Real World Asset Tokenization Is Fake News

“Tokenization,”
particularly
of
“real
world
assets,”
or
RWAs,
has
recently
been
touted
as
the
next
big
thing
in
crypto.
Most
people
do
not
make
the
connection
that
this
trend
is
just
another
form
of
security
tokens,
a
term
you
may
not
have
heard
since
2018

(for
good
reason).

Dave
Hendricks
is
the
co-founder
and
CEO
of
Vertalo.

The
people
hyping
tokenization
are
mostly
wrong. But
their
heart
is
in
the
right
place.
It’s
no
one’s
fault
that
something
becomes
trendy,
but
if
“security
tokens,”
“tokenization”
and
RWAs
are
all
part
of
the
same
technological
continuum,
and
if
the

Gartner
“Hype
Cycle”
is
right,
there
will
likely
be
another
bust
soon
enough.

Many
of
the
current
promoters
of
tokenization
are
refugees
from
the
former
hype-cycle
champion,
decentralized
finance,
otherwise
known
as
DeFi.

While
influential
TradFi
influencers
and
CEOs
see
tokenization
as
a
natural
evolution
in
finance
—
(for
instance,
BlackRock
CEO
Larry
Fink
said
the
recent
launch
of
bitcoin
ETFs
were
the

“first
step”
towards
everything
going
on-chain)
—
the
tokenization
of
“every
financial
asset”
is
much
more
complicated,
and
largely
misunderstood
by
both
proponents
and
detractors.

The
Tokenization
of
the
RWA
assets
industry
is
beginning
its
eigth
year,
having
started
in
late
2017. 
My
firm,

Vertalo,
launched
one
of
the
first
fully
compliant,
Reg
D/S
equity
tokenizations
in
March
2018. The
challenges
that
we
encountered
—
too
many
to
recount
here
—
led
us
to
pivot
from
our
original
role
as
an
issuer
of
tokenized
equity
to
a
“picks
and
shovels”
enterprise
software
company
with
an
aim
to
“connect
and
enable
the
digital
asset
ecosystem.”

See
also:



Andy
Warhol
Artworks
to
Be
Offered
as
Tokenized
Investments
on
Ethereum

Since
that
time,
we
saw
the
expansion,
and
subsequent
massive
contraction,
of
non-fungible
tokens
(NFT)
and
DeFi. NFTs
and
DeFi
were
easier
and
more
end-user
friendly
applications
of
tokenization
technology. In
the
case
of
NFTs,
you
could
buy
computer-generated
art
that
would
be
represented
by
a
tradeable
token
on
easily-accessable
marketplaces
like
OpenSea. 

If
you
asked
me
to
map
the
progress
of
NFTs
to
Gartner’s
Hype
Cycle,
I
would
place
them
post-peak
and
sliding
fast
through
the
“trough
of
disillusionment.”
For
instance,
OpenSea
investor
Coatue

marked
down
of
their
$120
million
investment
to
$13
million,
based
on
the
exchange’s
diminishing
fortunes.

Likewise,
the
formerly
red-hot
DeFi
market
has
demonstrated
its
own
cooling
—
with
many
projects
now
seemingly
rebranding
and
refocusing
on
real-world
assets.
This
includes
DeFi
titans
MakerDAO
and
Aave.

Teams
touting
their
RWA
cred
now
point
to
large,
traditional
financial
institutions
as
clients
or
partners,
which
makes
sense
since
many
DeFi
founders
cut
their
teeth
at
Stanford
or
Wharton
Business
School
before
working
at
Wall
Street
banks. 

Bored
by
quant
jobs
supporting
bond
salesmen
and
equity
traders,
but
enamored
with
the
volatility
and
work-life
balance
that
came
with
decentralization,
the
DeFi
movement
is
well-acquainted
with
the
world
(and
money)
of
global
finance,
but
less
enamored
with
its
rules,
regulations
and
rigor.

As
astute
observers
of
trends,
smart
DeFi
founders
and
their
engineer-mathematicians
saw
the
writing
on
the
wall
and
exited
the
governance
token-airdrop
game
in
2022
and
started
re-tooling
their
marketing
and
strategy
to
create
the
“new,
new
thing,”
i.e.
tokenization. The
result?
A
mass
migration
and
adoption
of
the
moniker
RWA
and
a
swift
flight
from
anything
that
looked
like
a
copy-paste
rug
pull,
a
signature
move
and
risk
in
the
anon-loving
DeFi
world
of
2020-22.

The
fact
that
the
assets
and
collateral
typically
under
management
in
most
of
these

RWA
projects
are
largely
stablecoins,
and
not
actual
hard
assets,
doesn’t
appear
to
be
a
problem. 

Tokenization
is
not
a
quiet
riot.
If
you
map
the
current
RWA
market
to
the
hype
cycle,
it
probably
would
land
right
at
“Supplier
Proliferation”
today. Everyone
wants
to
be
in
the
RWA
business
now,
and
they
want
to
get
into
it
as
fast
as
they
can.

Tokenization
of
RWA
is

actually
a
great
idea. Today
the
ownership
of
most
private
assets
—
the
target
asset
class
for
RWA
—
is
tracked
on
spreadsheets
and
centralized
databases. If
an
asset
is
restricted
from
being
sold
—
like
a
public
stock,
bearer
bond,
or
crypto
currency
—
there
is
little
reason
to
invest
in
technology
that
makes
it
easier
to
sell. The
antiquated
data
management
infrastructure
found
in
private
markets
is
a
function
of
inertia.

And
according
to
RWA
proponents,
tokenization
fixes
this.

There’s
some
truth
to
this
little
white
lie,
but
the
absolute
truth
is
while
tokenization,
by
itself,
does
not
solve
liquidity
or
legality
problems
when
it
comes
to
private
assets,
it

also
introduces
new
challenges. RWA
tokenization
advocates
conveniently
side-step
this
issue,
and
it’s
easy
for
them
to
do
so
since
most
of
the
co-called
real
world
assets
being
tokenized
are
simple
debt
or
collateral
instruments
that
are
not
held
to
the
same
compliance
and
reporting
standards
as
regulated
securities. 

In
reality,
most
RWA
projects
are
engaging
in
an
old
process
called
“rehypothecation,”
where
the
collateral
is
itself
lightly
regulated
cryptocurrency
and
the
product
is
a
form
of
a
loan.
That’s
why
almost
all
RWA
projects
tout
money-market
type
yield
as
their
drawing
card. Just
don’t
look
at
the
quality
of
the
collateral
too
closely.

Borrowing
and
lending
is
a
big
business,
and
so
I
would
not
count
out
the
future
and
long
term
success
of
tokenization.
But
saying
you
are
bringing
real
world
assets
on-chain
is
not
accurate.
It
is
simply
the
collateralization
of
crypto
assets,
represented
by
a
token. And
tokenization
is
just
one
piece,
an
important
one,
of
the
puzzle.

When
Larry
Fink
and
Jamie
Dimon
talk
about
the
tokenization
of
“every
financial
asset,”
they
are
not
talking
about
crypto-collateral
RWAs,
they
are
actually
talking
about
tokenizing
real
estate
and
private
equity,
and
eventually
public
equities.
This
will
not
be
accomplished
merely
with
smart
contracts. 

After
spending
more
than
seven
years
building
a
digital
transfer
agent
and
tokenization
platform
that
has
tokenized
almost
four
billion
units
representing
interests
in
almost
100
companies,
the
reality
of
mass
financial
asset
tokenization
is
much
more
complicated.

See
also:



Superstate
Debuts
Tokenized
Short-Term
Treasury
Fund
on
Ethereum
to
Compete
for
Zero-Yield
Stablecoins

First
of
all,
tokenization
is
a
relatively
simple
and
minor
part
of
the
process. 
Tokenization
is
a
commodity
business
and
hundreds
of
companies
can
tokenize
assets. Tokenization
by
itself
is
not
a
very
profitable
business,
and
as
a
business
model,
tokenization
is
a
competitive
race
to
the
bottom
when
it
comes
to
fees. With
so
many
suppliers
offering
the
same
thing,
it’s
going
to
become
a
commodity
really
fast.

Secondly,
but
far
more
important,
there
are
fiduciary
responsibilities
when
it
comes
to
tokenizing
and
transferring
RWAs.
That’s
where
the
hard
part,
the 
ledger,
comes
in.

Distributed
ledgers
offer
real
benefits
for
tokenizing
financial
assets
by
offering
immutability,
auditability
and
trustability.
This
creates
the
basis
for
provable
ownership,
and
enables
an
error-free
record
of
all
transactions,
instantly.
Without
this,
there
will
be
revolution
in
finance
using
tokens. 

The
ledger
creates
the
trust
that
will
enable
finance
professionals
and
their
clients
to
get
behind
the
words
of
Larry
Fink
and
Jamie
Dimon,
but
do
so
in
a
way
that
engenders
more
adoption
than
the
tricky
and
technical
world
of
DeFi
and
crypto.

So
before
you
start
riding
the
hype-cycle,
look
at
what’s
come
before,
and
what
has
to
happen
next. Don’t
end
up
riding
the
wrong
part
of
the
cycle,
or
else
you’ll
land
on
NFT
version
two.