An Introduction to the Tokenisation of Real World Assets (RWAs)

As decentralised finance (DeFi) continues to mature, its integration with real-world economic systems is becoming increasingly profound. A key driver of this trend is the rise of tokenised Real-World Assets (RWAs), which bridges the gap between DeFi and traditional finance (TradFi). Over the past 18 months, the market capitalisation of RWAs, excluding stablecoins, has surged dramatically, growing from approximately $2 billion to over $8 billion US dollars (USD).[1] This fourfold increase has been predominantly fuelled by a growing demand for tokenised, yield-bearing financial assets. In the current climate of high interest rates, these interest-bearing assets have become increasingly attractive to investors, contributing approximately $5.5 billion of the total $8 billion market capitalisation.

However, while there seems to be a resurgence in the discussions around RWAs, the concept of tokenising RWAs is far from new. The foundation for this trend was laid by stablecoin providers like Tether, which have been issuing tokenised representations of the US Dollar since 2014. These stablecoins have become foundational elements of the DeFi ecosystem, offering a stable medium of exchange and store of value, which has allowed them to amass a substantial market capitalisation over time. Currently, the $160 billion dollar market capitalisation of stablecoins significantly surpasses that of other RWAs, such as tokenised commodities, financial assets, and other tangible goods.[2] However, the burgeoning interest in generating yield from off-chain assets is now driving substantial growth in the tokenisation of traditional financial instruments like treasury bills and bonds.

In this article, we explore the complexities of RWAs by examining the market trends and growing demand for these assets, the intricacies of the tokenisation process, and the broader risks and benefits associated with RWAs. While the range of assets being tokenised is extensive—from precious metals like gold to diverse real estate holdings—our focus here is specifically on the tokenisation of financial assets.

What is RWA Tokenisation?

RWA tokenisation leverages smart contracts and blockchain technology to represent ownership or entitlements to an asset as a tradeable token on the blockchain. This token acts as a digital certificate of ownership, capable of representing almost any valuable object, whether physical, digital, fungible, or non-fungible. Furthermore, tokens can embed revenue-sharing models, profit participation rights, interest rights, or other financial entitlements. They can also grant the holder of the token the right to demand the fulfilment of service by the token issuer.

Tokenised assets offer numerous potential advantages and added utility compared to their non-tokenised counterparts. Tokenisation transforms traditionally illiquid assets into more liquid forms, enhancing accessibility to investment opportunities that were previously restricted. Tokenisation also increases transparency in ownership and ownership history while reducing administrative costs related to asset trading, including management, issuance, and reliance on financial intermediaries. Additionally, it provides an avenue for assets that were previously unable to access the DeFi ecosystem to be stored, traded, and used as collateral across blockchain networks, thereby broadening their utility and integration. It is therefore perhaps unsurprising to find that in the latest Coinbase State of Crypto report, 35% of Fortune 500 companies are planning future tokenisation projects and 86% of them recognise the potential benefits of tokenising RWAs for their company.[3]

The process of tokenisation depends on the type of asset being tokenised, however, most financially orientated tokenised RWAs typically undergo the following process:

1. Acquisition and Custody of Assets:

Financial Asset Acquisition: Financial institutions or licensed fund managers purchase and hold the financial assets to be tokenised. These assets could include Treasury bills, corporate bonds, or private credit instruments. For money market funds, the issuer collaborates with treasury or bond brokers to acquire these instruments or may directly subscribe to Treasury purchases from the US Government.
Custody and Safekeeping: All acquired assets are securely held by a custodian. The custodian maintains an updated list of holders and their balances, ensuring proper safekeeping and regulatory compliance.

2. Compliance and Regulatory Adherence:

Regulatory Compliance: As the fund is a regulated capital market product, it must adhere to relevant rules and regulations, and KYC requirements. There may be limitations on which investors can participate, ensuring compliance with financial regulations and safeguarding against illegal activities.
Fund Management: The issuer, who also acts as a licensed fund manager, creates and manages the money market fund. This involves strategic decisions on asset acquisition and maintaining the fund's compliance with financial regulations.

3. Tokenisation Process:

Technical Implementation: The entity responsible for tokenisation chooses the blockchain network and determines the token's technical standards e.g. ERC20, ERC721, or ERC1155. The token code specifies the total supply of tokens, ownership structure, and processes for minting and redeeming tokens.
Issuance of Tokenised Units: After the fund is created and assets are secured, the fund manager issues units of the money market fund as tokenised assets. These digital tokens represent ownership or a claim on the underlying financial assets.

4. Verification and Auditing:

Collateral Verification: To ensure the circulating token supply is backed by the reserve assets, third-party auditors verify the value of the collateral. This step enhances transparency and builds investor confidence. The verification process varies based on the type of asset being tokenised:
- Illiquid and Unique Assets: For assets like fine art or collectables, professionals and independent appraisers with specialised expertise assess their value.
- Traditional Financial Assets: For assets such as bonds or cash reserves, established financial auditing firms conduct the verification, ensuring compliance with standard financial practices.
On-Chain Solutions: Some issuers adopt on-chain solutions to provide real-time information about the value of their reserves. Systems like Chainlink oracles are used to feed up-to-date data directly to the blockchain, allowing continuous, automated verification and reducing the need for periodic manual audits.[4]

5. Secondary Trading and Liquidity:

Facilitating Secondary Trading: In certain instances, the issuer may establish a secondary trading venue for these tokenised assets. This platform allows qualified users to trade tokens among themselves (Peer-to-peer), enhancing the liquidity and marketability of the tokens.
Maintaining Market Dynamics: The trading venue may include features such as order matching, trade settlement, and compliance checks, providing a robust and compliant environment for trading tokenised assets.

Types of RWAs

There are many ways that we can think about categorising RWAs. For instance, we can group RWAs by the type of underlying asset that is being tokenised, whether the asset is yield-bearing or not, by the function or use of the token, or by the rights pertaining to token holders. While an exploration of the various types of RWAs is warranted, the focus of this article will primarily be on assets of a financial nature, distinguished by the underlying asset being tokenised. Specifically, in this article, we examine the following RWAs:

Currencies (Stablecoins)
U.S. Treasuries
Private Credit
Corporate Debt

Currencies

The first assets to receive mainstream tokenisation were fiat currencies, the reason for this is twofold. The complexity of tokenising currencies is relatively low compared to other financial assets, and the demand for these assets is relatively high given the volatile nature of crypto assets. These assets are commonly referred to as stablecoins and are designed to track the price of an official currency. Popular stablecoins such as USDT and USDC which both track the US Dollar are issued by centralised entities responsible for managing the circulating supply of the tokens as well as maintaining a 1:1 backing of reserve assets. For an in-depth discussion of the market dynamics for stablecoins see our Stablecoin Foundations Report.

The current market capitalisation of stablecoins is sitting around $165 billion, which is nearing the 2022 high of roughly $180 billion.[5] The vast majority (over 99%) of the stablecoin market is comprised of USD-denominated stablecoins. While the market of non-USD stablecoins has seen substantial growth, as seen by the increase in the market capitalisation of Euro-denominated stablecoins from roughly $80 million in 2021 to roughly $600 million today,[6] demand for non-USD denominated stablecoins remains comparably low as evidenced by the disproportionate number of USD-stablecoins denominated trading pairs on popular exchanges.

Tether Limited is the largest stablecoin issuer, with its USDT stablecoin capturing over 70% market share with a market capitalisation of roughly $115 billion.[7] USDT exists on multiple blockchain networks, with the majority of its tokens being issued on TRON and Ethereum.[8] Apart from its US Dollar backed stablecoin, Tether has expanded its product offering to include various other currencies such as tokenised representations of the EURO, MXN and CHN. Tether issues quarterly proof-of-reserve reports detailing the breakdown of assets custodied by the company which are verified by BDO, an independent accounting firm. The latest report indicates that cash and cash equivalents comprise 84% of Tether’s reserve assets.[9]

Stablecoin issuers such as Tether follow a similar minting and redemption process to maintain the supply of their stablecoins at any given moment. This is managed through a process known as minting and burning. When a whitelisted entity wants to purchase USDT, they send US Dollars to Tether Limited. In response, Tether mints an equivalent amount of USDT and issues it to the customer's wallet on a supported blockchain, such as Ethereum or TRON. This newly minted USDT is now in circulation and backed by the deposited dollars. Conversely, when a customer wants to redeem their USDT for US Dollars, they send the USDT back to Tether. Upon receipt, Tether burns, or permanently removes, the USDT from circulation and transfers the equivalent US Dollar amount back to the customer. This process ensures that the number of USDT in circulation always matches the dollar reserves held by Tether, maintaining the stablecoin's peg to the US Dollar.

Decentralised stablecoins such as DAI and more recently Aave’s GHO represent another faction of the stablecoin market. These stablecoins are managed by decentralised autonomous organisations (DAOs) and are often over-collateralised by other crypto assets to maintain price stability. Users can mint and redeem these stablecoins by depositing volatile crypto assets such as Ethereum into the protocol’s smart contracts. However, many decentralised stablecoins are starting to diversify their reserves from crypto assets into RWAs. The rationale behind this is not only to diversify holdings and reduce the systematic risk of issuing a stable token collateralised by volatile crypto assets but also to increase exposure to real-world low-risk yield opportunities, primarily through purchasing products such as money market instruments and treasury bills. This trend is perhaps best exemplified by MakerDAO’s strategic decision to pivot the collateral base of DAI to include RWAs, which now make up over one-third of DAI’s collateral base.[10]

Recognising the success of tokenising currencies, stablecoin issuers such as Tether started expanding their product offering by tokenising commodities such as gold. This led to the creation of XAUt, a token designed to track the price of gold with minting and redemption characteristics similar to fiat-pegged stablecoins. In fact, in June of this year, Tether announced the launch of Alloy – a new stablecoin (ticker: aUSDT) designed to track the value of the USD but which utilises an over-collateralisation model backed by Tether Gold (XAUt).[11] The attraction of this product is that it allows investors to maintain exposure to the price of gold while having additional ownership over a stablecoin which can be used in other on-chain activities. However, while a discussion on the market for tokenised commodities is of interest, it is beyond the scope of this article.

Given the historical success and growing utilisation of stablecoins, we are likely to witness increasing competition and innovative developments in this space. Stablecoins are expected to expand their appeal by capitalising on real-world yield opportunities, integrating assets like treasury bills to offer both stability and returns. Furthermore, stablecoin providers are likely to diversify their offerings by pegging tokens to a wider array of fiat currencies, including more exotic ones.

U.S. Treasuries

One of the leading narratives of 2023 was the emergence of tokenised U.S. Treasury Products which together captured a market capitalisation of roughly $800 million.[12] This momentum carried into the current year, with the market capitalisation of these products now reaching around $1.5 billion.[13] The main driver behind the demand for these products has been the increase in the U.S. Federal Funds Rate alongside decreasing DeFi yield opportunities.

Growth in the tokenisation of U.S Treasuries in early 2023 was concentrated in Franklin Templeton’s tokenisation of the Franklin U.S. Government Money Fund through its FOBXX token.[14] The fund was the first U.S. registered fund to use a public blockchain (Stellar) to record share ownership and process transactions. At the start of 2023, roughly 90% of funds allocated to tokenised Treasuries were secured by Franklin Templeton, however, as the sector grew, Franklin Templeton lost market shares to competitors. By the end of 2023, the market of tokenised Treasurys grew to nearly $800 million, of which Franklin Templeton owned roughly 50%. Growing demand for tokenised treasuries encouraged new market participants in 2024. The largest and most recognised institution which joined the space was BlackRock which incorporated the BlackRock USD Institutional Digital Liquidity Fund (BUIDL) in March 2024.[15] The BUIDL token operates on the Ethereum blockchain, and the fund invests 100% of its underlying assets in cash, U.S. Treasury bills and repurchase agreements. Since launch the BUIDL fund has grown to a market capitalisation of roughly $460 million becoming the largest on-chain treasury product available today.

The structure of tokenised U.S. Treasury products is often tailored to meet the needs and requirements of institutional investors. These products typically feature high minimum investment thresholds to ensure they cater to large-scale investors rather than individual retail investors. For example, the BUIDL tokenised Treasury offering requires a minimum investment of $5,000,000. This high entry point reflects the targeted demographic of these financial instruments, which includes institutional entities such as hedge funds, asset managers, and corporate treasuries, who seek secure and regulated exposure to government debt. Other notable Treasury products such as the Ondo Short-Term US Government Bond Fund or the Superstate Short Duration US Government Securities Fund have a minimum deposit threshold of $100,000. The vast majority of tokenised Treasury products incorporate whitelisting functionality, which restricts ownership and transfer capabilities to verified, KYC-compliant accounts. This ensures that only accounts that have undergone identification processes can hold these tokens and transfer them to other similarly vetted accounts. Whitelisting not only enhances security and compliance with regulatory standards but also provides a controlled environment that appeals to institutional investors.

As of now, there isn’t a readily accessible and transferable tokenised Treasury product tailored for retail investors. However, the rise of interest-bearing stablecoins, some of which are collateralised by U.S Treasurys, are beginning to fill retail investors growing demand for on-chain yield. These stablecoins, such as Mountain Protocol’s USDM, allow users to indirectly earn yields associated with U.S. Treasury securities, either through price appreciation or through rebasing. By holding these stablecoins, investors benefit from the security and returns of Treasuries without the complexities of direct investment. Furthermore, these stablecoins are permissionless and freely transferrable, opening opportunities to be integrated with other DeFi activities.

Private Credit

Another popular application of RWAs is the $1.6 trillion market for private credit.[16] Private credit refers to non-publicly traded debt instruments typically provided by private lenders to companies or individuals, example include direct loans, real estate loans, and mezzanine debt.

Since 2022 the total value of tokenised private credit loans has grown from roughly $1 billion to nearly $8 billion.[17] Of this, nearly $7 billion of loans are facilitated through Figure, a pioneering financial technology company. Figure utilises its proprietary blockchain platform, Provenance, to streamline and secure the lending process. One of their flagship products is the Home Equity Line of Credit (HELOC), which enables homeowners to access their home equity through a streamlined, digital process that is often completed within days.[18] Additionally, Figure provides crypto-backed loans, allowing borrowers to use their ETH or BTC holdings as collateral.[19] The Provenance Blockchain was launched by Figure in 2018 and rebuilt as a public chain in 2021, it is a public, open-source, proof-of-stake blockchain built using the Cosmos SDK and Tendermint consensus module.

The largest tokenised private credit protocol on Ethereum is Centrifuge with roughly $280 million in outstanding loans.[20] Centrifuge is a protocol which provides both the infrastructure and applications to tokenise, manage and invest in RWAs. While the Centrifuge protocol is built as a Polkadot parachain using Substrate, Centrifuge liquidity pools allow for integration with any EVM blockchain.[21] Liquidity pools on Centrifuge are fully collateralised and investors in the pools have legal recourse to the underlying assets.[22] While Centrifuge is asset agnostic and has tokenised pools representing U.S. Treasuries, residential real estate and corporate credit, the protocol’s two largest pools represent structured private credit lines which are securitised and managed by BlockTower, a SEC-registered investment firm.

Centrifuge has integrated with other DeFi protocols to extend its reach and provide broader exposure to real-world yields on-chain. For instance, MakerDAO, a leading decentralised stablecoin platform, invests in Centrifuge's asset pools to back its DAI stablecoin with tokenised real-world assets. This collaboration allows MakerDAO to diversify its collateral base with stable, income-generating assets like Treasury bills, enhancing the stability of DAI.

The weighted average rate that borrowers are paying on loans across the eight largest private credit tokenisation protocols is 9.59%.[23] The largest tokenised private credit market is currently consumer loans at $210 million followed by auto loans at $200 million while loans for fintech and real estate sit at roughly $90 million and $50 million respectively.

While the demand for tokenised private credit has grown significantly in recent years, the market capitalisation is still a slither of the estimated $1.6 trillion private credit market in traditional finance.

Tokenised Corporate Debt

According to an analysis conducted by the Hong Kong Monetary Authority, by the end of 2023, the estimated value of tokenised bonds globally was $3.9 billion, with 70% of this being issued by Asian financial institutions and 30% by European financial institutions.[24] Of this $3.9 billion, 90% of the issuances occurred in or after 2021 highlighting the significant growth in the tokenisation of corporate debt in recent years.

At the start of 2023, the European Investment Bank utilised Goldman Sach’s Digital Asset Platform to issue €100 million worth of digital bonds on its private blockchain.[25] More recently in 2023, Dutch investment bank ABN AMRO issued €450,000 in digital bonds on the Stellar blockchain in collaboration with Fireblocks and Bitbond.[26]The digital bond was registered for a minicorp client and was issued to a select number of approved investors. Another notable example includes Siemens issuing a €60 million 1-year bond on Polygon, purchased by DekaBank, DZ Bank and Union Investments.[27] These instances are just a few of the increasingly frequent examples of financial institutions leveraging blockchain technology to issue tokenised bonds at scale, reflecting a broader shift in appetite for digital innovation across the TradFi sector.

A significant portion of developments in RWA tokenisation has been unfolding on private rather than public blockchains. Private blockchains offer a controlled environment where access is restricted to approved participants, facilitating easier compliance with regulations and enhancing data confidentiality to permissioned node operators. Using private blockchains also means that bond issuers and buyers aren’t competing for blocks space on public networks which could occasionally result in network congestion and higher gas costs. However, compared to public networks, private blockchains often sacrifice transparency and decentralisation, limiting network robustness and security. In contrast, generally, public blockchains, while offering broader participation, greater transparency, and decentralisation, face challenges with regulatory acceptance and operational efficiency.

Despite the trade-offs between public and private blockchain networks, tokenising bonds offers significant efficiency and cost advantages over traditional bond trading mechanisms. An empirical study by the Hong Kong Monetary Authority highlights these benefits, showing that tokenised bonds reduce underwriting fees by an average of 0.22 percentage points (ppt) of the bond’s par value and decrease borrowing costs by an average of 0.78 ppt compared to conventional bonds issued by the same entities.[28] Additionally, tokenised bonds demonstrate superior liquidity, evidenced by lower bid-ask spreads – 5.3% less than similar conventional bonds. This liquidity improvement is even more pronounced, reaching 10.8%, when the tokenised bonds are accessible to retail investors. Moreover, the presence of tokenised bonds can enhance price discovery for conventional bonds, as their bid-ask spreads decrease by 8.5% following the issuance of the corresponding tokenised bonds.

The Future

The potential for RWAs to transform the traditional financial world is perhaps best underscored by Boston Consulting Group's (BCG) recent prediction that the market for tokenised RWAs could reach $16 trillion by 2030.[29] According to their report, this rapid growth will stem from several compelling benefits that tokenisation offers over traditional asset fractionalisation:

Improved Affordability: Tokenisation enables investment in high-value assets by allowing them to be divided into smaller, more affordable units. This fractional ownership opens up access to expensive assets, such as hedge funds and alternative investments, to a broader range of investors.
Borderless Accessibility: Tokenisation facilitates the listing and trading of previously illiquid assets, like natural resources, real estate, and vintage art, across different jurisdictions. This seamless cross-border trading enhances the global market's inclusivity and liquidity.
Unlocked Liquidity and Enhanced Flexibility: By allowing assets to be traded before maturity, tokenisation provides greater flexibility and liquidity. For instance, future earnings from agricultural land can be tokenised and traded, making the investment more dynamic and accessible.
Immutable Transparency and Accountability: Blockchain's transparent ledger offers a clear historical and current record of transactions, ensuring that ownership rights are immutably assigned and recorded. This transparency is particularly valuable for public ownership rights and could improve tax recovery and governance in projects like government infrastructure.
Streamlined Transaction Efficiency: Tokenisation streamlines transactions by enabling faster, more cost-efficient asset transfers through smart contracts. It reduces friction by requiring a single KYC process across all investments linked to a blockchain wallet, and it simplifies asset servicing without the need for third-party intermediaries, thereby reducing settlement times and costs.
Better Price Discovery of Illiquid Assets: Blockchain technology helps in reducing intermediary costs and enhancing price discovery for illiquid assets. This disintermediation lowers the "rent-seeking" behaviour of auction houses and asset management companies, leading to more efficient and transparent markets.

However, it is crucial to examine these points beyond their surface-level implications. For instance, while tokenisation can indeed enhance liquidity and improve price discovery, these benefits are contingent upon the integration of the tokenised product with the existing markets. If the introduction of tokenised assets leads to the creation of a fragmented market, where liquidity is split between traditional and digital platforms, the overall liquidity may not improve as anticipated. Instead, this bifurcation could dilute the available liquidity, making it more difficult to achieve seamless trading and accurate price discovery across both markets. Therefore, for the benefits of increased liquidity and better price discovery to be fully realised, it is essential to ensure that tokenised and traditional markets are well-integrated, preventing the cannibalisation of liquidity.

Moreover, while the streamlining of transactions and reduction of intermediary costs are appealing, these advantages must be balanced against the potential regulatory hurdles and compliance issues that could arise as the ecosystem of tokenised assets evolves. As regulators intensify their scrutiny, the regulatory landscape could impose new constraints that might offset some of the efficiencies gained through tokenisation.

The market for tokenized RWAs is still in its early stages, but it's already showing signs of significant potential. The rapid increase in market capitalisation, driven by the growing interest and participation from major financial institutions like BlackRock and Goldman Sachs, is providing credibility to the sector. These developments suggest a promising future for the integration of on-chain and off-chain assets. As these two worlds become increasingly interconnected, we can expect innovative financial products and services to emerge, offering new opportunities for investors and transforming traditional asset management. The convergence of DeFi with TradFi is not just a fleeting trend but potentially a foundational shift that could redefine how assets are issued, traded, and managed globally.

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[1] https://messari.io/report/welcome-to-the-real-world

[2] https://coinmarketcap.com/view/stablecoin/

[3]https://assets.ctfassets.net/o10es7wu5gm1/2n9KtrCyq59uQ4uOCF18hi/21fd908639c6c87e9d36a994ccacda51/Q2_2024_State_of_Crypto_final.pdf

[4] https://blog.chain.link/real-world-assets-rwas-explained/

[5] https://www.theblock.co/data/stablecoins/usd-pegged/total-stablecoin-supply

[6] https://www.theblock.co/data/stablecoins/non-usd-pegged/total-euro-stablecoin-supply

[7] https://coinmarketcap.com/currencies/tether/

[8] https://tether.to/en/transparency/?tab=usdt

[9] https://tether.to/en/transparency/?tab=reports

[10] https://makerburn.com/#/charts/dai

[11] https://tether.io/news/tether-announces-launch-of-alloy-by-tether-a-new-digital-asset-backed-by-tether-gold/