This is it, the big showdown – a Mexican standoff! The tradfi institutions, the RWA fintechs, and the crypto degens. The good, the bad, and the ugly – but not necessarily in any order. And who shoots first may depend on whether the law rolls into town.
To recap, the situation for tokenizing real-world assets is stuck.
Fintechs are tokenizing asset such as loans, but these lack liquidity. There’s no market-making industry. The first product to be tokenized was cash, which after six years is finally gaining traction. It required a long slog in creating those secondary market features. So it can be done.
But one lesson from stablecoins is that it takes time and hard work to build the trading ecosystem.
Product, meet need
The second lesson is that the product has to fit an urgent need. T-bills were the next product to be successfully tokenized, designed for crypto speculators in a bear market who sought the relative attractions of money markets. Tokenized T-bills remain small in volume, even as more firms are rushing to introduce these: demand among the crypto natives has dried up, now that interest rates have moderated and yield-bearing opportunities in DeFi have opened again.
Other than stablecoins, the most popular tokenized assets are private credit. But tokenizing loans doesn’t make them liquid. This segment is large because the underlying asset provides an attractive yield – but to be attractive to investors, they require RWA providers put a derivative or wrapper on top of the underlying asset. These bespoke structures make the tokens even harder to trade. Meanwhile, whoever wants to own T-bills is better off doing so in the traditional way, offchain.
RWA proponents believe the space needs time for investors, particularly institutions and corporate treasuries, to embrace onchain finance for its technical advantages. BlackRock and other asset managers believe tokenized mutual funds will be the next evolution in investment products, picking up from exchange-traded funds. Why? Because tokenized funds offer instant settlement, round-the-clock trading, and lower costs.
To get there, however, will require meaningful demand for assets in tokenized form. This has nothing to do with those technical benefits.
Actual demand
For the foreseeable future, RWA serves as a destination for crypto speculators when the crypto markets are in a downturn and they need to swap into something that provides a yield. For banks, asset managers and other tradfi dabblers, this is easy money but it’s not reinventing finance, and its scale is limited.
There’s another possible market for retail in emerging markets with poorly developed financial markets, payment rails, or a lot of financially excluded people. Stablecoins are already proving to be a useful alternative as people and small businesses transact across borders.
RWA players talk about fractionalizing capital market products, such as funds or bonds, to give such people access to investments they can’t get at home. But this goes back to the original issue with demand. If such people are already trading crypto, they may want crypto products like staking tokens in a DeFi protocol. Fractionalization has been around for many years but it hasn’t taken off. Something else has to change.
Fragmented
One change needs to come from integrating the crypto ecosystem. Asset managers sense potential demand for tokenized funds as a form of collateral within crypto markets. But this requires market makers (just as ETFs do) and so far the handful of players working with institutional products haven’t found enough demand. It’s not just whether investors are interested. The crypto markets are fragmented across many centralized exchanges, decentralized exchanges, and blockchain networks, not to mention banks’ internal blockchains.
Without a killer product, this leaves RWA players chasing a limited crypto-native investor audience across a patchwork of liquidity pools. As of today there isn’t scale.
It’s expensive to build the network for coins to operate across markets. Tether and Circle have done it with their stablecoins, after years of heavy lifting, and with a product with obvious demand.
Regulated onchain cash can help, but investors may not want to settle in eHKD or eUSD. They might want to settle in multiple stablecoins. How many trading venues will list the token of a tradfi bond, stock or fund? They’ll list it if they think it will generate a lot of trading activity, and if they attract the market makers. BlackRocks’s BUIDL made this happen. Collectively these networks are getting better. But we’re still a long way from a coherent secondary market, and BUIDL may not have a lot of company for a while.
Regulation
The other big change required is regulation, which remains an important driver for institutional participation. Market participants expect the US to take the lead in making crypto reputationally safe, if not actually safe. With the erratic nature of Mad King Donnie, it’s not exactly clear what these regulations will involve: right now they seem to be making The World Safe for Memecoins. This may not turn out to be the gift that the crypto industry expects from the mad king: already demand for bitcoin and other coins is sagging in the wake of relentless pump-and-dump schemes.
Even so, other jurisdictions are also moving to regulate stablecoins and pave the way for banks to offer tokenized versions of deposit accounts. The most important aspect of this is that it will create tokenized cash legs that will make it much easier to settle tokenized securities transactions.
Regulatory clarity also enables banks to develop hybrid settlement systems leveraging SWIFT or local real-time payments infrastructure, but using smart contracts to automate flows. Another hybrid model is leveraging centralized securities depositories or introducing CSD-style infrastructure to RWA settlement. This can come from top-down market players like Marketnode in Singapore, from native crypto custodians, or by traditional banks: HSBC’s Orion platform is integrated with the central clearing plumbing of the HKMA. Such integrations allow institutional players to use familiar infrastructure for at least part of their activities in crypto or with RWA.
Regulation to clear the way for things like adoption of stablecoins is one thing, but authorities are also trying to figure out how to regulate RWA products. Token-friendly regulators do see plenty of product pitches by platforms or issuers eager to tokenize everything from real estate to commodities to green energy.
Um, question!
These projects often need to sharpen their pencils around basic things like investor protection and legal rights. If a token launches in Singapore or Dubai or Japan, where’s the actual asset domiciled? Are tokens providing actual fractionalized ownership, or are they just a special-purpose vehicle, designed to funnel money from a credible jurisdiction to someplace lacking the same legal frameworks? Is there enough disclosure Is there insurance against the asset in case of a natural disaster? What protections exist for underlying projects that don’t get completed on time? Is there enough liquidity for a ‘democratizing finance’ story to actually serve investors? Who’s providing that liquidity? Is it daily, weekly, monthly; what kind of gates exist? Might a project be more viable as a basket of assets rather than a single building or product?
Ultimately such questions are about why someone is bringing a tokenized asset to market. Could they get this launched in the traditional world? If not, do regulators want people dumping low-quality assets into their jurisdiction? If yes, why tokenize?
These questions have little to do with the purported benefits of RWA tokenization, such as atomic settlement and global trading.
Who shoots first?
This leaves us with our Mexican standoff. Eventually somebody shoots first and the story changes. The technical benefits of tokenization are real. The success of tokenizing dollars, and to an extent loans and T-bills, demonstrates what is possible when stars align (meaning, crypto degens decide they want to invest in tradfi products in digital-asset form – and with crypto markets crashing, 2025 might see a spike in such demand).
Regulatory clarity around stablecoins, CBDCs, and tokenized deposits will grease the wheels, while fintechs and tradfi groups leverage hybrid models where possible. But interoperability and fragmented liquidity are here to stay. And RWA, for all its institutional bona fides, is still married at the hip to the vagaries of crypto markets. If Michael Saylor’s leveraged bet on Bitcoin implodes and takes the market with it, will you still be talking about tokenizing mutual funds?
Larry Fink says all funds and many other financial products will be tokenized, and he’s probably right, but it’s going to take a lot of work to build the connectivity, the infrastructure, and the use cases. There are no quick wins. As the Gil Scott-Heron song goes, “The Revolution Will Not Be Televised”.
