Making Sense of Why FIs Are Tokenizing Real-World Assets

The tokenization of real-world assets (RWA) is emerging as more than just a token exercise.

It’s another function of the blockchain landscape that has captured the imagination of various players across payments, finance and commerce: the ability for organizations to represent ownership rights of a real-world asset as a digital, on-chain token.

Tokenized RWAs have the potential to make assets more liquid, accessible and efficient while enhancing transparency, security and global reach. Representing RWAs on the blockchain — such as real estate, private equity and venture investments, fine art and collectibles, physical commodities like gold, fixed income instruments, intellectual property assets and even stocks and equities — can transform the way ownership of assets is recorded and enable new functions.

Last month, asset manager BlackRock unveiled its first tokenized fund issued on a public blockchain, the BlackRock USD Institutional Digital Liquidity Fund (BUIDL)

“Tokenization of securities could fundamentally transform capital markets. Today’s news demonstrates that traditional financial products are being made more accessible through digitization,” said Carlos Domingo, CEO of Securitize, BlackRock’s Web3 partner in the fund, in a statement.

As blockchain technology continues to evolve and regulatory frameworks adapt to accommodate tokenization, the range of tokenizable RWAs is likely to expand further.

But, despite their promise, some observers have been left wondering whether the appropriate technical and regulatory frameworks are in place to allow tokenization of RWAs to successfully scale across the sectors its proponents are targeting.

Read more: Tokenization Must Prove Useful in Order to Scale

Building On-Chain Ecosystems Requires Real-World Guardrails

One of the main reasons the tokenization of RWAs hasn’t taken the world by storm yet is the absence of a widely interoperable infrastructure that spans both the private and public payment sectors.

“The true intrinsic value of blockchain , which is around programmability of transactions, immutability of transactions, and the ability to do delivery versus payment and always-on types of payments, has yet to be unlocked,” Mastercard Chief Digital Officer Jorn Lambert told PYMNTS in July.

“Until there exists the ability to actually develop financially regulated applications on the blockchain, the benefits will never go mainstream,” Lambert said. “Regulated financial institutions are crucial for [tokenized blockchain money movement vehicles] to truly scale.”

But the marketplace is starting to respond to the whitespace opportunity. On April 8, Kyriba and JPMorgan ’s blockchain business unit, Onyx , announced a collaboration to tokenize cross-border payments.

Separately, Citigroup earlier this year (Feb. 14) partnered with Wellington Management and WisdomTree to explore the tokenization of private markets. Smart contracts were used to encode the underlying fund distribution rules and embed them in the token transferred to hypothetical WisdomTree clients. This highlighted how smart contracts could enable greater automation and create an enhanced compliance and control environment for issuers, distributors and investors.

As Pat Thelen , vice president of global account management at Ripple , said to PYMNTS on Oct. 6, “innovation is relentless. And innovation and competition will find a way to apply the technology that is already here. The technology is ready now . You have commercial banks, central banks and institutional players leaning in.”

Read more: Are Blockchain-Based Smart Contracts a Smart Option for Global Financing?

Bringing Transparency and Efficiency to Traditional Processes

Tokenization allows fractional ownership of assets, enabling investors to buy and sell smaller portions of assets. This increased divisibility can make illiquid assets such as real estate or fine art more liquid, as tokens can be traded on secondary markets more easily and quickly than traditional asset transfers.

Blockchain-based tokenization streamlines the process of issuing, transferring and settling asset ownership, reducing administrative overhead and eliminating intermediaries. This efficiency can lead to lower transaction costs and faster settlement times compared to traditional methods.

The process of tokenizing RWAs involves several steps, typically facilitated by blockchain technology and smart contracts. The first step is to identify the real-world asset to be tokenized and establish a legal framework governing the tokenization process. This includes determining ownership rights, regulatory compliance and any contractual agreements related to the asset.

Once the asset is identified, it needs to be represented digitally on a blockchain. This is typically done by creating digital tokens that represent ownership or rights to the underlying asset. These tokens are programmed with specific attributes and functionalities, often using standards such as ERC-20 or ERC-721 for Ethereum-based tokens.

Smart contracts are used to automate the execution of token issuance, transfer and compliance with regulatory requirements. These smart contracts can enforce rules governing the ownership and transfer of tokens, such as eligibility criteria, investor accreditation and compliance with securities regulations.

Custody of the underlying asset is a critical aspect of tokenization. Depending on the asset type, custody may be handled by a custodian or trustee responsible for holding the asset on behalf of token holders. Asset management processes, such as income distribution, voting rights or asset maintenance, may also be automated through smart contracts.

And while the tokenization of RWAs poses regulatory and technical challenges that need to be addressed, as the landscape moves forward, observers believe that the incentives to solving those challenges will rear their heads in short order.

“I look at tokenization being key to portability and integrating the FI more into the consumer’s lifestyle,” Ron Bergamesca , general manager of banking and FinTech Solutions at Paymentus , told PYMNTS in August. “By definition, you can’t provide a great user experience … with outdated technology.”