Why RWAs: Bridging the Financial Gap
Last updated
Last updated
The modern financial system increasingly favors the wealthy, leaving the less affluent at a disadvantage. Wealthy individuals often have access to inflation-proof and high-performing assets, unlike the middle class. 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. Government regulations, while curbing malpractices, have inadvertently limited opportunities for average earners. As blockchain enthusiasts, it's crucial to enhance trust, transparency, and compliance to democratize access to these lucrative assets.
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.
There has been a significant trend of companies remaining private longer, limiting public investment opportunities. For instance, tech giants like Google, Tesla, and Amazon were significantly valued at their IPOs, long after early private investments had reaped substantial gains. This trend deprives the public of profitable investment opportunities during a company’s growth phase, typically reserved for affluent investors.
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.
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?
Investing early can significantly impact wealth accumulation, akin to how chefs perfect their craft over many years. Delaying investments can drastically reduce potential returns due to the power of compound interest. Real-life examples, like investing scenarios for individuals at different stages of life, can underscore the benefits of early financial planning and investment.
Imagine Sarah, who invests $1,000 at age 20 without adding more, and by the time she retires at 70, her investment could grow to about $32,000, assuming a 7.2% growth rate. However, if Sarah delays investing the same $1,000 until she is 30, her retirement fund would only reach about $16,000, and delaying until 40 would leave her with just $8,000.
Now, if Sarah decides to contribute $1,000 annually starting at age 20, she could potentially accumulate $465,000 by age 70. Starting at 30 would reduce her total to about $225,000, and beginning at 40 would further reduce it to about $105,000.
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.
All parent want good for their families and that is their top priority. Right now there are limited options for these families to invest when in the inflation hit countries. Access to global financial system will give these families a change to work on their own destiny.
