Article author: Jeff Wilser Article compilation: Block unicorn

Tokenization has long been a big theme in the cryptocurrency world, and now, it may finally be ready for prime time. Wall Street is diving deep, creating tokens for everything from buildings to gold bars. One advantage: relatively little regulatory scrutiny.

Consider the biggest weakness of cryptocurrencies: cryptocurrencies such as Bitcoin are not "real" because they are not backed by real-world hard assets; disasters; often, they're even considered ridiculous, with MeMe coins and cartoon apes selling for millions.

You don't have to agree with the criticisms (at least I don't quite agree), but the merits of the arguments don't matter. Like it or not, these are the reasons why most banks, financial institutions, governments, and billions of "regular people" still haven't bought a bit of cryptocurrency.

However, if the next generation of electronic money is no longer the "Schematic Internet virtual currency" that non-professionals have never heard of, but stocks, bonds, cars, and things people really care about in real life is encryption "tokenization" " Woolen cloth?

And including the elites on Wall Street, they began to care about the tokenization of physical assets, or RWAs (real world assets, real world assets), which have quietly risen during the cryptocurrency winter. Tokenization allows you to “create liquidity for things that cannot be liquidated today,” said Lucas Vogelsang, CEO and co-founder of Centrifuge, which has tokenized more than $400 million in real-world assets.

While most cryptocurrencies are entirely new kinds of assets—from Bitcoin to Ethereum to Dogecoin—tokenization takes assets from the “real world” and puts them on-chain, bringing the benefits of the blockchain to bear. Combine with real world assets.

These on-chained "items" can contain pretty much anything. Art, real estate, luxury goods, wine bottles, cars, carbon credits, financial instruments like US Treasuries, stocks, all of these can be chained. "We're trying to tokenize everything, and then we'll try to see if we can cut all the underlying system costs," said Allan Pedersen, chief executive of the Monetalis group, which has worked to tokenize real-world assets And as collateral on MakerDAO, Pedersen said they have tokenized $1.2 billion worth of treasury bills, which are now used as collateral by Maker.

Even intellectual property can be tokenized, let's start with a hypothetical. Sid Powell, Maple's CEO and co-founder, said: "Imagine someone running a YouTube channel that makes instructional videos about cooking. Now imagine that this YouTube chef, with both humor and charm, has amassed a huge audience, She makes $50,000 a month from YouTube ad revenue."

Sid Powell explained: “Creators can tokenize this copyright and sell it to financiers, and we buy their token rights. We have all rights to their YouTube cooking videos flowing into revenue. Royalty income is valued at $600,000, and the financier may buy it for $550,000 (allowing for some intrinsic gain), which provides the Chef with a loan against future income.

“This model exists in big music companies and private equity, but it’s not accessible to smaller players, and tokenization makes those tools more inclusive,” said Sid Powell, Institutional and Capital Markets Business Development at Ava Labs “Tokenisation has the potential to give lenders access to capital markets where smaller deal sizes and lower minimum investment amounts will become economically viable,” said director Morgan Krupetsky.

Lucas Vogelsang, CEO and co-founder of Centrifuge, said: "Tokenization allows you to create liquidity for things that cannot be liquidated now." Can benefit from tokenization. Let’s say another scenario: A transporter wants to transport grain across the ocean. Typically, the transporter would obtain bank financing and use the grain as collateral for the loan.”

Sid Powell, Maple's CEO, said: "It's very suitable for on-chain because it involves cross-border finance." He compared the existing system with Blockbuster video rentals and Netflix. ), and I’m in Brazil, if I want to serve customers in Bulgaria, I have to set up a Blockbuster branch in Bulgaria, and if I’m Netflix, people there just need to have an internet connection.”

Sid Powell, Maple’s CEO, said on the topic of grain shipments: “Grain haulers can now use tokenization to find funds anywhere in the world, not just from banks in Brazil or Bulgaria. Loans. It’s like entering the streaming world of Netflix, which turns global financial markets into a clearing house.”

Then, we should also note that although ordinary people may not care much about food transportation, people in the financial industry can calculate and foresee the comprehensive transformation of the financial market due to tokenization. A Boston Consulting Group report even predicts that the market for tokenized real-world assets will balloon to $16 trillion by 2030. Imagine if Bitcoin's market capitalization could reach that number, each Bitcoin would be worth $800,000.

Finally, welcome to learn more about the fascinating and potential field of real world assets.

Private Equity, Public Profits

Tokenization is not a new technology, it just has new adoption and new love. Just like early adopters have been working on NFTs before they hit the mainstream, think CryptoPunks, Rare Pepes - tokenization has been around since 2017. Now, they are at an important moment.

Infrastructure has improved, on-ramps are smoother, institutions are curious about the token, and unexpected economic forces drive adoption. Financial advisor Adam Blumberg wrote in a CoinDesk commentary: “As interest rates rise, the option to tokenize real assets offers them double-digit interest-yielding returns without the volatility risk of cryptocurrencies. Make low-risk loans in markets that finance cannot or does not want to enter, and keep the process efficient."

While FTX and some embarrassing events in 2022 continue to tarnish the image of cryptocurrencies, banks and governments have been quietly practicing RWA. The Monetary Authority of Singapore is now tokenizing bonds and they are working with DBS Bank and JP Morgan. Gold is also being tokenized. Bank of America research found that the tokenized market for gold alone has exceeded $1 billion. Tokenized gold provides investors with access to and invest in physical gold, 24/7 real-time settlement , no management fees and no storage or insurance costs.

Some tokenization projects don’t even sound all that exciting — such as tokenizing government bonds — but Krupetsky said, “They can lower the cost of things like certification, underwriting, asset monitoring, and fund release, because those red lines” It has been historically and operationally burdensome, manual and time consuming. "

That's why some banks and corporates are interested, with a recent Ernst & Young report finding that "institutions see a lot of potential in tokenization and are looking to invest in tokens more quickly over the next two years." are moving towards tokenizing assets while also tokenizing their own assets. A survey conducted by the firm found that 57% of institutional investors want exposure to tokenized assets.”

According to Philipp Pieper, co-founder of Swarm, the appeal of blockchain for private equity funds is that it can replace entire funds. He further explained that smart contracts can do what fund managers usually do and can also reduce costs by 100 to 200 basis points.

For more exclusive “closed-end” private equity funds, tokenization could make the game more liquid. Take, for example, the syndicated purchase of a company by a private equity fund called the Nasty Rich Group. They have invested in this company for at least five years, when can they sell and settle their profit? Members of the pesky rich group may not agree on when to sell their stakes.

By year five, some may want to take their chances and hope that the company they now own will continue to grow. Some might think that the price may have peaked and is about to fall (like this company is now peaking in value so they should sell). Some may just want their funds to be used for other things, tokenization as described by Philipp Pieper: "A "smart contract-based secondary market could be established for funds, which gives them a structured way to decentralize Risk or increased risk, depending on what they see. "

For those of you who aren't into high-level finance, you might get dizzy with the inner workings of equity funds. Perhaps making life more comfortable for wealthy venture capitalists wasn’t Satoshi’s original vision. However, these innovations are attractive to key decision makers in traditional finance, and these people — like it or not — are the critical influencers needed to promote blockchain and cryptocurrencies.

Vogelsang, CEO of Centrifuge, said that we are somewhat dependent on large lenders entering the space. He emphasized that the current number of early adopters of DeFi is not enough to expand this market to $100 trillion, which is the final pattern he foresees. Funding will come from pension funds, banks and existing companies. So it's important to get those institutions comfortable with the technology, understand it, and start using it.

Even stocks can be tokenized, which struck me as odd and even nonsensical when I first heard it. After all, buying and selling stocks with commission-free options ranging from Charles Schwab to Robin Hood may seem easy enough, yet it takes digging deeper to discover the benefits behind it.

Bob Ras, co-founder of Sologenic, said that we can't actually buy a small part of Tesla, Amazon or Netflix in reality. But when you represent those shares with tokens, users can buy a fraction of those shares.

Bob Ras admitted that users can indeed buy small shares of Tesla or Amazon in the Robin Hood app. However, he emphasized that this is only because Robin Hood buys a large number of popular stocks and allows users to buy part of the shares in the program. (Whether this difference can be accepted by users in the end, only time will tell)

When you buy or sell a token, you can achieve instant settlement, which is very important for transactions. Because in today's financial system, even on wealthy Wall Street, it takes two to three days for a transaction to settle. There is a cost to this, banks, hedge funds and trading desks all want to be able to invest their capital as quickly as possible, and tokenization will allow their funds to be put to use faster.

Tokenization can sometimes even remove the intermediate currency of the US dollar. Investors often sell one asset to buy another asset (for example, sell Tesla stock and then buy Walmart stock), you need to first sell Tesla Stocks are sold to get dollars, and then the dollars are used to buy Wal-Mart stocks. This process can be tokenized to make the process simpler and faster.

You can directly use Tesla shares to convert to Walmart shares. In this process called "cross-conversion", you don't need to convert Tesla shares into US dollars to buy Walmart shares. During this process, Bob Ras, co-founder of Sologenic, mentioned that on a decentralized trading platform, users can freely query and create the trading pairs they want, and the free market will act like a magnet to hold Wal-Mart tokens Attract people with Tesla tokens. Best of all, since you didn't sell your Tesla stock for dollars or use your dollars to buy Walmart stock, you don't pay capital gains tax. Of course, future regulation may change this.

Maybe tokenizing stocks is just a novelty. But if it turns out to be cheaper and more efficient, and if it eventually scales to become the new normal, it could change Wall Street in unimaginable ways. Stocks can be traded 24/7, just like cryptocurrencies. Typically, most trading occurs between 9:30 and 10:30 am ET, and all U.S.-listed companies compare their earnings reports, communications, and financial decisions (such as dividend buybacks) to the U.S. stock market Monday through Friday. The rhythm of the market matches. If tokenization—if it goes mainstream across the board—could disrupt all financial markets.

Pieper calls tokenization “Fin Tech 2.0.” As he outlined in a post on Medium, he sees tokenization as a natural progression from ETFs (exchange-traded funds), which were created in the early 1990s. ETFs have changed the stock market, and tokenization may do the same. ETFs give investors the opportunity to invest in a basket of assets in a specific industry, such as aviation or healthcare or energy. What about tokenization? Portfolios can become “atomic,” letting you create a portfolio that includes stocks and cryptocurrencies, among other asset classes that haven’t been invented yet, putting users at the center of financial instrument design. Tokenization creates liquidity pools that generate yield.

It's understandable if you feel a little wary when you hear the phrase "earning gains." In 2022, it is the promise of overly rosy earnings that leads to crashes like Celsius. As I wrote at the time, Celsius CEO Alex Mashinsky confidently told the crowd that Celsius was less risky than banks, and that Celsius managed assets that "offered high single-digit or low-teens" returns. (It then filed for bankruptcy, and New York's attorney general charged Mashinsky with fraud.)

Or we think further. Back in 2008, banks boosted their profits by trading complex financial packages they didn't fully understand, including financial products bundled with subprime mortgages. We all know what happened next. These loans are toxic, causing banks to falter and economies to collapse. So, if we create a clever new lending and debt regime with real assets and liabilities (RWA), are we just repeating history and increasing the likelihood of a financial crisis?

**If the world is truly tokenized, then "real assets" will no longer need the clumsy word "real thing". They just need to be called "assets". **

Vogelsang accepts the idea that the technology could produce a lot of harmful poor quality products, but he insists that the core nature of DeFi tools can enhance transparency and thus reduce the possibility of system failure. He also mentioned that a big part of the problem in 2008 was that people didn't know what subprime bundling was, retail users and everyone else.

Asset tokenization provides everyone with a clear view of assets and liabilities. Daniela Barbosa, executive director of the Hyperledger Foundation, explained that details of asset ownership, transfers and transactions can be recorded on the blockchain, forming a historical record that can be verified and audited. She also emphasized that such transparency can simultaneously enhance trust and reduce fraud.

We must also note that "in theory" does not necessarily mean that it is true in practice. In the encrypted world, a lot of information claims to be transparent and risk-free, but it may not be the case, for example, you can ask Terra investors.

Break the rules, play fair

In all cryptocurrencies, the trillion dollar question is: "Will the SEC consider this a security?" One of the benefits of tokenizing physical securities is that there is no ambiguity about whether the so-called token is a security . In order to avoid being defined as a security, there are people who do the tricky thing, and they deliberately create a fake utility so that it doesn't look like a security, Pieper said. As such, Swarm, as well as many other tokenization projects, are currently only open to accredited investors.

The ultimate goal of tokenization is not just to target "accredited investors," its proponents believe they can help ordinary people, such as thinking about small business loans. Private credit markets are illiquid for small firms, giving larger firms an advantage. Vogelsang mentioned that, for example, when Google issues bonds, the purchase and transaction can be easily carried out, which allows them to pay a premium that is slightly higher than the yield on the Treasury bond, which is probably around 6% at current interest rates. . However, if you are a small business, since there is no liquid market for these types of loans, your options will be limited and you may have to pay an interest rate of 15%, which means you need to charge your customers more More money gives Google a huge advantage.

Tokenization, however, can change this and level the playing field. Although Vogelsang admits that we can't make Google pay the same interest rate as small businesses, because the risk of lending to small businesses is definitely greater than that of Google, but creating liquidity can undoubtedly help bridge this gap, which is why Vogelsang started Centrifuge .

Maple's Sid Powell echoed similar sentiments. He sees the tokenization of physical assets as a way to provide real benefits to ordinary people, which could help the crypto space recover from its reputation for speculation and gambling. “One of the big narrative threads in the tokenization of real assets is how on-chain lending can actually impact real businesses and help them grow.”

Perhaps the most popular tokenization project is the one we all ignore - cash. “Cash is being tokenized. It’s called a stablecoin. It’s a physical asset that’s replicated on-chain and becomes tradable,” Pieper said. And Central Bank Digital Currency (CBDC), which is essentially a tokenized version of central bank money that lives on a distributed ledger. These, Barbosa said, will "reduce the cost of cross-border transactions and settlements, drastically reducing the time."

Since Tether launched in 2014, the tokenization of cash could have global ramifications. This leads to what Pedersen calls "big thinking." He begins by noting that "the world's money market is a dollar-denominated market" and that "all these dollar-denominated backed assets are spread out in 'many different places.'" No one knows its exact size. “Nobody can see the whole picture,” said Pedersen, who described these dollar-backed assets as “completely dark” so that when the system fails, it “explodes the world” every time.

However, what if collateralized assets in the USD market were placed on the blockchain? “You’re going to start seeing a transparent world money market,” Pedersen said. “Central banks will be able to understand what’s going on.” That will help avert the next financial disaster.

These advantages of tokenization — without the downside risk of crypto price speculation — are why many see its adoption as inevitable. Ava Labs’ Krupetsky predicts that “more and more assets will be tokenized, to the point where we no longer distinguish between tokenized and non-tokenized assets.” She imagines it will be like we “no longer distinguish between marketing and digital assets.” Marketing", this is marketing.