What Are Real World Assets?
I have been asked this enough, so now is the right time to write it down. I am going to offer my definition of Real World Assets (RWA) and explain why I think RWA is an appropriate and useful term to describe the transformation of traditional financial markets underway today.
Opinions Vary
What are Real World Assets? What does it mean? That depends on who you ask.
Some people think anything of value can be considered RWA.
For many, RWA must be something you can actually hold in your hand, an object you can physically touch, items that accountants categorize as tangible assets.
For others, the term Real World Asset is unnecessary at best or confusing at worst. For them, there are already well-established terms for financial assets that fall into tangible or intangible categories, classifying every possible financial instrument: securities, funds, bonds, real estate, money markets, commodities, collectables and so on — so why bother coming up with yet another term?
Distinguishing Blockchain Assets
Real World Assets are any financial asset tokenized for use on a blockchain. Blockchain origination distinguishes RWA from traditional financial assets issued outside the blockchain space. RWA fulfill a need to differentiate assets originating from traditional financial systems and assets issued by blockchains.
Compared to other commonly encountered terms used to describe on-chain assets, RWA actually reduces confusion. For example, take the term Digital Assets. What does that entail, traditional financial assets, blockchain assets, both? Assets in general are already digitally represented in today’s traditional financial system. How do we distinguish between them and blockchain assets? Digital assets cast an even wider net than RWA; in fact, RWA would be included within the set of all digital assets.
RWA also help by grouping together the set of assets suitable for tokenization on-chain. Although specifically representing on-chain assets RWA nevertheless casts a wide net encompassing many assets in both tangible and intangible categories, all combined into a new super-class of assets capable of being issued, traded and held in custody on a blockchain, a new blockchain-based financial ecosystem for traditional assets to migrate into — projected by Ernst & Young Parthenon to be $28.7 trillion by 2030:
Although any asset class can be tokenized, RWA opportunity is ripest in traditionally illiquid investments like commercial and residential real estate, debt instruments like bonds and treasury bills, collectables such as fine art, rare wine and other antique. Illiquid assets are difficult to quickly turn into cash. Large barriers exist in traditional markets, high minimum investment requirements for example, plus antiquated, inefficient platforms and processes. To minimize overhead, retail investors are intentionally excluded from investment opportunities in favor of just a few wealthy investors. This longstanding situation creates significant opportunities for RWA blockchain platforms which specialize in:
- Lowering costs up to 70% through automating administrative overhead in middle and back offices
- Tokenizing illiquid assets into smaller fractional units, issuing many more affordable tokens to a wider investor pool, significantly expanding the scope of investments retail investors can own and trade, accelerating the rate of investor democratization
RWA Genesis: Tokenization, Distribution and Trading
Creating RWA involves five phases as presented in a recent KPMG asset tokenization report:
Phases 1 and 2 involve asset tokenization where specification and due diligence is taken to transform an asset into a digital token suitable for custody and trading on blockchain. During this phase token value is linked directly to the value of the underlying Real World Asset so token holders retain legal ownership of the tokenized asset.
Phases 3, 4 and 5 involve distributing newly issued tokens into primary markets where investors can then purchase and trade them on the blockchain or over-the-counter (OTC) in secondary markets; depending on the asset class of the token, holders will receive coupon payments, dividends, principal and other lifecycle actions throughout the asset’s lifecycle.
RWA Tokenization Business Models
Financial organizations offering RWA products/services implement a business model that fits into one of five broad categories, from traditional off-chain issuance and trading, to fully on-chain RWA issuance and trading. Some models focus on certain asset types only, or only offer tokenization or exchange trading, rarely both. Traditional financial institutions issue and trade assets completely off-chain (Model 1). Most RWA projects today fall into Model 2 through 4 categories. Very few have managed to reach the highest realization, Model 5, where the entire RWA lifecycle is completely managed on-chain. Chintai’s RWA blockchain platform is a rare Model 5 offering.
Just How Significant is RWA?
Larry Fink, CEO of the world’s largest asset manager, BlackRock, has spent the past year emphasizing how traditional financial markets will be transformed by tokenization:
The next generation of financial markets and securities will be built on the tokenization of assets
Don’t believe me? Watch Mr. Fink expound upon “Tokenization”:
More About RWA And Chintai
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To learn more about RWA and Chintai’s mission to transform traditional financial markets with its comprehensive RWA blockchain platform, please visit chextoken.com and read these companion articles:
