Bittime - Recently, Real World Asset (RWA) has been talked about more and more. RWA tokenization could ultimately link blockchain with RWA, opening up a wide range of practical applications for decentralized technology. Therefore, this innovative development is poised to bring crypto into the mainstream.
However, the current blockchain ecosystem is not yet fully ready to host this new mainstream audience. This doesn't mean that the technology isn't ready. However, there are lessons to be learned from traditional financial markets before we start seeing billions, or even trillions in RWA assets moving on-chain, especially when it comes to security, regulation, and identity verification. Without these core principles, RWA tokenization will remain an experimental technology.
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Scaling Up
To achieve RWA tokenization at scale, companies working on this will have to shift their focus. Currently, RWA tokenization is being trialled by several large institutional players. The latest news comes from Citi bank, which brought a private equity fund issued by Wellington Management to the Spruce Avalanche subnet. The network was launched last April for institutions looking to test trade execution and settlement on-chain.
Like other giant banks, including JP Morgan and DBS Bank, Citi has been testing the feasibility and potential applications of blockchain technology in the financial sector in Project Guardian, led by the Monetary Authority of Singapore (MAS). However, although this collaboration has seen some interesting developments that hint at the potential future success of RWA tokenization, to date it is only an experiment and proof of concept.
Although some RWA assets have begun moving on-chain, such as US government bonds, this so far represents a small proportion of the asset class's total market capitalization. For example, the total value of bonds issued will be under $700 million in November 2023, according to 21.co. This is a fraction of the total size of the US government bond market, which stands at $26 trillion, based on data from the Securities and Exchange Commission (SEC).
Also Read: What are Real World Assets (RWA), and what is their function in DeFi?
Regulatory Barriers
To bring the trillions of dollars currently traded in traditional stocks, equities, real estate and more onto the blockchain, we need to stop just talking and focus on the practical aspects of RWA tokenization. First and foremost, this means understanding how RWAs fit within the global regulatory framework.
As with the entire decentralized finance (DeFi) ecosystem, RWA tokenization faces a number of regulatory hurdles. For example, when it comes to the tokenization of real estate, in theory this should be subject to the same laws as other property investments.
However, different jurisdictions have different regulations to govern real estate transactions, making it difficult to establish a uniform framework for the global property tokenization market. Solving this fragmentation problem should be a top priority for regulators around the world.
To bring tokenization to the mainstream and truly reap its benefits, we need to revisit the global regulatory framework and adapt it to the modern world of blockchain technology.
We need fit-for-purpose DeFi regulation, which must cover all its different aspects: decentralized governance, privacy, speed of innovation, and the global nature of DeFi. With a comprehensive framework, we can move forward to bring RWA tokenization to the mainstream - not just to the testnets of a few select institutional giants.
Also Read: 5 RWA Crypto Projects to Pay Attention to in 2024
Focus on Security
However, it is not just outside regulatory influences that will shape the future of RWA tokenization. The blockchain industry must also adapt to help trillions of dollars move across chains seamlessly.
Part of this will depend on the scalability of existing blockchain networks. We see a lot of development happening in this arena, with Ethereum firmly focused on scalability throughout its planned development over the next few years, which should support the expansion of RWAs on the blockchain.
However, we need to see more focus on security. Instead of simply testing the technology, we must ensure that the blockchain world meets the stringent standards of traditional financial markets, because that is where the money will come from.
Also Read: What is Real World Assets (RWA) Tokenization? This is what you need to know
Identity Verification
This means crypto can no longer pay the price of the attacks and exploits that have plagued this space, resulting in losses of $1.7 billion in 2023, according to Chainalysis. We believe this cannot be achieved without a certain degree of compromise. Therefore, the DeFi ecosystem must embrace identity verification to minimize these risks and make large-scale RWA tokenization on-chain sensible.
This identity verification process must be adapted to the world of DeFi to maintain the privacy elements that are an important part of its ethos, but there are ways to get the best of both worlds. For example, soul-bound NFTs and zk-rollups offer solutions that facilitate anonymous identity verification, allowing users to transact within the DeFi ecosystem securely without exposure.
This enhanced level of security is exactly what we need to facilitate the shift of trillions of dollars in mainstream capital on-chain. It will take time for regulatory frameworks to catch up to the enormous potential of RWA tokenization, but blockchain technology is perfectly positioned to lead the way, if we are willing to build and maintain this bridge between digital and real assets.
Also Read: Types and List of the Best Crypto Real World Assets
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DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.
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