By Raj Bagadi, Founder and CEO of E Money Network
The world can be categorised into two groups – the crypto community and crypto sceptics. Unfortunately, despite crypto having stood the test of time, crypto sceptics far outnumber crypto advocates. Their criticism of crypto investments focuses on the risky, volatile and unregulated nature of these investments. They would rather contend with the comfortable familiarity of traditional investments as these are recognised as legal and operate within what are perceived to be safer regulatory frameworks. However, the crypto industry is at the cusp of a revolution which might just close the divide between the crypto and non-crypto communities.
At the heart of the crypto industry’s next phase of evolution are real world assets (RWAs) such as real estate, commodities like gold and oil, art and luxury goods. By allowing the tokenisation of RWAs, we are enabling these assets to be transferred into the crypto realm. This is achieved by creating digital representations of physical assets on a blockchain. In essence, RWA tokenisation marries the security and efficiency of crypto with the reliability and stability of traditional physical assets.
Tokenisation of assets overcomes several problems that traditional finance faces when dealing with real world assets. For instance, traditional high-value assets that are difficult to liquidate as a single entity can be split into smaller manageable portions and tokenised. This makes it easier for these smaller fractionalised entities to be sold. These RWAs can be held as investments, traded freely on RWA marketplaces, or deployed in DeFi protocols for earning interest or availing loans. Furthermore, blockchain brings efficiency gains and enhanced security of transactions in managing traditional physical assets. Thus, by solving real world problems and empowering users with greater flexibility in managing their assets, RWA tokenisation incentivises traditional investors to embrace crypto.
By bringing more users to crypto, RWA tokenisation also enhances the liquidity of crypto which currently is significantly lower than that of the traditional financial industry. Take Ethereum, for example. Among ETH’s most significant use is in DeFi protocols in the Ethereum ecosystem as native asset and default collateral. So, ETH primarily derives its value from its use in DeFi platforms by crypto users. However, RWA tokenisation is poised to transform DeFi by enabling users to deploy their RWAs 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 DeFi user base and transactions.
Though the RWAs sector is still in its nascent stages, it is already experiencing rapid growth and adoption by financial giants. The current TVL of the RWA market is over $6 billion, led by tokenised US treasury products from BlackRock and Franklin Templeton. New projects across 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 RWAs sector.
A crucial point to note is that this new wave of growth led by RWAs is happening at a very opportune time as regulatory compliance is becoming mandatory for the crypto industry. In Europe, the first phase of Markets in Crypto Assets (MiCA) regulations was implemented recently. Several other countries including the USA, the UK, Singapore and Japan also have measures in place for crypto-specific taxation, AML/CFT, consumer protection and licensing policies in place.
Let me explain why compliance is crucial to RWAs. RWAs fundamentally require the implementation of compliance measures as in the real world, linking real identities to assets is imperative. In the mainstream economy, there are government agencies and well-established mechanisms that maintain records of ownership of real world assets such as real estate and vehicles. When it comes to RWA tokenisation, it is important to ensure that the practice of recording ownership data accurately is also upheld in the realm of crypto for ensuring the legitimacy and trustworthiness of tokenised assets.
So, if the RWA tokenisation wave had emerged in the pre-regulations era, it is likely that it would have faced significant challenges in gaining the trust of the community. Without regulatory frameworks for safeguarding users and ensuring market integrity the credibility of tokenised assets would have been weak, leading to scepticism from individual investors and financial institutions. However, with the rise of regulations, all RWA-centric developments will fall under the ambit of law, giving peace of mind to investors.
Another thing to be noted about the RWAs sector is that most of the existing blockchain infrastructure is 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 in place to meet the regulatory requirements of real world assets. For example, a global commodity ETF like Global X Silver Miners ETF (SIL) needs a regulated blockchain for transactions to be settled in a compliant manner. The use of blockchain in trading the global silver ETF will enable real-time-settlement in a market which is open 24X7, leading to enhanced liquidity and better price discovery. Thus, to facilitate compliance-driven growth of RWA projects, the industry is also witnessing the development of RWA-centric infrastructure. E Money Network, for example, is a blockchain with in-built compliance modules to ensure that every transaction and process is compliant by default.
It is safe to say that RWA tokenisation nurtures a symbiotic relationship between real world assets and crypto from which both traditional investors and crypto stand to benefit. I believe that settling real world assets on blockchain rails will become a standard practice in the next 5 years, with RWAs-on-blockchain becoming a 5 to 10 trillion dollar market. Emerging RWA projects need to bear in mind that they should have a strong use case and a user-friendly product geared towards both seasoned crypto enthusiasts and newcomers alike for achieving product-market fit. More people using the product will validate its success and lead to higher adoption of crypto.
About Raj Bagadi
Founder & CEO of E Money Network, 10+ years exp in Global Fintech & Banking.
Raj Bagadi is an accomplished entrepreneur with a diverse background. He holds a postgraduate degree in Business Development and Management, and a Postgraduate Certificate in Economic Development from the University of Oxford.
Raj is also a certified specialist in anti-money laundering in the UK and has extensive experience in the finance 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.
Additionally, he holds a Bachelor’s degree in Aeronautical Engineering and a Master’s degree in Aerospace Technology.
I have been writing about Bitcoin, Ethereum and other digital currencies for over 5 years. My work has been published in major publications such as The Wall Street Journal, Business Insider and Forbes. It is also featured on CNBC, Bloomberg and other financial news outlets. I’m a sought-after speaker on the topic of digital currency investing and I have presented at numerous conferences around the world.