Unlocking Value with Tokenized Real-World Assets for Fund Managers
Tokenization. Everybody, from big corporations to small and nimble startups, is talking about it. However, the topic is not exactly easy to grasp. What exactly does it mean? What is it good for? Let's dive in.
Tokenization refers to Real World Assets (RWA) having a representation on-chain.
Examples of RWA include (but are not limited to):
- Real estate
- Fund shares
Tokenizing these assets means having an on-chain representation of them, often in the form of tokens (hence the name). The tokens can take various forms, such as ERC-20 tokens, ERC-721 (the NFT standard). No matter the implementation, they all share common benefits.
Benefits of tokenized RWA
General benefits associated with tokenization are:
- Accessibility: It can make these assets more accessible to a wider range of people. No more gatekeeping by institutions.
- Liquidity: Tokens can be traded easily and quickly, which can make these assets more liquid (easier to buy and sell), especially for second-hand markets.
- Transparency: All transactions are recorded on the blockchain, which increases transparency and trust.
- Efficiency: It reduces the need for middlemen, which can make transactions faster and cheaper, for everyone.
- Fractional Ownership: It allows for the division of high-value assets into smaller, more affordable units.
- Interoperability: Tokens can be easily integrated with other digital systems and services. Crypto protocols build on top of each other all the time.
Of course, for each type of RWA, you can have special benefits within specific use cases. For example, we detail the benefits of tokenized fund shares in this article.
A simple example
Stablecoins are the most common form of tokenized RWA used every day in crypto. Circle, the entity that emits USDC, is simply tokenizing dollars. They get dollars in their bank account (which are, for all intents and purposes, real-world assets), and emit one USDC for each dollar they get in. The promise of always being able to redeem 1 USDC for 1 dollar maintains the price around 1 dollar (hence "stablecoin"). This means that every USDC on-chain is linked to a dollar in the real world. This link between on-chain and the real world is the process of tokenization.
Implications for fund managers
Tokenized assets are great on their own. But the real potential comes in the automation and the on-chain possibilities. An investment fund is composed of processes that are streamlined and simplified to their core, without costly administration on top. Let us imagine that all the assets that the fund owns are tokenized on-chain. In that case, it also makes sense to bring the administration of the fund on-chain, so that everything happens within the same system.
Thanks to this system containing everything, new possibilities arise.
- 24/7 Proof-of-reserves become possible. Without relying on an external third party to audit the process and the reserves. Everything can be transparent, and always up-to-date.
- Automated redemptions. When investors want to get out of a fund, the usual process is that assets have to be sold in order to create liquidity to be able to give the money back to the outgoing investor. With tokenized assets, this can be done automatically, and the selling can be done for the exact amount that is needed for the redemption.
- Traceability: Since every transaction is on-chain, immutable and forever, the investors or financial regulators can see everything that has been going on.
- Audits: Auditing can become much easier. Report generation, asset repartition and other aspects of it can be completely automated. The flow of money is transparent, and fraud becomes much harder.
Transition and Future Outlook
According to Binance Research, the RWA market is estimated to be worth US$16 trillion by 2030.
In a PwC report , 23% of fund managers say that they want to tokenize their fund shares.
More and more actors are starting to notice that tokenization and blockchain technology offer real benefits and are starting to put resources into researching it.
The transition from Traditional Finance (TradFi) to Decentralized Finance (DeFi) is not expected to be an instantaneous leap, but rather a gradual shift. The tokenization of real-world assets can bridge these two worlds. This not only democratizes the ownership of assets that were once only available to the privileged or institutional investors but also brings a level of transparency and efficiency previously unseen in traditional markets. Most importantly, the shift to DeFi doesn't need to abandon regulatory oversight. Platforms such as Fume are starting to emerge to provide a necessary in-between step that eases this transition. In the case of Fume, it provides a regulated environment for investment funds, ensuring a smooth transition and fostering trust among participants.
At Fume, we believe that tokenization is coming and that it will help make the financial world a better place. However, it only makes sense when more and more infrastructures are being brought on-chain. Tokenizing everything but still relying on off-chain processes and structures will lead to even more problems than there currently are. This is what we do with on-chain administration, in addition to tokenizing fund shares.
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Overall, the tokenization of real-world assets is starting. It will be a long process, which needs the collaboration of every ecosystem player. But on the other side of it is a promising development in the financial world, one that brings with it the potential for greater accessibility, efficiency, and security.
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