Real World Assets and Stablecoins: An Overview

Introduction

As someone who has spent years navigating the complex world of finance and technology, I find myself deeply intrigued by the emerging landscape of Real World Assets (RWAs) and their potential to transform our financial systems. Having seen the evolution of digital assets from the early days of Bitcoin to the current boom in DeFi, I am convinced that RWAs represent the next major step in this journey.

In the blockchain industry, Real World Assets (RWAs) encompass tangible and intangible assets like real estate, art, music, and commodities. These assets are transferred onto the blockchain via a process called tokenization. Tokenization involves creating a digital representation of a physical asset using a self-executing smart contract. Developers usually construct smart contracts that generate tokens reflecting the ownership of an RWA, while ensuring the issued token can be exchanged for the original asset off the blockchain.

Real Asset Wrappers (RWAs) are highly valued by cryptocurrency investors and developers alike. The combined value of potential tokenizable assets such as real estate, carbon credits, gold, art, and music markets is astronomical, far surpassing the value of the cryptocurrency market itself.

Stablecoins: A Popular RWA

As a crypto investor, I’ve found myself increasingly drawn to the world of Stablecoins – a unique type of digital currency that mirrors the stability of real-world assets. These Stablecoins are often linked to stable assets like the US dollar or gold, providing a level of predictability in an otherwise volatile market. Interestingly, it’s been reported that the transaction volume of these Stablecoins has surpassed Mastercard’s and is rapidly approaching Visa’s levels, indicating a significant shift in digital finance.

Many consider stablecoins to be the “crown jewel” or “breakthrough application” of cryptocurrencies, demonstrating the essential value of this larger technology. This is one of the key factors that have sparked growing interest from the traditional financial market in the digital assets field.

Mechanics of Stablecoins

Stablecoins are digital currencies issued on blockchain platforms, sharing similar traits with other digital assets, except in terms of their underlying infrastructure. The creation of most stablecoins is contingent upon the receiver acquiring or safeguarding the asset that represents the stablecoin. This practice is called “1:1 backing” because, due to design decisions such as the option to exchange stablecoins for their corresponding assets, these assets maintain their value by doing so.

Without a doubt, the widely used stablecoins are primarily US Dollar-backed ones such as Tether (USDT) and USD Coin (USDC). These digital U.S. dollars have proven to be a safe haven for crypto investors looking to secure their profitable Bitcoin and altcoin transactions. Stablecoins offer a remedy to the natural volatility found in cryptocurrencies like Bitcoin and Ethereum, which can yield significant returns but also carry risks. By using stablecoins, traders can remain on the blockchain, thus avoiding tax implications tied to the volatile nature of crypto price fluctuations, while maintaining liquidity within the network.

Use Cases and Advantages of Stablecoins

Apart from their role in trading, USD stablecoins offer numerous advantages over traditional US Dollars. They are simpler and less costly to acquire and use. Moreover, without identity restrictions, holders can earn interest through Web3 platforms. Remuneration can be directly deposited into stablecoin blockchain wallets, similar to bank accounts. When paired with crypto-backed debit cards, stablecoins expand the scope of banking activities to individuals and businesses that might otherwise be underserved by traditional banking systems.

As an analyst, I’ve observed the significant role that stablecoins play in facilitating the onboarding of Web3 users to the blockchain and encouraging them to remain connected. In August 2024, during an interview with Brave New Coin, Yat Siu, Co-founder and Chairman of Animoca Brands – a key player in the development and investment of Web3 technology – shared his insights. He stated that “Users will gradually become accustomed to purchasing Web3.0 goods and services using stablecoins, which also means they will hold these stablecoins for extended periods. Once money is within the blockchain, it tends to remain there.

These enhancements will be facilitated by Ethereum’s EIP:7702 and the ERC-4337 standard. The integration of these updates is designed to introduce account separation on Ethereum and its associated networks, thereby simplifying many complexities of the blockchain backend, making it more akin to a Web 2.0 user experience.

Risks and Regulatory Concerns surrounding USD stablecoins

Although this application holds significant strength, it also presents certain challenges. In the event that a US dollar-pegged stablecoin were to grow substantially and fail like Terra’s UST, the potential ripple effects across the global financial system could be severe.

As an analyst, I’d like to point out that unlike traditional stablecoins such as USDT and USDC, UST operated on an algorithmic basis rather than a 1-for-1 backed system. The distinction is crucial because while 1-for-1 stablecoins are backed by cash reserves equal to their value, algorithmic stablecoins like UST rely on a volatile secondary digital asset. This secondary asset can fluctuate between undercollateralizing and overcollateralizing the stablecoin it supports, making its model inherently riskier compared to most USD stablecoins in circulation today.

American banks enjoy safety and peace of mind because organizations like the Federal Deposit Insurance Corporation (FDIC) and the U.S. government oversee and safeguard them. In case of a rare and unpredictable event known as a “black swan,” these protective measures are in place. The FDIC specifically guarantees coverage for consumer bank accounts up to $100,000 per account.

The straightforward and borderless character of USD-backed stablecoins contributes significantly to their growth, yet there are downsides to consider. Unlike traditional USD holdings, which are safeguarded by the U.S. government, these stablecoins depend on private entities for support instead.

A plausible, practical reason why the USD stablecoin market might face limitations or even collapse is due to possible strict regulation similar to that applied to U.S. banks, or possibly even tighter measures. Critics such as Democratic Senator Elizabeth Warren are skeptical about USD stablecoins.

Senator Elizabeth Warren from Massachusetts, also a Vice-Chair of the Senate Democratic Caucus, points out that stablecoins may pose threats to our national security. As it stands, stablecoins are increasingly linked to crypto frauds and transactions involving sanctioned entities, surpassing Bitcoin in this regard. Criminal organizations find attractive the use of stablecoins because they struggle to access the U.S. dollar through conventional methods but seek its stability for their illicit activities.

The Emergence of Stabull and the non-USD stablecoin

Stabull serves as a platform for a Stablecoin & RWA DEX, bridging the gap between traditional Forex and commodities markets in the digital realm. Users of both USD-backed stablecoins and other non-USD stablecoins can easily swap assets, offer liquidity, and stake their coins round-the-clock at affordable fees and swift transaction speeds.

As a researcher, I’ve noticed that cryptocurrencies like NZDS, BRZ, and GYEN were developed with a strategic perspective, taking into account the impending regulation in the USD stablecoin sector. Moreover, these stablecoins were also designed to address the under-representation of non-USD stablecoins within the digital asset landscape.

An overemphasis on US Dollar stablecoins has created a potential concentration risk.

Moreover, the sector could operate more effectively due to its international scope. A standard user of stablecoins is a remote worker who specializes in cryptocurrency and works for a multinational company with flexible hours. They receive payment in stablecoins, but often need to exchange them into local currency for everyday expenses. Many intermediaries are typically involved in such transactions.

By introducing more fiat-backed stablecoins such as Digital Yen, Euro, and Pound, we can minimize the number of intermediaries in cross-border transactions from fiat to cryptocurrency. Advanced platforms like Stabull global stablecoin exchange can also decrease transaction costs and enhance the swiftness and efficiency of blockchain applications that are well-suited for their market and widely used.

In the given scenario, a platform such as Stabull (a stablecoin exchange) facilitates seamless conversion between USDC and Canadian Dollar-backed stablecoins (CAD stablecoins). Many CAD stablecoins provide direct redemption options and can typically be traded on significant exchanges. Notably, QCAD has been proposed for listing by the prominent global exchange, Coinbase.

As a crypto investor finding myself restricted from accessing American banks due to using an exchange with Canadian credentials, I am hopeful that the arrival of Stabull might indirectly address this issue. Stabull is diligently uniting stablecoin issuers, big and small, from all around the world, which could potentially lead to a more interconnected and inclusive global crypto economy.

Beyond providing liquidity for stablecoins, issuers are collaborating by pooling resources and expanding the reach of the stablecoin market. By exchanging information about banking partners, off-ramp services, DeFi integrations, and other related aspects among various stablecoin providers, the growth of the non-USD stablecoin ecosystem is expected to escalate annually, leading us towards a more expansive market by 2025.

RWA Opportunities Beyond Stablecoins

Stablecoins, however, are just one layer of the RWA iceberg, and the sector’s potential and scope are all-encompassing.

One of the key advantages of Real Asset Wraps (RWAs) lies in making it simpler for individuals to invest in expensive assets such as art, real estate, and private credit. Tokenization divides these assets into smaller, manageable units, making them more attainable for a wider range of investors. Additionally, tokenization eliminates obstacles like geographical restrictions and data privacy concerns.

Breaking down Real-World Assets (RWA’s) into tokens increases their liquidity due to the ability to fractionalize them. Tokens are simpler to trade on secondary markets compared to tangible, intricate assets such as real estate, thanks to tokenization. Furthermore, tokenization enhances the usefulness of real-world assets by enabling them to serve as collateral for Decentralized Finance (DeFi) platforms.

RWAs are also considered a key pathway for the institutional adoption of cryptocurrencies. Some of the most popular assets to tokenize are high-value assets that often sit on the balance sheets of major institutions like banks and family offices. These institutions are exploring asset tokenization because of the efficiency benefits like transparency and transaction speed.

Additional Categories of RWAs

The five most popular and relevant RWA categories are:

Stablecoins
Private Credit
Tokenized Treasuries and Securities
Regenerative Finance
Art and Collectibles

Regenerative Finance (ReFi)

The idea of Regenerative Finance (ReFi) is gaining popularity in the Real World Assets (RWA) and Decentralized Finance (DeFi) sectors. ReFi aims to combine sustainability, economic robustness, and financial returns. Conventional finance has faced criticism for emphasizing immediate profits at the expense of long-term issues such as environmental degradation and societal harm. ReFi proposes a viable alternative by designing systems that foster long-term economic and social prosperity.

One example of Regenerative Finance (ReFi) is KlimaDAO, an initiative that has introduced a cryptocurrency token, KLIMA, which represents actual carbon assets and credits in the real world. By purchasing a KLIMA token, individuals are essentially investing in the elimination of environmentally harmful carbon. According to KlimaDAO, they have successfully removed millions of tons of carbon from the globe.

A well-known Refinance (ReFi) application is the Seed Club, a decentralized autonomous organization (DAO) based in Vancouver. This DAO serves as both an incubator and accelerator for environmentally conscious startups, assisting them in establishing decentralized autonomous organizations (DAOs) with communal governance structures that align more closely with their egalitarian objectives.

Tokenized Treasuries

Digital versions of government bonds, known as tokenized treasuries, can be bought and sold using smart contract tokens on a chosen blockchain. These are secure investments that offer returns, particularly in times when interest rates increase.

The 10-year U.S. Treasury bond is widely sought after in the government bond market. This yield represents the interest rate that the U.S. government charges when borrowing money for a ten-year period. Once these bonds are initially sold to investors, they can choose to keep them or resell them to other investors on the secondary market.

Investments in tokenized securities are often considered safer and more stable compared to equities and cryptocurrencies, as they offer a steady return. These investments can be particularly beneficial under specific economic circumstances, such as when a central bank is attempting to curb inflation by increasing interest rates.

In just under five months following a market cap of $1 billion, the value of tokenized Treasury notes has more than doubled once more, surpassing the $2 billion mark as reported by RWA.xyz’s data.

Future Outlook: Tokenized stock

As a researcher, I had the opportunity to engage with Scott Gentry from the Stabull team during the course of my study. With his background in Traditional Finance, he has given considerable thought to the transformative impact of tokenization. He posits that the US share ownership system could potentially reap significant benefits from this innovative technology. The US share ownership system is currently handled and administered by the Depository Trust Company (a subsidiary of the Depository Trust and Clearing Corporation, or DTCC). Established in the 1970s, this centralized entity was designed to streamline processes and minimize back-office administrative tasks and paperwork obligations for Wall Street firms, thereby enhancing efficiency.

When examining their share registry, public companies primarily encounter the Depository Trust Company. Stock brokers facilitate the transfer of shares among client accounts at this trust, acting as intermediaries for individual shareowners. This system, where brokers hold control over shares that technically belong to their clients, can give rise to several complications. For instance, instead of executing a trade, a broker might simply swap shares among their clients and note the transaction as an external trade. In another parallel scenario, if a trader wishes to short a stock by borrowing it and subsequently selling it on the market, then the broker could facilitate this by lending a shareholder’s stocks without their consent, and with no publicly accessible evidence that such an occurrence took place in the first case.

During the Dole settlement case in 2013, pressures surfaced due to various complications. The lawsuit against David H. Murdoch and his team claimed they had conflicts of interest when privatizing the company. Shareholders were promised a fair compensation, but problems arose as it was difficult to identify all shareholders who held shares.

In the town, a total of 4,662 individuals and organizations declared ownership of approximately 49 million shares priced at $2.74 each. However, Dole Food Company had only 36.8 million shares available for trading. It’s unlikely these claims were false. Additionally, there may have been a pessimistic outlook on Dole due to the perception that its merger and privatization might not succeed, which could have influenced the bearish market sentiment towards the company.

In addition to the problem of shorting, there might be another concern: the Depository Trust Company occasionally fails to monitor certain shares. When this happens, these shares are effectively put on hold, meaning they stop being tracked due to established procedures for the final three trading days before a merger is finalized. This situation is often referred to as putting a “chill” on the shares. (The New York Times discusses this issue in their coverage of the case.)

Tokenization simplifies this process by enabling direct possession. Through tokenization, individuals can own tokens that represent their shares on the blockchain, rather than having brokerage accounts. This empowers shareholders with complete control over their assets, eliminating the need for intermediaries.

There are additional benefits like Streaming dividends. Tokenization means that any dividends can be paid directly to the wallet holder, in the form of assets, at any point in time or automatically through smart contracts when they conduct a snapshot of who holds their shares.

Blockchains’ openness and traceability play a significant role here. Since each public blockchain maintains an unchangeable record of tokenized share transactions, every transaction is out in the open for all to see. This transparency helps avoid scenarios where shares are erroneously over-claimed, or if they are, it becomes instantly clear when and where the problem originated.

This measure aims to prohibit the unauthorized lending of shares for short selling. It facilitates immediate trade settlements, thereby resolving problems associated with delayed settlements among brokers and internal transfers. Consequently, ownership accounts would be updated instantaneously and automatically, ensuring precision and timeliness in records. Moreover, tokenization minimizes the requirement for centralized clearing houses, thus decreasing the chances of human error or manipulation.

Critiques of Real World Assets (RWAs)

Challenges to the Adoption of RWAs

Consulting powerhouse McKinsey highlights some critical hurdles for the broad implementation of Real-World Asset (RWA) systems and tokenization:

1. Technology and Infrastructure Limitations

The expansion in the Real World Assets (RWA) sector has been restricted due to a lack of readiness in technology and infrastructure. Services like Agio, offering institutional-grade wallets, exchanges, and custody, are available but often struggle to match the adaptability and connectivity of conventional, non-blockchain systems. Although decentralized and permissionless blockchain platforms provide benefits, they also present challenges such as slower upgrades, inadequate tooling, insufficient token standards, and security issues.

2. High Implementation Costs and Unclear Short-term Business Cases

The practical applications of RWAs (Real World Assets) may become evident primarily with widespread industry adoption, robust connectivity, and well-structured trading platforms. At present, professional investors find it necessary to maintain dual systems for handling both transactions off the blockchain and those on it, which increases legal and regulatory intricacy. Furthermore, it remains uncertain whether there will be significant capital inflow towards new issuers in the short term and how many potential buyers there might be in this market.

The Future of RWA Tokenization

Tokenization is at an Inflection Point

McKinsey indicates that tokenization could be approaching a significant turning point. Although there are some structural challenges, the field is demonstrating potential due to advancements in tokenized cash alternatives, the advent of Regulatory Wrapped Assets (RWAs) like tokenized treasuries that take advantage of the current high-interest-rate climate, and the development of favorable regulatory landscapes in unconventional markets.

The market for USD-backed digital coins has experienced rapid growth, primarily due to advances in blockchain technology that enable less expensive, quicker, and more adaptable transactions. The popularity of USDC and USDT has surged as a result of their deployment on Optimism and Tron, and technologies like Synapse simplify cross-chain transfers. As restrictions on stablecoins are gradually lifted, platforms such as Stabull are fostering the growth of non-USD stablecoins.

If global retail users are allowed to own digital forms of their native currencies rather than just digital US dollars, the Real-World Assets (RWA) sector could potentially grow more. This vision aligns with Stabull’s objective of minimizing dependence on USD stablecoins by promoting a wide variety of fiat currencies across multiple blockchain platforms.

Institutional Interest and Regulatory Support

Leading companies such as Goldman Sachs and nations like El Salvador and the U.A.E. have developed systems for tokenizing assets. These systems are designed to create safeguards, connections, regulations, and other infrastructure to foster the expansion of the sector. With growing institutional attention, ambitious RWA projects are becoming more popular.

A significant factor fueling expansion is the thriving market for tokenized treasuries, which are increasingly appealing in a high-interest-rate setting. As McKinsey points out, short-term liquidity operations like tokenized repo transactions and securities lending have seen advantages from capital efficiency in this economic context. With a current value surpassing $2 billion, the growth of tokenized treasuries has been remarkable, primarily due to favorable circumstances.

Looking Ahead

In recent times, tokenized securities have gained significant traction. However, the possibility of interest rate reductions could diminish their appeal moving forward. Yet, the flexibility within the Real Asset (RWA) sector opens up possibilities for alternative assets such as gold, which perform well in low-interest scenarios. Gold, being a secure asset that is less affected by currency devaluation, might witness an uptick in demand as interest in tokenized securities decreases. Similarly, if the decline in US rates reduces interest in tokenized treasuries, RWA staking could be another viable alternative.

One way to rephrase the given text in a more natural and easy-to-read manner could be:

Historically, making money as a liquidity provider by offering capital for trading was limited to institutions and experts. However, Decentralized Finance (DeFi) has shattered many of these boundaries by democratizing and streamlining financial structures, allowing easier paths for profit generation. Now, people can buy tokenized versions of fiat currencies, gold, or commodities, then deposit them onto platforms like Stabull to facilitate trades. This enables the depositor to collect a portion of the transaction fees generated.

Industry Critiques:

In our conversation, Nelson from Stabull’s team raised a thought-provoking question: Why hasn’t tokenization, being a potentially revolutionary tech model, transformed the world yet? Nelson explained that establishing a Real World Asset (RWA) startup is no walk in the park. It represents a completely new technological landscape with obstacles, often invisible, still standing.

Antone Golub, the creator of cryptocurrency platform Lykke and a part of SwissAssetDAO, spearheaded a venture to convert Lykke and SwissAssetDAO shares into tokens. This pioneer in tokenizing real-world assets is paving the way for crypto investors to expand their portfolios with variety. He has shed light on some significant hurdles from within the industry:

1. Tokenization via Special Purpose Vehicles (SPV)

In many cases, turning Real Asset Warrants (RWAs) into digital form involves setting up Special Purpose Vehicles (SPVs), a process that can be expensive, intricate, and ineffective. Golub points out that numerous legal systems do not offer a means for the immediate, on-blockchain issuance of RWAs, leading to the creation of SPVs even within jurisdictions that favor tokenization. Converting from physical certificates to electronic recordkeeping, commonly known as Dematerialization (DEMAT), is well-established in traditional finance.

2. Lack of Secondary Markets and Liquidity

As a market analyst, I’ve observed that one of the major hurdles in the widespread adoption of Real World Assets (RWA) is the lack of secondary markets and liquidity. This means that investors have limited options to trade tokenized assets seamlessly, which slows down the ecosystem’s growth and reduces its appeal.

3. Regulatory Challenges

Remarkable regulatory hurdles persist as an obstacle in the tokenization of stocks and Regulatory Capital Weights (RWAs). Golub points out that intricate legal issues frequently surface when endeavoring to develop and implement RWAs on open, permissionless blockchains without encountering consequences. This legal resistance not only escalates costs but also creates a tough terrain for both investors and issuers.

4. Declining Interest and Liquidity in the RWA Ecosystem

Golub also notes that liquidity is gradually leaving the RWA ecosystem, and investor interest is waning. For the sector to succeed beyond stablecoins, it must become easier for investors to access RWAs, and issuers should be able to deploy them seamlessly across multiple public blockchains.

Conclusion

The integration of Real World Assets (RWAs) using blockchain technology signifies a significant advancement in the financial and asset management sectors. A type of RWA, known as Stablecoins, is now widely regarded as the latest breakthrough in cryptocurrency, but it merely scratches the surface of what tokenization can accomplish in making real-world worth accessible on distributed networks.

As a crypto investor, I’ve noticed the relentless surge in the popularity of USD stablecoins, which is not only propelling their own growth but also boosting the entire Real-World Assets (RWA) sector. This sector includes assets such as non-USD Stablecoins, gold, treasuries, private credit, and more. The allure of these tokenized assets lies in the advantages they bring, from improved liquidity to democratized investment opportunities for both small and large investors alike.

However, as promising as this space is, significant hurdles remain. Regulatory challenges, technological limitations, and liquidity concerns must be addressed for the sector to reach its full potential. Platforms like Stabull, which seek to diversify and strengthen the stablecoin ecosystem, are taking the first steps toward overcoming these barriers by broadening the fiat currency stablecoin market with a single platform to swap between large and small stablecoins, streamlining cross-border transactions in the process.

In essence, Resourceful Ways of Asset (RWA) management holds tremendous promise to transform the way individuals and corporations invest, trade, and handle their resources. The key to their success lies in a harmonious blend of regulatory understanding, upgraded infrastructure, and ongoing innovation within the sector. With tokenization on the brink of a significant shift, its effects might transcend stablecoins, potentially reshaping global finance by facilitating broader institutional acceptance and a tighter integration with Decentralized Finance (DeFi) networks. By enhancing market efficiency and transparency, they could unlock new avenues of value creation.

Stabull Finance functions as a specialized decentralized exchange, primarily catering to stablecoins pegged to fiat currencies and assets representing real-world items (Real World Assets or RWAs). The platform aims to bridge an essential infrastructure void within the web3 environment, since there’s currently no core infrastructure specifically tailored for the expanding variety of non-USD stablecoins.

2024-11-08 05:23