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RWA heralds next wave of blockchain innovation in tradfi

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RWA heralds next wave of blockchain innovation in tradfi

Disclosure: The views and opinions expressed here are solely those of the author and do not represent the views and opinions of the crypto.news editorial team.

In the future, all tradable assets will be tokenized. If that seems like too bold a prediction, you should take a closer look at the leading traditional finance (tradfi) funds that are adding momentum to the rise of real-world asset (RWA) tokenization.

Larry Fink, CEO of BlackRock, the world’s largest asset manager, you think that tokenization of securities will herald the “next generation” for trade markets. Bernstein Private Wealth Management forecasts that tokenization could amount to a total market size of $5 trillion by 2028, driven by the introduction of central bank digital currencies (CBDC), stablecoins, private market funds, stocks and real estate.

Earlier this year, BlackRock launched its first tokenized fundBlackRock USD Institutional Digital Liquidity Fund (BUIDL). BUIDL, launched on Ethereum, allows investors to earn returns in U.S. dollars via a subscription to the fund via Securitize Markets. BNY Mellon enables interoperability for the BUIDL fund across digital token and trading markets. Initial ecosystem participants in BUIDL include Anchorage Digital Bank, BitGo, Coinbase, and Fireblocks, among other market participants and infrastructure providers in the digital token space.

Second data from RWA.xyz., BUIDL is now the largest tokenized treasury fund and has surpassed the $500 million mark in market value. RWA.xyz highlights a growing trend in the use of tokenized treasuries as collateral in various financial ecosystems, indicating that tokenized treasuries are finding practical applications.

The overall tokenized treasury market has also seen impressive growth, with its total market cap increasing from $572.40 million to $1.79 billion, marking a 212.72% increase year-over-year. According to data According to CoinGecko, the total market capitalization of RWA-related assets has increased by 11.7% over the past 24 hours.

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

Meanwhile, Edinburgh-based Abrdn launched a tokenised money market fund in 2023, the first of its kind in the UK, the Aberdeen Standard Liquidity Fund (Luxury)—Sterling Fund. The UK Treasury has already established a Technology Working Group to explore how blockchain technology can be implemented in the wealth management space. The Technology Working Group has published a blueprint for UK-regulated funds to put the assets they hold 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 timescales.

Michelle Scrimgeour, chief executive of Legal & General Investment Management and chair of the working group, described the publication of the report by the Technology Working Group as a milestone in tokenization implementation within the UK fund industry. “Fund tokenisation has huge potential to revolutionise the way our industry operates, enabling greater efficiency and liquidity, better risk management and the creation of more personalised portfolios,” he said in an interview.

In a further innovation, Jiritsu, a layer one RWA blockchain platform backed by gumi Cryptos Capital, Republic Capital, Polymorphic, Tokentus and Susquehanna, has integrated with the BlackRock ecosystem to improve RWA verification. This integration aims to revolutionize the way RWAs are managed and verified. Jiritsu’s technology extends the concept of proof of reserves to include the precise value that backs Bitcoin Exchange Traded Funds (ETFs) and any RWA.

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

Assets on traditional market balance sheets that 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 protecting ownership of the underlying digital asset. Additionally, integrating on-chain transparency will enhance decentralized finance (defi) solutions by offering synthetic assets, options, and granular insights into asset flows.

In a relationship Titled “Tokenization: A Déjà Vu of Digital Assets,” McKinsey & Co. outlined how tokenization can improve levels of automation in tadfi markets through the ability to embed code in a digital token with the programmability of digital tokens, offering the ability to interact with smart contracts.

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

The drivers of tokenization in trading are manifold. Tokenization offers trading opportunities for corporations and high net worth individuals who will benefit from increased liquidity for their assets. Meanwhile, institutional investors benefit as providers of capital and will be able to select from many more choices when investing in financial assets. Additionally, the promise of smart financial contracts, which include the payment obligations and cash flows of all parties to the financial contract, will result in efficient price discovery and post-trade automation. This will enable the construction and rebalancing of risk-return adjusted portfolios at currently unattainable cost levels.

As evidenced by this year’s flurry of Bitcoin ETF launches, there is enormous pent-up demand in the tradfi space for exposure to blockchain-based applications. Tokenized assets appear poised to bring greater transparency, liquidity, and accessibility to tradfi markets, facilitating fractional ownership and liquidity that could democratize access to high-quality investment assets. RWA may just be a catalyst for the next wave of innovation as blockchain proves to be a highly resilient and compatible technology for the evolution of tradfi markets.

Arthur Firstov

Arthur Firstov Arthur is the Chief Business Officer (CBO) of Mercuryo, a global payments infrastructure platform based in London. 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 been instrumental in helping Mercuryo partner with over 300 companies in the digital token space, including Binance, MetaMask, Ledger, Jupiter and Trust Wallet. Arthur’s first foray into the world of digital tokens and blockchain came in 2018 when he began exploring early cryptocurrency exchanges and wallets. Arthur began his career in finance as a sales specialist for payment solutions and banking systems providers. He was responsible for building lasting relationships between financial companies and their target customers and partners, ensuring exceptional enterprise sales and helping introduce new products. He has since become an experienced business leader with over seven years of experience in sales, customer relations and B2B partnerships. Arthur has been deeply involved in creating early digital payment use cases with major players in the decentralized finance space. Arthur is a strong believer in the power of blockchain technology to revolutionize the world of business and finance.

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Bitcoin (BTC) Price Crashes as Donald Trump’s Win Odds Dip

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Stephen  Alpher

Markets received nominally good news on Thursday morning, with the US ISM manufacturing PMI for July falling much more than economists expected, sending interest rates to multi-month lows across the board. Additionally, initial jobless claims in the US jumped to their highest level in about a year. Taken together, the data adds to the sentiment that the US is on the verge of a cycle of monetary easing by the Federal Reserve, which is typically seen as bullish for risk assets, including bitcoin.

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Terra Blockchain Reboots After Reentry Attack Leads to $4M Exploit

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Terra Blockchain Reboots After Reentry Attack Leads to $4M Exploit

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CoinDesk is a awarded press agency that deals with the cryptocurrency sector. Its journalists respect a rigorous set of editorial policiesIn November 2023, CoinDesk has been acquired from the Bullish group, owner of Bullisha regulated digital asset exchange. Bullish Group is majority owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant digital asset holdings, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial board to protect journalistic independence. CoinDesk employees, including journalists, are eligible to receive options in the Bullish group as part of their compensation.

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$6.8M Stolen, ASTRO Collapses 60%

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$6.8M Stolen, ASTRO Collapses 60%

In the latest news in the blockchain industry, there has been a turn of events that has severely affected Terra and its users and investors, with the company losing $6.8 million. The attack, which exploited a reentry vulnerability in the network’s IBC hooks, raises questions about the security measures of the once celebrated blockchain protocol.

A web3 security company, Cyvers Alerts reported that the exploit occurred on July 31st and caused the company to lose 60 million ASTRO, 3.5 million USDC500,000 USDTand 2. 7 BitcoinThe flaw was discovered in April and allows cybercriminals to make payments non-stop by withdrawing money from the network.

Earth’s response

Subsequently, to the hack employed on the Terra blockchain, its official X platform declared the Suspension network operations for a few hours to apply the emergency measure. Finally in its sendTerra’s official account agreed, sharing that its operations are back online: the core transactions that make up the platform are now possible again.

However, the overall value of the various assets lost in the event was unclear.

Market Impact: ASTRO Crashes!

The hack had an immediate impact on the price of ASTRO, which dropped nearly 60% to $0.0206 following the network shutdown. This sharp decline highlights the vulnerability of token prices to security breaches and the resulting market volatility.

This incident is not the first time Terra has faced serious challenges. Earlier this year, the blockchain encountered significant problems that called into question its long-term viability. These repeated incidents underscore the need for stronger security measures to protect users’ assets and maintain trust in the network.

The recent Terra hack serves as a stark reminder of the ongoing security challenges in the blockchain space. As the platform works to regain stability, the broader crypto community will be watching closely.

Read also: Record Cryptocurrency Theft: Over $1 Billion Stolen in 2024

This is a major setback for Terra. How do you think this will impact the blockchain industry?



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Luxembourg proposes updates to blockchain laws | Insights and resources

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Luxembourg proposes updates to blockchain laws | Insights and resources

On July 24, 2024, the Ministry of Finance proposed Blockchain Bill IVwhich will provide greater flexibility and legal certainty for issuers using Distributed Ledger Technology (DLT). The bill will update three of Luxembourg’s financial laws, the Law of 6 April 2013 on dematerialised securitiesTHE Law of 5 April 1993 on the financial sector and the Law of 23 December 1998 establishing a financial sector supervisory commissionThis bill includes the additional option of a supervisory agent role and the inclusion of equity securities in dematerialized form.

DLT and Luxembourg

DLT is increasingly used in the financial and fund management sector in Luxembourg, offering numerous benefits and transforming various aspects of the industry.

Here are some examples:

  • Digital Bonds: Luxembourg has seen multiple digital bond issuances via DLT. For example, the European Investment Bank has issued bonds that are registered, transferred and stored via DLT processes. These bonds are governed by Luxembourg law and registered on proprietary DLT platforms.
  • Fund Administration: DLT can streamline fund administration processes, offering new opportunities and efficiencies for intermediaries, and can do the following:
    • Automate capital calls and distributions using smart contracts,
    • Simplify audits and ensure reporting accuracy through transparent and immutable transaction records.
  • Warranty Management: Luxembourg-based DLT platforms allow clients to swap ownership of baskets of securities between different collateral pools at precise times.
  • Tokenization: DLT is used to tokenize various assets, including real estate and luxury goods, by representing them in a tokenized and fractionalized format on the blockchain. This process can improve the liquidity and accessibility of traditionally illiquid assets.
  • Tokenization of investment funds: DLT is being explored for the tokenization of investment funds, which can streamline the supply chain, reduce costs, and enable faster transactions. DLT can automate various elements of the supply chain, reducing the need for reconciliations between entities such as custodians, administrators, and investment managers.
  • Issuance, settlement and payment platforms:Market participants are developing trusted networks using DLT technology to serve as a single source of shared truth among participants in financial instrument investment ecosystems.
  • Legal framework: Luxembourg has adapted its legal framework to accommodate DLT, recognising the validity and enforceability of DLT-based financial instruments. This includes the following:
    • Allow the use of DLT for the issuance of dematerialized securities,
    • Recognize DLT for the circulation of securities,
    • Enabling financial collateral arrangements on DLT financial instruments.
  • Regulatory compliance: DLT can improve transparency in fund share ownership and regulatory compliance, providing fund managers with new opportunities for liquidity management and operational efficiency.
  • Financial inclusion: By leveraging DLT, Luxembourg aims to promote greater financial inclusion and participation, potentially creating a more diverse and resilient financial system.
  • Governance and ethics:The implementation of DLT can promote higher standards of governance and ethics, contributing to a more sustainable and responsible financial sector.

Luxembourg’s approach to DLT in finance and fund management is characterised by a principle of technology neutrality, recognising that innovative processes and technologies can contribute to improving financial services. This is exemplified by its commitment to creating a compatible legal and regulatory framework.

Short story

Luxembourg has already enacted three major blockchain-related laws, often referred to as Blockchain I, II and III.

Blockchain Law I (2019): This law, passed on March 1, 2019, was one of the first in the EU to recognize blockchain as equivalent to traditional transactions. It allowed the use of DLT for account registration, transfer, and materialization of securities.

Blockchain Law II (2021): Enacted on 22 January 2021, this law strengthened the Luxembourg legal framework on dematerialised securities. It recognised the possibility of using secure electronic registration mechanisms to issue such securities and expanded access for all credit institutions and investment firms.

Blockchain Act III (2023): Also known as Bill 8055, this is the most recent law in the blockchain field and was passed on March 14, 2023. This law has integrated the Luxembourg DLT framework in the following way:

  • Update of the Act of 5 August 2005 on provisions relating to financial collateral to enable the use of electronic DLT as collateral on financial instruments registered in securities accounts,
  • Implementation of EU Regulation 2022/858 on a pilot scheme for DLT-based market infrastructures (DLT Pilot Regulation),
  • Redefining the notion of financial instruments in Law of 5 April 1993 on the financial sector and the Law of 30 May 2018 on financial instruments markets to align with the corresponding European regulations, including MiFID.

The Blockchain III Act strengthened the collateral rules for digital assets and aimed to increase legal certainty by allowing securities accounts on DLT to be pledged, while maintaining the efficient system of the 2005 Act on Financial Collateral Arrangements.

With the Blockchain IV bill, Luxembourg will build on the foundations laid by previous Blockchain laws and aims to consolidate Luxembourg’s position as a leading hub for financial innovation in Europe.

Blockchain Bill IV

The key provisions of the Blockchain IV bill include the following:

  • Expanded scope: The bill expands the Luxembourg DLT legal framework to include equity securities in addition to debt securities. This expansion will allow the fund industry and transfer agents to use DLT to manage registers of shares and units, as well as to process fund shares.
  • New role of the control agent: The bill introduces the role of a control agent as an alternative to the central account custodian for the issuance of dematerialised securities via DLT. This control agent can be an EU investment firm or a credit institution chosen by the issuer. This new role does not replace the current central account custodian, but, like all other roles, it must be notified to the Commission de Surveillance du Secteur Financier (CSSF), which is designated as the competent supervisory authority. The notification must be submitted two months after the control agent starts its activities.
  • Responsibilities of the control agent: The control agent will manage the securities issuance account, verify the consistency between the securities issued and those registered on the DLT network, and supervise the chain of custody of the securities at the account holder and investor level.
  • Simplified payment processesThe bill allows issuers to meet payment obligations under securities (such as interest, dividends or repayments) as soon as they have paid the relevant amounts to the paying agent, settlement agent or central account custodian.
  • Simplified issuance and reconciliationThe bill simplifies the process of issuing, holding and reconciling dematerialized securities through DLT, eliminating the need for a central custodian to have a second level of custody and allowing securities to be credited directly to the accounts of investors or their delegates.
  • Smart Contract Integration:The new processes can be executed using smart contracts with the assistance of the control agent, potentially increasing efficiency and reducing intermediation.

These changes are expected to bring several benefits to the Luxembourg financial sector, including:

  • Fund Operations: Greater efficiency and reduced costs by leveraging DLT for the issuance and transfer of fund shares.
  • Financial transactions: Greater transparency and security.
  • Transparency of the regulatory environment: Increased attractiveness and competitiveness of the Luxembourg financial centre through greater legal clarity and flexibility for issuers and investors using DLT.
  • Smart Contracts: Potential for automation of contractual terms, reduction of intermediaries and improvement of transaction traceability through smart contracts.

Blockchain Bill IV is part of Luxembourg’s ongoing strategy to develop a strong digital ecosystem as part of its economy and maintain its status as a leading hub for financial innovation. Luxembourg is positioning itself at the forefront of Europe’s growing digital financial landscape by constantly updating its regulatory framework.

Local regulations, such as Luxembourg law, complement European regulations by providing a more specific legal framework, adapted to local specificities. These local laws, together with European initiatives, aim to improve both the use and the security of projects involving new technologies. They help establish clear standards and promote consumer trust, while promoting innovation and ensuring better protection against potential risks associated with these emerging technologies. Check out our latest posts on these topics and, for more information on this law, blockchain technology and the tokenization mechanism, do not hesitate to contact us.

We are available to discuss any project related to digital finance, cryptocurrencies and disruptive technologies.

This informational piece, which may be considered advertising under the ethics rules of some jurisdictions, is provided with the understanding that it does not constitute the rendering of legal or other professional advice by Goodwin or its attorneys. Past results do not guarantee a similar outcome.

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