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The Silent Revolution: The Shift Towards Asset Tokenisation in 2024 and Beyond
Matthew James Low, Head of Tokenisation
8 February 2024
Tokenised private credit, introduced in 2021, offered a middle ground in the risk-return profile within the crypto market, providing attractive risk-adjusted, non-correlated returns. This new asset class filled the gap between high-risk cryptocurrencies and low yield stablecoins, leading to the coining of the term "real-world assets" (RWAs). The scope of RWAs has since broadened, encompassing various asset classes, ranging from currency and money market instruments to private credit assets. This expansion signals a transformation in the investment landscape, integrating traditional financial instruments with innovative blockchain technology.
RWAs function through a three part structure: the physical assets, the information bridge (legal frameworks and token standards) and the on-chain presence (token issuers and smart contracts). For instance, the total value locked (TVL) in US Treasury bill-related products, a key RWA category, rose from $100 million at the start of 2023 to $784 million during the digital assets winter, reflecting the market's growing appetite.
Figure 1: The Structure of tokenised RWA (DigiFT Research - adapted)
Figure 2: Tokenised US Treasuries (Axios Visuals & rwa.xyz) – based on Daily data: Jan 2 to Aug 7 of 2023
The Dual Paths of RWA Issuance: Direct and Asset-Backed
The issuance of RWAs predominantly follows two models: the direct issuance model and the asset-backed model, according to a recently published report by DigiFT Research. These models exist due to the varying degrees of regulatory, technological and market readiness across different jurisdictions and sectors.
- The Direct Issuance Model: A more straightforward approach where assets are tokenised directly on the blockchain. This model is ideal in environments with advanced legal frameworks that recognise and support blockchain technology, such as Switzerland's Distributed Ledger Technology (DLT) Act. The appeal of this model lies in its ability to streamline processes, enhance transparency, and reduce costs associated with traditional asset registration and transfer. However, its adoption is limited in regions where legal frameworks are still adapting to the nuances of blockchain technology.
- The Asset-Backed Model: A response to regulatory and technological constraints in markets that are yet to fully integrate blockchain into their financial systems. In this model, real-world assets are represented on the blockchain indirectly, through tokens that replicate some rights of the underlying assets. This approach is more prevalent in major financial markets like the US, Singapore and Hong Kong SAR, where direct blockchain registration of securities is not fully supported by existing laws. The asset-backed model bridges the gap between traditional asset management and blockchain's capabilities, offering a compromise that leverages blockchain's benefits while navigating current regulatory landscapes.
As legal frameworks and market practices continue to evolve, these models play a crucial role in shaping the future of blockchain-based asset tokenisation.
The 2023 RWA Landscape: The Rise of Fixed Income RWAs and the path forward to 2024 for institutional Investors
Figure 3: Private Credit Tokenised RWA Total Value Locked (rwa.xyz) – as of 02/02/2024
In 2023, the landscape of tokenised real-world assets (RWAs) has been predominantly shaped by fixed-income products, with a significant focus on tokenised private credits and US Treasuries. The trend began in earnest around 2020, initially with private credit offerings that targeted unsecured loans, attracting attention from platforms like Maple Finance, Clearpool, and Centrifuge. However, the sector has experienced volatility, notably after major digital assets market upheavals that led to a sharp decrease in the Total Value Locked (TVL) from approximately $1.5 billion to $256 million at the outset of 2023.
Figure 4: RWA TVL Rankings (DefiLlama) - as of 08/02/2024
This contraction reflects the market's sensitivity to broader economic conditions and specific digital assets market events. Conversely, tokenised US Treasuries have witnessed a surge in demand, attributed to the higher interest rates in the broader economy and the search for yield within the digital assets space. DeFi Llama notes a steady increase in TVL for US Treasuries-related RWA projects, from $100 million at the start of 2023 to $784 million by November, indicating a clear appetite for such assets among investors. These absolute amounts show that the market for tokenised RWA has remained for early adopters, however, the prospects for 2024 and beyond means it is coming up from the “trough of disillusionment” – as per the Gartner Hype Cycle (below).
Figure 5: Gartner Hype Cycle (Wikipedia)
This interest in tokenised US Treasuries has been further exemplified by significant projects on the Stellar public blockchain by asset management firms such as Franklin Templeton and Wisdom Tree, which have collectively secured hundreds of millions of dollars in TVL. Despite these projects being more centralised and utilising blockchain primarily as a record-keeping tool rather than for full decentralisation, their success underlines the growing institutional and investor confidence in tokenised assets.
Fasanara believes this trajectory in 2023 sets a foundation for 2024, which suggests a continued expansion and diversification in the tokenisation sector. As traditional financial mechanisms blend more seamlessly with blockchain technology, we anticipate a broader acceptance and integration of RWAs, potentially leading to more innovative financial products and investment strategies that cater to a wider audience while navigating the regulatory and economic landscapes.
Figure 6: Tokenised Treasuries Report 2023 (rwa.xyz)
The Accredited Investor Focus: A Necessity Amidst Regulatory Complexities
Most RWAs in the current digital assets market cater to qualified or accredited investors, primarily due to the high costs and regulatory complexities associated with offering these assets to retail investors. This limitation reflects stringent investor requirements and the elaborate steps necessary for issuing securities. The complexity arises partly from the requirement for a 'bridge' between the underlying assets and the issued tokens, in compliance with securities laws. This means that the token must independently comply with all relevant securities laws, including the preparation and registration of a comprehensive investor prospectus.
The process of issuing securities to retail investors involves multiple steps from due diligence of underlying assets to prospectus preparation and distribution. Each of the steps in this process adds layers of complexity and cost. Given the relatively smaller size of the digital asset market compared to traditional markets, these high costs and the lack of stable returns in the market today make direct offerings to retail investors prohibitive.
Further, the current infrastructure for these tokens is incomplete, lacking regulatory compliant securities exchanges to facilitate trading and securities registration agencies that support tokens as proof of ownership. Consequently, most RWAs are structured as debentures using a Special Purpose Vehicle (SPV) as the issuer with underlying assets like US treasury bills or credit notes, generally introducing high counterparty risk. This structuring could potentially downgrade the credit rating of the underlying assets, affecting investor confidence and the appeal of these tokens to a broader market, or introduce complexity to remove granularity in the details behind the RWAs being tokenised. However, partnerships between tokenisation platforms and asset managers could help counter these outcomes through extensive due diligence on the RWAs, as partnerships such as Fasanara with Untangled Finance or Standard Chartered Ventures with Libeara demonstrate.
Therefore, the unwavering focus on qualified investors is not just a preference but a necessity, driven by the current global regulatory and infrastructural environment. This focus limits broader market access to RWAs, potentially slowing down their widespread adoption.
Friend or Foe: The Impact of the Bitcoin ETF on RWA adoption
Bitcoin ETFs have significantly influenced the digital assets market and the realm of tokenised real-world assets. As a bridge between traditional finance and the world of digital assets, Bitcoin ETFs enable a wider range of investors to engage with Bitcoin indirectly, fostering liquidity and increasing trading volumes in the digital assets market. This accessibility appeals particularly to institutional investors and retail traders, who might find direct investment in digital assets complex or risky. This is further exemplified by a recent commentary (excerpt below) on the subject by BlackRock Chairman & CEO – Larry Fink at The World Economic Forum in Davos. The regulatory stance on Bitcoin ETFs, whether positive or negative, also plays a crucial role, as it affects market sentiment, driving bullish or bearish trends in both digital assets and related tokenised asset markets.
We said the fixed income market will be transformed through ETFs. That has now happened. Yesterday, we had the first day of Bitcoin ETFs and our reorganisation is taking that ethos of what has happened over the last 10 years. We believe everything will be done through ETFs. And so, we believe this is just the beginning. —Let me be clear, I think ETFs are step one point in the technological revolution in the financial markets. Step two is going to be the tokenisation of every financial asset. And to me, this is where we believe it’s going so, we’re looking at Bitcoin, we’re looking at ETFs in the same manner, these are technological changes that can allow us to move forward. – Larry Fink, BlackRock Chairman & CEO (World Economic Forum, Davos)
The entry of institutional investors through Bitcoin ETFs is a key step towards the maturity of the digital assets market. It signals a growing acceptance of digital assets within the traditional financial ecosystem, potentially paving the way for a broader range of digital assets-based financial products, including those involving tokenised real-world assets. The impact of Bitcoin ETFs thus extends beyond their immediate market function, influencing the regulatory landscape, investor behaviour, and the overall perception of digital assets and tokenised assets. This evolving narrative continues to shape the financial sector, promising further integration and acceptance of digital and tokenised assets.
Figure 7: Bitcoin ETF holdings of BTC Supply (Ecoinometrics.com) – Updated January 28, 2024
The Future Outlook: Embracing the Potential of RWAs
As the curtain falls on 2023, the financial landscape is undeniably transitioning towards a new paradigm where tokenisation is not just an emerging trend but a fundamental aspect of asset management and investment. The journey from the introduction of tokenised private credit in 2021 to the broadening scope of RWAs has illustrated a clear shift towards integrating traditional financial instruments with the innovative capabilities of blockchain technology. The substantial growth of Total Value Locked in US Treasury bill-related products, from a modest inception to a formidable presence, underscores the increasing trust and interest from the market in these digital asset forms.
Looking ahead to 2024, the momentum built around RWAs, particularly in the fixed-income domain, hints at an evolving tokenisation sector ready to embrace further diversification and expansion. The role of institutional investors in the fight for a Bitcoin ETF, amplified by projects like those undertaken on the Stellar blockchain by financial behemoths Franklin Templeton and Wisdom Tree, has been pivotal. Their success signals a year where traditional financial mechanisms are expected to merge more seamlessly with blockchain technology, indicating a broader acceptance and integration of RWAs. This anticipated trajectory is poised to unlock innovative financial products and investment strategies, catering to a more diverse investor base while adeptly navigating the intertwined regulatory and economic landscapes that define our times. The focus on qualified investors, necessitated by regulatory complexities, underscores the ongoing dialogue and developments needed to bridge the gap to more inclusive market participation. As we look ahead at what 2024 has in store, the financial sector stands on the cusp of a more open, transparent and efficient era, powered by the silent revolution of tokenisation.
To learn more about Fasanara’s tokenisation strategy, please reach out to Matthew James Low, Head of Tokenisation.