royalty streams from their YouTube cooking videos.” If the annual licensing fee is worth $600,000, financiers can buy it for $550,000 (allowing for some built-in returns), providing the chef with a loan against these future earnings.
Powell said that this model is popular in the field of large music companies and private equity firms, but smaller companies cannot use it. Tokenization makes these tools more inclusive. Morgan Krupetsky, the Director of Institutional and Capital Markets at Ava Labs, said, “Tokenization has the potential to democratize access to capital markets for borrowers. Smaller transaction sizes and lower investment thresholds will be feasible.”
Even more traditional business projects like “grain transportation” can benefit from tokenization.
Another assumption: a shipper wants to transport grain overseas. Typically, the shipper would obtain financing from a bank and use the grain as collateral for the loan. Powell believes that this is something that is very suitable for the blockchain because it involves cross-border finance. He sees the current system as similar to Blockbuster Video and Netflix. He said, “If I am Blockbuster, currently in Brazil, and I want to provide service to customers in Bulgaria, I have to set up a Blockbuster branch in Bulgaria. If I am Netflix, then this person just needs to have an internet connection.”
Back to grain transportation. Shippers can now obtain funds not only from banks in Brazil or Bulgaria but also find capital from anywhere on the planet through tokenization. Powell said, “It turns the global financial market into a single settlement center.”
Perhaps the average person does not care about shipping grain. But litigators in the financial field can do mathematical calculations, they can imagine various possibilities, and they can anticipate a thorough transformation of the financial market. A report by Boston Consulting Group suggests that by 2030, the tokenized RWA market could expand to $16 trillion. This is a very abstract numerical image. So, let’s make a comparison: consider Bitcoin’s current market value of $600 billion, what if Bitcoin’s market value is $16 trillion? Each Bitcoin would be worth $800,000!
Welcome to the world of lucrative RWA.
Advantages of private equity and stock tokenization
Tokenization is not a new technology; it has only gained new adoption and popularity. Tokenization has been around since 2017, which corresponds to the modifications made by early adopters a few years before NFTs entered the mainstream (such as CryptoPunks, Rare Pepes), and now they are welcoming a good time.
Infrastructure has improved, entry has become easier, institutions are curious about tokens, and surprising economic forces have stimulated adoption. Financial advisor Adam Blumberg wrote in a CoinDesk column, “With interest rates rising, many RWA options provide double-digit returns through interest, without the volatility risk of cryptocurrencies. They can provide low-risk loans in markets that traditional finance cannot or does not want to enter, while maintaining efficiency in the process.”
Despite the setbacks to the image of cryptocurrencies caused by FTX and a series of events in 2022, banks and governments have quietly – almost secretly – entered the world of tokenization of RWAs.
The Monetary Authority of Singapore is currently tokenizing bonds; they are working with DBS Bank and JPMorgan. Gold is being tokenized. A study by Bank of America (BoA) found that the tokenized gold market alone exceeds $1 billion, as “tokenized gold offers exposure to physical gold, 24/7 real-time settlement, no management fees, and no storage or insurance costs.”
Some tokenization projects are not something new – such as tokenizing treasury bonds – but Krupetsky said they can reduce costs in areas such as authentication, underwriting, asset monitoring, and fund payments, as this bureaucracy has always been burdensome, manual, and time-consuming. This is part of the reason why banks and enterprises are interested.
A recent report by Ernst & Young found that “institutions see broad prospects for tokenization and hope to invest in tokenized assets faster in the next two years and tokenize their own assets.” A survey conducted by the company found that 57% of institutional investors want to invest in tokenized assets.
What makes tokenization attractive to TradFi?
Let’s start with private equity funds. Philipp Pieper, co-founder of Swarm, another startup tokenizing RWAs, said, “Blockchain can replace the entire fund, and smart contracts can do what fund managers typically do, but it will reduce 100 to 200 basis points.”
For more exclusive “closed” private equity funds, tokenization can make their operations smoother. Suppose a private equity fund called Annoyingly Wealthy Group acquires a company. They invest in this company for at least five years. When can they sell and realize profits? Members of Annoyingly Wealthy may not agree on timing.
After the fifth year, some may want to take a chance and hope the company (they now own) continues to grow. Some may think “the top is here” (because the company is now at the peak of its value, so they should sell at a high price). Some may just want to use the funds for other things. As described by Pieper, through tokenization, you can establish a “smart contract-based secondary market” for the fund, which provides them with a “structured way to partially reduce or increase risk based on what they see.”
For those not involved in high-end financial work, the inner workings of stock funds may be unfamiliar. Making the lives of wealthy venture capitalists more comfortable may not have been Satoshi Nakamoto’s original vision. On the other hand, these innovations attract important participants in traditional finance, which is what blockchain and cryptocurrencies widely adopted need – whether you like it or not.
Centrifuge CEO Vogelsang said, “We to some extent rely on large lending institutions” to enter the field. He said that the number of early adopters of DeFi is still not large enough to expand the space to $100 trillion, which is what he believes is the ultimate market potential. Vogelsang said, “The money will come from pension funds, banks, and existing companies, so the most important work is to familiarize them with this technology and make them understand it so that they will start using it.”
Even stocks can be tokenized. You may find this strange or even somewhat meaningless because buying and selling stocks seems quite easy and cheap, with options like Jiaxin Wealth Management and Robinhood providing zero-commission choices. But there are benefits beneath the surface.
Sologenic tokenizes securities such as stocks, ETFs, and commodities. Co-founder Bob Ras said, “You can’t buy a small portion of Tesla, Amazon, or Netflix. When you tokenize it, users can buy a small portion of these stocks.”
Ras acknowledges that through the Robinhood app, users can actually buy a portion of Tesla or Amazon stocks, but he said that’s only because Robinhood itself holds a large number of popular stocks and allows users to purchase fractional shares from within the app. (Whether users will accept it remains to be seen.)
Settlement is immediate when you buy or sell tokens. This is important in trading. In the current financial system, even in large Wall Street companies, it still takes two to three days for a transaction to settle completely. This comes at a cost. Banks, hedge funds, and trading desks want to deploy funds immediately after they arrive- tokenization allows their funds to be put to use faster.
Tokenization can even eliminate intermediaries for the US dollar. It is common for investors to exchange one asset, such as Tesla stock, for another asset, such as Walmart stock. This can be done faster in the case of tokenization. In the process called “cross-conversion” by Ras, users can directly exchange Tesla tokens for Walmart tokens. Ras said users can find and create their own trading pairs on decentralized exchanges. Additionally, because they are never sold for US dollars, there is no need to pay capital gains tax. (Of course, future regulations may close this loophole.)
If stock tokenization does become cheaper, more efficient, and ultimately expand into the new norm, its impact could change Wall Street in unimaginable ways. Stocks can be traded 24/7, just like cryptocurrencies. Typically, most trading occurs between 9:30-10:30 am Eastern Time, and all US companies follow the established rhythm of the US stock market from Monday to Friday for profit reporting, communication, and financial decisions (such as stock buybacks). Tokenization, if it becomes mainstream, could disrupt all financial markets.
Pieper refers to tokenization as “FinTech 2.0”. He believes that tokenization is the natural evolution of ETFs (Exchange Traded Funds), which were created in the early 1990s. ETFs changed the stock market, and tokenization can have the same effect. ETFs allow investors to invest in a basket of thematic assets, such as airlines, healthcare, or energy. Through tokenization, this portfolio can become “atomized”, creating combinations of stocks, cryptocurrencies, and other yet-to-be-invented asset classes, “putting users at the core of financial instrument design”. Tokenization creates liquidity pools that can generate returns.
If you’re wary of the term “returns”, that’s understandable. It was the promise of high returns that led to the collapse of companies like Celsius in 2022. The then-CEO of Celsius, Alex Mashinsky, confidently told users that Celsius had successfully achieved “high single-digit or low double-digit” returns because it was “much less risky than a bank”. (The company later filed for bankruptcy, and the New York Attorney General accused Mashinsky of fraud.)
Let’s look back again. In 2008, banks made profits through complex financial schemes (which they didn’t fully understand at the time, including bundled subprime mortgages). We all know what happened next: bad loans, banks teetering on the brink of collapse, and an economic crisis. So, if we create a clever new loan and debt system through RWA, are we just repeating history and increasing the possibility of a financial crisis?
Vogelsang acknowledges that this technology “could create many dangerous bad products”, but he believes that the essence of these DeFi tools is to achieve transparency and reduce the likelihood of collapse. Vogelsang says, “Many of the problems in 2008 were that people didn’t really understand what it (subprime mortgage sales) was, nobody really knew. Retail users didn’t know, and nobody really knew.”
Tokenization is transparent. Assets and liabilities are visible. Daniela Barbosa, Executive Director of the Hyperledger Foundation, says, “Detailed information about asset ownership, transfer, and transactions can be recorded on the blockchain, providing a verifiable and auditable history. This transparency enhances trust and reduces fraud.” Therefore, theoretically, with this transparency, it would be easier to detect systemic risks.
Of course, the key word here is theoretically. Many things in the cryptocurrency field “sound” transparent and risk-free, as Terra investors are well aware.
Regulatory Concerns
The question currently worth trillions of dollars among all cryptocurrencies is: “Does the U.S. Securities and Exchange Commission consider it a security?” One happy benefit of tokenizing real-world securities is that there is no dispute about whether the so-called token is a security. The fact is that it is. Pieper says, “Some other projects have built-in false utilities to make it look like it’s not a security.” Therefore, Swarm (and many other tokenization projects) is currently only available to accredited investors.
In other words, attracting “qualified investors” is not the ultimate goal of tokenization. Its proponents believe that they can help ordinary people, such as small business loans. Private credit is a market with poor liquidity for small companies, which provides assistance to large companies. Vogelsang said, “When Google issues bonds, you can easily buy and trade them,” which is one of the reasons they only pay a premium slightly higher than the yield of government bonds, so according to today’s interest rates, the premium may be 6%. What about small businesses? Since the loan has no liquidity market, there are few choices and a 15% interest rate needs to be paid. This means charging customers more fees, which gives Google a huge advantage.
Vogelsang said: “Tokenization does change everything and creates a fair competitive environment.” He admits that we will never reach the point where Google and small businesses pay the same interest rates – the risks of lending to small businesses are greater than lending to Google – but creating liquidity helps narrow the gap. “This is the motivation for founding Centrifuge.”
Maple founder Sid Powell has a similar view. He believes that tokenizing RWA is a way to provide real benefits to the general public, which can help the crypto industry recover from its reputation for speculation and gambling. “One important theme of RWA is how on-chain lending really touches real-world businesses and helps them grow?”
Pieper said: “Perhaps the most popular tokenization project is something we take for granted – cash. “Cash is being tokenized. It is called stablecoin. It is a real-world asset that is replicated on the chain and then becomes tradable.” Central Bank Digital Currency (CBDC) is essentially a tokenized version of central bank currency that exists on a distributed ledger, reducing the cost of cross-border transactions and settlements and greatly shortening the time.
Since the launch of Tether in 2014, the tokenization of cash has been happening and could have a global impact. Pedersen pointed out that “the world currency market is a dollar-denominated currency market” and that “all these dollar-denominated collateral are located in many different places.” No one knows its exact size. No one has transparency,” Pedersen described the pool of dollar-denominated collateral as “completely dark,” so when the system fails, it “destroys the whole world every time.”
On the contrary, what if the dollar market was collateralized on the blockchain? Pedersen believes that “you will start to have a transparent world currency market, and central banks will know what is happening,” which will help avoid the next financial crisis.
These benefits of tokenization – the absence of downward risks of cryptocurrency price speculation – are why many people believe its adoption is inevitable. Krupetsky of Ava Labs predicts: “More and more assets will be tokenized to the point where we no longer distinguish between tokenized and non-tokenized assets,” just like we “no longer distinguish between marketing and digital marketing,” it’s all marketing.
Perhaps if the world truly becomes tokenized, “real-world assets” will abandon the cumbersome “real world” and become true assets.
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