RWA Introduction
What are real world assets in Crypto?
Real World Assets, Asset Tokenization, and Asset Securitization are terms that essentially describe the same concept, though they have evolved over time. Initially popularized as Security Tokens (STOs) during 2019-2020, the terminology shifted to Asset Securitization in 2021-2022, and most recently to Real World Assets in 2023-2024. All these terms refer to the process of converting off-chain assets (those existing in traditional finance) to on-chain assets (digital tokens on a blockchain).
The technological processes involved in creating and trading these tokens, which represent real-world assets, are similar to those used for Utility Tokens or Governance Tokens. However, these asset-backed tokens differ significantly due to their legal implications. Virtually all tokens representing real-world assets are classified as "securities" under regulatory frameworks, necessitating adherence to specific legal requirements.
Asset Tokenization(RWA tokenization) Process
The diagram above shows the process of tokenizing assets. Builders with no experience in securitization or secondary markets often view "Phase 2 - Digitization" as the entirety of tokenization. However, to provide real value to investors, builders should ensure a seamless experience across all five phases of the tokenization process.
Since the assets being bridged onto the blockchain are securities, builders must ensure compliance throughout all phases of asset tokenization.
Note: Builders/Token Issuers need to consider the legal implications of both the jurisdiction where the token is issued (securitized) and where the token is distributed.
When distributing or enabling the trading of assets with retail investors, many jurisdictions may require obtaining necessary licenses, such as those for Dealers and Alternative Trading Systems, or engaging a third-party vendor that holds these licenses. Getting these licenses can take between 6-18 months and $100K-$500K as cost which includes application and legal fees of the security lawyers.
Need for Assets
The modern financial system is increasingly benefiting the wealthy while disadvantaging the less affluent. There are numerous reasons for this, one of which is that the wealthy have access to assets that are not only inflation-proof but also outperform those available in public markets. Although government regulations have effectively deterred many bad actors, they have simultaneously restricted opportunities for the middle class. As members of the blockchain community, we need to foster trust, transparency, and compliance to make high-performing assets accessible to all. Below, we discuss some reasons why it is crucial to extend these opportunities to the middle class.
Money Printing
Inflation is determined by the amount of money available to buy the same goods and services. Although human productivity and output have increased multifold, everyday necessities are becoming more expensive rather than cheaper. Along with the increase in the price of basic necessities, asset prices also continue to rise. The middle or lower class might have just 0-10% of their wealth in assets, while the wealthy have 90-99% of their wealth in assets. Therefore, printing more money inflates asset prices, making it more difficult than ever for the lower and middle classes to acquire real assets.
Below is a graph that relates to the amount of money that has been printed in the last 15 years. Whom should the middle and lower classes approach when their governments are making them poorer with each passing day? We see the same pattern in many Western economies, and in many countries, the situation is much worse.
Companies are choosing to stay private for longer
Companies are staying private longer Here's how much Google, Tesla, and Amazon were worth when they first sold shares to the public:
Google: Google started selling shares on August 19, 2004. Each share was $85, making the company worth about $23 billion.
Tesla: Tesla started selling shares on June 29, 2010. At that time, the company was worth approximately $1.15 billion.
Amazon: Amazon started selling shares on May 15, 1997. It was worth about $438 million.
From 2015 to 2022, before interest rates went up, you didn't see any big new companies starting to sell shares worth around $1 billion. Venture capitalists preferred to keep these companies private while they were growing fast. Most companies only started selling shares when their fast growth had slowed down. So, the public usually gets the less attractive deals while rich investors have had access to these companies much earlier. These investors can make a lot of money on their investments, while the public investors are left hoping for a small increase, which often just balances out the poorly performing investments. In contrast, one good investment can make up for 10-20 bad ones for these wealthy investors.
Here you can see that institutional investors have been reducing their holdings in public markets and fixed income funds and have been increasing their allocation in private investments. There private investments are not even available to public/retail
Crowdfunding a blackhole for public investors
US and other Western economies have introduced regulations that help companies raise capital from public investors. While this has been beneficial for many startups needing capital, it hasn't always served the best interests of public or retail investors.
Firstly, it's often the companies that cannot raise capital from VCs that opt for crowdfunding. This means that retail investors frequently get the worst deals. Furthermore, investments in these companies are illiquid, with no guaranteed returns. Only a few instances have allowed public or retail investors to liquidate their investments through trading or because the company went public.
On the other hand, wealthy individuals invest in funds that offer the option for early returns on their investments, whether when the company enters the next funding round or through the exchange of positions with other investors.
Did these new regulations created by the SEC act in the best interest of the investors or the companies raising the funds? Why not allow for the immediate trading of these investments so that retail investors can see the immediate and real market value of their investments?
Countries with high inflation
When living in countries with stable financial systems, we are mostly concerned with the growth of our wealth or earning more. However, many countries with large economies are experiencing very high inflation. Residents of these countries see the prices of necessities doubling every year, and sometimes even every quarter. For these people, the US dollar is considered the best asset, and many obtain US dollar cash to store at home. Facilitating the purchase, sale, and safekeeping of US dollars can greatly improve their lives.
This concept was unimaginable to me until a couple of years ago. I only realized the extent of these challenges after speaking with some people from these high-inflation countries.
As the crypto and real-world asset (RWA) builders, we can add real value to people's lives by offering trustworthy, accessible, and liquid assets.
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