By Raj BagadiFounder and CEO of Electronic money network
The world can be divided into two groups: the crypto community and the crypto skeptics. Unfortunately, even though crypto has stood the test of time, crypto skeptics far outnumber crypto advocates. Their criticism of cryptocurrency investments focuses on the risky, volatile and unregulated nature of these investments. They prefer to settle for the comfortable familiarity of traditional investments, recognized as legal and operating within regulatory frameworks perceived as safer. However, the crypto industry is on the cusp of a revolution that could well bridge the gap between the crypto and non-crypto communities.
At the heart of the next phase of the crypto industry’s evolution are real-world assets (RWAs) such as real estate, commodities like gold and oil, art, and luxury goods.By enabling the tokenization of RWA, we enable these assets to be transferred into the crypto realm. This is done by creating digital representations of physical assets on a blockchain.Essentially, RWA tokenization combines the security and efficiency of cryptography with the reliability and stability of traditional physical assets.
Asset tokenization overcomes several issues that traditional finance faces when dealing with real-world assets. For example, high-value traditional assets that are difficult to liquidate as a single entity can be divided into smaller, manageable portions and tokenized. This makes it easier to sell these small, fractional entities. These RWAs can be held as investments, traded freely on RWA markets, or deployed in DeFi protocols to earn interest or benefit from loans. Additionally, blockchain brings efficiencies and enhanced transaction security to traditional physical asset management. Thus, by solving real-world problems and providing users with greater flexibility in managing their assets, RWA tokenization is incentivizing traditional investors to embrace crypto.
By attracting more users to cryptocurrencies, RWA tokenization also improves the liquidity of cryptocurrencies, which is currently significantly lower than in the traditional financial sector. Take Ethereum for example. ETH is one of the most prominent uses in DeFi protocols in the Ethereum ecosystem as the native asset and default collateral. Thus, ETH primarily derives its value from its use on DeFi platforms by crypto users. However, RWA tokenization is poised to transform DeFi by allowing users to deploy their RWA such as real estate and commodities as collateral in lending and borrowing protocols. In doing so, it will increase the demand and liquidity of ETH by expanding the DeFi user base and transactions.
Although the RWA industry is still in its infancy, it is already growing rapidly and being adopted by financial giants. The current TVL of the RWA market is more than $6 billionled by tokenized U.S. Treasury products from BlackRock and Franklin Templeton. New projects in other real-world assets such as real estate, intellectual property and data are emerging with the promise of expanding and accelerating the growth of the RWA sector.
A crucial point to note is that this new wave of RWA-led growth is happening at a very opportune time, as regulatory compliance is becoming mandatory for the crypto industry. In Europe, the first phase of Regulation of Crypto-Asset Markets (MiCA) has been implemented recently. Several other countries including the United States, the United Kingdom, Singapore and Japan have also implemented measures on cryptocurrency-specific taxation, anti-money laundering and counter-terrorism financing, consumer protection and licensing policies.
Let me explain why compliance is crucial for RWAs. RWAs fundamentally require compliance measures because in the real world, it is imperative to link real-world identities to assets. In the traditional economy, there are government agencies and well-established mechanisms that maintain ownership records of real-world assets such as real estate and vehicles. When it comes to RWA tokenization, it is important to ensure that the practice of accurately recording ownership data is also followed in the crypto space to ensure the legitimacy and trustworthiness of the tokenized assets.
Thus, had the RWA tokenization wave emerged before the regulation was in place, it is likely that it would have faced considerable challenges in gaining the trust of the community. Without regulatory frameworks to protect users and ensure market integrity, the credibility of tokenized assets would have been low, leading to skepticism from individual investors and financial institutions. However, with the rise of regulation, all developments centered around RWA will fall under the purview of the law, which will reassure investors.
Another thing to note about the RWA sector is that most existing blockchain infrastructures are deficient when it comes to facilitating regulatory compliance in RWA projects. Using public blockchains like Ethereum will pose regulatory and compliance challenges for RWA projects as they do not have a comprehensive compliance layer to meet the regulatory requirements of real-world assets. For example, a global commodity ETF like Global X Silver Miners ETF (SIL) requires a regulated blockchain for transactions to be settled in a compliant manner. The use of blockchain in global silver ETF trading will enable real-time settlement in a 24/7 market, leading to increased liquidity and better price discovery. Thus, to facilitate the compliance-driven growth of RWA projects, the industry is also witnessing the development of RWA-centric infrastructure. Electronic money networkfor example, is a blockchain that has built-in compliance modules to ensure that every transaction and process is compliant by default.
It is safe to say that RWA tokenization is nurturing a symbiotic relationship between real-world assets and crypto, from which both traditional investors and crypto can benefit. I believe that putting real-world assets on blockchain rails will become common practice in the next 5 years, with RWA on blockchain becoming a $5-10 trillion market. Emerging RWA projects should keep in mind that they need to have a strong use case and a user-friendly product that caters to both seasoned crypto enthusiasts and newcomers to achieve product-market fit. More people using the product will validate its success and lead to greater crypto adoption.
About Raj Bagadi
Founder and CEO of Electronic money networkOver 10 years of experience in global Fintech and banking.
Raj Bagadi is an accomplished entrepreneur with a diverse background. He holds a Postgraduate Diploma in Business Development and Management and a Postgraduate Certificate in Economic Development from the University of Oxford.
Raj is also a certified UK Anti-Money Laundering Specialist and has extensive experience in the financial sector, including providing technical and software solutions to blockchain and cryptocurrency start-ups as an advisor. He is the Founder and CEO of E Money Network, a modular RWA blockchain.
He also holds a bachelor’s degree in aeronautical engineering and a master’s degree in aerospace technology.
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