Real-World Tokenization Is Surging as TradFi Grows More Receptive to Blockchain

Blockchain-based tokenization of real-world assets (RWA) is gaining traction among major financial service firms and other big brands. That makes a number of industry watchers upbeat about the trend in 2023.

They say tokenization of RWA – a way of putting ownership of tangible assets such as stocks and bonds on the blockchain – offers the convenience of buying and selling these assets around the clock because the transactions do not involve traditional brokers.

This concept isn’t new, but over the past few months a number of large banks and other companies have begun using the process. In November, for instance, U.S. banking giant JPMorgan executed the first live trade using tokenized versions of the yen and the Singapore dollar on the Polygon blockchain. A month later, asset manager WisdomTree unveiled nine digital funds, adding to the one it had started successfully earlier in the year. The funds allow the transfer agent to keep a secondary record of shares on either the Stellar or Ethereum blockchains.

More recently, Hong Kong’s central bank offered an inaugural $100 million tokenized green, or sustainable investment, bond, and just this week French investment bank Credit Agricole CIB and Swedish bank SEB agreed to develop a blockchain-based platform for digital bonds.

A recent S&P Global Ratings report shows that issuers distributed around $1.5 billion in digital bonds on the blockchain in 2022, up from just a few bonds the previous year.

These businesses aim to create efficiencies that traditional markets can’t achieve, according to Daniela Barbosa, executive director of Hyperledger Foundation.

“If you think about traditional corporate bond issuance, for example, there’s a lot of paperwork and tracking,” Barbosa told CoinDesk in an interview. “You’d have to have a bond certificate. When you tokenize these assets you can increase the usability of the assets because you can support automation with smart contracts platforms and put important information on these assets … where in the past maybe you had to go with a third party or a middleman.”

Barbosa, who has worked in the crypto space since 2017, said more companies are more receptive to blockchain-enabled “business models, despite the series of debacles that have stung the industry over the past year. Those “failures we’ve seen in the marketplace have nothing to do with the (blockchain) technology,” she said.

For example, German-based Siemens’ $63 million digital bond on Polygon in February was a way for the engineering giant to reduce paperwork and open “new markets to new customers of those bonds,” she said. Public companies have traditionally used conventional methods – often Wall Street underwriters – to issue bonds to finance capital investment.

“If you’re creating technology and platforms that allow more people to participate in the economy, it’s going to have a positive impact on the economy,” she added.

Bob Ras, co-founder of the exchange and digital asset ecosystem Sologenic, said tokenized real-world assets also account for fractional ownerships more efficiently and generate faster settlement times.

He noted that users can trade a fraction of a specific tokenized stock like Tesla (TSLA) that has been divided into smaller shares or units at lower cost, with the settlement completed in seconds. Orders in traditional markets usually take 48 to 72 hours for the actual stock to transfer from the liquidity provider to the bank or the platform, Ras told CoinDesk.

The speed and efficiency “give buying power to smaller investors” and provide better accessibility “for those who don’t have a significant amount of investment funds,” he added.

Eliézer Ndinga, director of research at crypto investment product firm 21.co, said U.S. dollar-pegged stablecoin tether (USDT) offered a potentially strong argument for RWA, especially in countries suffering currency debasement or a collapse of the financial system, creating higher demand for the U.S. dollar.

“Tether is like the fiat-pegged currency of the world’s reserve currency,” Ndinga told CoinDesk in an interview. “From a remittances perspective, people can access it on a global scale as long as they have the internet connection, like the same way they would send emails to another party.”

Meanwhile, industry observers are also watching the increasing use of RWA in decentralized finance (DeFI), including MakerDAO’s investment in U.S. Treasurys and corporate bonds and Maple Finance’s yield-generating strategies adopted from traditional finance.

In February, Berlin-based crypto exchange Swarm launched tradable, tokenized U.S. stocks and bonds via its DeFi platform. “To date, traditional market participants have not had a comprehensive and regulatory-compliant solution for issuing and trading real world assets on-chain,” Swarm co-founder Timo Lehes said in a statement.

21.co’s Ndinga described the infrastructure of RWA as the equivalent of “dial-up” in the early internet – slow and less-than-ideal user experiences that will be resolved as the technology improves.

Market observers are also closely tracking how U.S. regulators will view tokenization. If their view is favorable, the regulatory clarity could spur more development by companies.

“We are now at the cusp of the convergence between traditional and decentralized finance, to some extent,” Ndinga said.