Creating Virtual Avatars for Rolex and Pokémon Card! What is RWA?
To explore Taiwan’s readiness for RWA tokenization, the Financial Supervisory Commission (FSC) recently announced the establishment of the “RWA Tokenization Working Group” in collaboration with Taiwan Depository & Clearing Corporation and six financial institutions (including Taiwan Cooperative Bank, Taipei Fubon Bank, CTBC Bank, Cathay Securities, Cathay Mutual Fund, and Yuanta Financial Holdings). The group will jointly study related promotion matters.
But what exactly is RWA and why does even the FSC care about it?
Let’s start with a true story. In June 2023, a century-old Rolex watch was “tokenized” for the first time, allowing the owner to borrow over NT$400,000 by mortgaging it. This is not just talk, it’s a real case.
It’s not just watches; even a piece of artwork or a luxury mansion can be divided into several pieces, allowing multiple people to “co-own” it. This technology is called “Real World Asset (RWA) Tokenization” and is one of the most discussed blockchain applications in 2023.
RWA refers to the tokenization of tangible and intangible assets such as watches, real estate, wine, trading cards, and bonds in the real world, creating a virtual counterpart in the blockchain world that is tied to the value and identity of the original asset.
The scope of real-world assets is vast, covering both tangible and intangible assets.
RWA tokens can be either “fungible” or “non-fungible.” For example, a Rolex watch can be transformed into an indivisible token or divided into multiple tokens.
Through the transparent and traceable nature of blockchain, RWA can lower the investment threshold for high-value commodities, create higher liquidity, efficiency, and transparency, reduce human errors, and the risk of buying counterfeit products.
According to a report on “Real World Asset Tokenization” by the world’s largest exchange, Binance, although RWA development is still in its early stages, 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 figures demonstrate the enormous potential and prospects of asset tokenization, and RWA will be the key to unlocking the next bull market.
Why has RWA gained popularity? It’s actually a history of blockchain development.
Although RWA has gained more attention in the past year, it is actually a process of blockchain technology development.
According to Huang Chaoqiu, Co-founder and CEO of BSOS, when blockchain technology first gained popularity, major corporations were looking for “killer applications.” During 2016 and 2017, various commercial experiments were conducted worldwide, such as supply chain traceability, anti-counterfeiting, and logistics.
Since 2021, the focus has shifted to “value” and “asset circulation.” The term “Real World Assets” also emerged in the blockchain field, but at that time, it was just a general term.
It wasn’t until 2022 when a comprehensive 70-page report 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 released industry reports on RWA.
Major players in the cryptocurrency industry, including Coinbase, the issuer of the popular stablecoin USDC, and Aave, the largest decentralized lending platform, announced in September this year that they would jointly form the “Tokenized Asset Coalition” (TCA) to encourage more traditional financial assets to go on-chain and further promote the application of blockchain technology in the financial sector.
RWA has officially been established as an independent track.
Although RWA has gained more attention in the past year, it is actually a process of blockchain technology development, according to Huang Chaoqiu, Co-founder and CEO of BSOS.
The reason why RWA has gained popularity, as analyzed by Gao Zijun, Chairman of the Blockchain Enthusiasts Association, is that in a bull market (a market trending upward), investors tend to put their assets on the blockchain to quickly respond to money-making opportunities while enjoying the stable returns of real-world 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 areas: financial instruments (bonds, real estate, stocks, etc.) and cultural items (baseball cards, Pokémon cards, etc.), and there have been many application cases in both categories.
Category 1: Financial Instruments
Finance is currently the fastest-growing field for RWA, with most applications related to “US Treasury bond tokenization.”
According to data from the RWA.xyz platform, as of early November 2023, the US bond tokenization market has reached $750 million, nearly seven times its growth since the beginning of this year.
US Treasury bonds are sovereign debts issued by the US government and are considered “risk-free assets.” As interest rates rise, the yield of these bonds stabilizes and has already surpassed DeFi yields. Investors can invest in tokenized treasury bonds and enjoy real-world yields.
Not just US bonds, Michael Hsu, Acting Comptroller of the Currency, mentioned at the Fintech Week event in November 2023 that asset tokenization can address the complexity of “funding and securities flow risks.”
In July this year, Milano Hub, under the Bank of Italy, announced that it would support the development of an institutional-grade security token ecosystem within six months, assisting traditional financial institutions in integrating into the tokenized asset ecosystem and conducting transactions through decentralized financial channels in a secure and regulated manner.
In the real estate sector, Galaxy Digital data shows that 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 New York Mellon Bank (BNY Mellon) showed that 91% of institutional investors are enthusiastic about investing in tokenized assets. 97% of respondents believe that tokenization has the potential to completely change the field of asset management.
Category 2: Cultural Items
The first Pokémon Center in Taiwan, “Pokemon Center Taipei,” recently opened and introduced limited edition commemorative cards, such as “Pikachu in Taipei.”
In October this year, the well-known NFT trading platform Magic Eden collaborated with “Collector,” a project promoting real-world asset (RWA) tokenization in the Solana ecosystem, to tokenize classic Pokémon cards, sparking intense 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 are concentrated in three areas: cost, efficiency (time), and transparency.
Without the involvement of intermediaries (banks, securities firms), tokenization can speed up transaction processing time. All transaction information is recorded on the blockchain, ensuring transparency.
Tokenization also enables asset fragmentation, allowing more people to participate in investments. Expensive artworks and real estate can be tokenized, enabling ownership distribution among investors with lower entry barriers to higher markets.
Challenges: Trust, Compliance, Infrastructure
Ensuring the credibility of real-world assets
RWA involves the tokenization of real assets, and the reliability of real asset information is crucial. If the initial information is unreliable, the tokenized assets will also lack credibility.
There are various means to enhance information reliability. For example, Circle, the issuer of the stablecoin USDC, enlisted one of the Big Four accounting firms, Deloitte, to conduct asset reserve audits, while Tether, the issuer of USDT, collaborated with the fifth-largest accounting firm, BDO.
Regulation and compliance must meet the requirements of different countries
RWA also involves regulatory and compliance issues. Even though the blockchain world is borderless, it still needs to comply with different countries’ regulations.
Huang Chaoqiu pointed out that since token issuance is straightforward, various products have emerged on the market. For example, celebrities or athletes issuing tokens for their “future income rights” would require new regulations to govern such products.
Infrastructure needs to be improved
In the traditional financial system, various organizations and roles, such as insurance companies and investors, collaborate with each other. In the blockchain ecosystem, these roles may need to be redefined and coordinated. The maturity of the ecosystem and infrastructure will be crucial to ensure stable development of the tokenized market.
One key infrastructure is stablecoins used for transactions. Stablecoins need to be widely used to facilitate smooth trading of tokenized assets. However, there is still some distance to go before stablecoins can be fully commercialized. Without proper infrastructure, market acceptance will be affected.
“While the first 30 floors are not yet complete, trying to build the 31st floor will certainly be difficult to stabilize, and this is where the risk lies,” said Huang Chaoqiu. “There are still many challenges to overcome to achieve the desired outcome, and if these challenges cannot be overcome, they will become risks.”
Although RWA will not experience explosive growth, it will be an irreversible trend that will continue to develop steadily and create immense value. At this stage, what is needed is time and a healthy mindset.
Proofread and edited by: Gao Jingyuan
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