Blockchain
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.