Web3 Makes RWA Opportunities Borderless by Becoming Trustless
One of the most promising innovations made possible by blockchain is the idea of tokenization, where physical, real-world assets such as cash, real estate, artworks and others can be represented as digital tokens. These tokens have the potential to transform the way financial markets operate, with numerous advantages for every stakeholder.
When real-world assets or RWAs are tokenized on platforms such as Centrifuge, Ironlight and MultiBank, the way they can be accessed, managed, bought and sold is dramatically simplified, and that has some important implications for the financial world. The process enables something truly novel in the creation of new, blockchain-based environments where digital tokens can represent real-world assets, increasing accessibility, democratizing ownership, and bringing more liquidity to the market.
One of the most promising benefits of tokenization is something known as "fractionalization". This refers to a physical asset such as a house or a car or a vintage bottle of wine being split into digital shares (like shares in a company) and owned by thousands of different investors and traded freely on public markets.
By fractionalizing RWAs such as real estate and art, we not only make these assets more accessible to smaller investors but also increase liquidity in their respective markets. For example, real estate is viewed as an illiquid market, especially in the case of more expensive properties, as these assets are only accessible to the ultra-rich and they can take a long time to sell. But if we tokenized a $1 million luxury penthouse and split ownership into one million tokens worth $1 each, those individual tokens can be bought and sold by practically anyone in seconds on a decentralized marketplace. That means retail investors can actually invest in such properties, and this increased access brings more liquidity to the market.
The Need For Trust
The potential of tokenized RWAs is an exciting one that has attracted a lot of attention from traditional financial institutions, but this nascent industry must overcome some challenges if it's to go mainstream.
One of the biggest roadblocks is the legal ambiguity surrounding the custody of the physical assets represented by these digital tokens. When an asset is tokenized, there needs to be a legal process through which those tokens are recognized as legitimate, legal representations of those assets in order to protect investors. At present, this is one of the most pressing headaches.
A related problem is that, even if an asset is held in the secure custody of a reputable firm, that custodian may only be subject to the regulations of the country it's based in, which means international investors may have less protections. The best way to get around this is to have a reputable, multinational financial institute handle the custody of such assets, as its operations will be regulated in multiple territories around the world.
Without any widely recognized custodians, the tokenized RWA world is unlikely to make much further inroads beyond the niche markets that exist today. Fortunately, there is some progress being made in this area. For instance, Chainlink has created a number of tools for handling the custody and provenance of RWA tokens, including its proof of reserve verification services and its on-chain identity system that makes it possible to quickly verify the ownership of any given RWA token. Chainlink's tools have attracted attention from leading financial institutions including Swift, Euroclear, Clearstream, BNP Paribas, BNY Mellon, and Citi, which recently demonstrated a proof of concept using its technologies.
Another major player working to bring tokenization to the mass market is Multibank.io, the crypto trading arm of Multibank.fx, which is one of the oldest and most reputable financial trading platforms with more than two decades of operation under its belt. Multibank enables users to trade a wide range of tokenized RWAs, representing equities, commodities and other asset classes. Users can be reassured of the validity of these assets as Multibank is one of the most heavily regulated exchange platforms of its kind, holding in excess of 14 licenses to operate across key markets such as the U.S., the U.K., and Europe. Its one million-plus user base highlights how the company has secured the complete trust and confidence of investors from across the globe.
These reassurances are necessary because the world of RWA tokenization remains fraught with risk. The crypto industry is well known for its scams and vulnerabilities, such as smart contract bugs, but the backing of a reliable platform can more than compensate for such deficiencies.
The Real-World Impact Of RWAs
By bringing much-needed validity to tokenized markets, the benefits of this exciting innovation are being made available to more investors than ever before,
Besides fractional ownership, tokenization also provides new options for businesses seeking financing. Smaller businesses' options have previously been limited to difficult-to-obtain bank loans and qualified investors, but RWAs give them a new way to seek capital. A small catering business owner, for example, could tokenize contracts that prove future revenue as a way to seek capital upfront. Alternatively, a developer building a luxury resort might tokenize those properties before they are built, giving early investors the opportunity to earn a share of the rental income they generate in return for funding the venture.
Tokenization also means more fluid markets. As mentioned, fractionalization brings more liquidity to traditionally illiquid asset classes, as it enables smaller shares to be bought and sold freely in an instant on the blockchain. Secondly, it reduces the need for intermediaries. Apart from the custodian, which only needs to participate when an asset is first tokenized, RWAs can be traded without the involvement of any party through the use of smart contracts. This reduces transaction times and costs significantly, ensuring that markets can operate 24/7 in the most streamlined fashion. This could make RWAs more attractive to investors, increasing the value of the underlying assets.
Blockchain can also increase the security and transparency of tokenized assets, as its decentralized nature makes it immune to tampering. As such, investors can have more confidence that they're buying an asset from its legitimate owner, and that confidence will be boosted even more if they know the marketplace they're buying it from is operated by a legitimate and respected financial entity.
Of course, there remains the risk of smart contract vulnerabilities and hacks, but innovations in digital asset security are fast addressing these concerns. The involvement of respected institutions in the industry will mean greater security investments and provide additional guarantees to investors, boosting confidence in the marketplace.