How tokenization of real-world assets will revolutionize the financial landscape

To gain deeper insight into the state of RWA tokenization in 2023, Kitco Crypto spoke with Benjamin Stani, director of business development at Matrixport, which operates the Matrixdock digital asset platform, the second-largest issuer of on-chain T-Bills.

“With the compression of on-chain yields compared with an increase in FED rate, there has been a big divergence of on-chain and off-chain rates,” Stani said. “RWA and specifically T-bills can bridge the gap.”

He noted that while the stablecoin market serves as “a cornerstone of the crypto ecosystem with a market cap of ~$125 billion,” the underutilization of these stable assets “has been a lingering concern,” one that RWA tokenization can address.

“This has emerged as a disruptive force in 2023, unlocking the potential of the asset class and fundamentally altering how value is created, transferred and stored,” he said.

According to Stani, the push for “risk-free real-world yields has shifted the industry’s focus toward tokenizing regulated financial instruments,” with T-bills, real estate, precious metals, and fine art seen as the most viable assets for tokenization.

He said that the launch of Matrixdock’s tokenized short-term treasury bills (STBT) has “garnered a very positive response thus far, amassing $123 million in just over five months,” and the company is now focused on expanding the pool of holders as institutions begin to understand the potential business use cases in areas such as treasury management.

“This ambitious vision is backed by stringent security measures, comprehensive legal architecture, and thorough KYC and AML procedures,” he said.

When asked about Matrixport’s plans for tokenization moving forward, Stani noted that the appeal of tokenized T-Bills “is driven by FED rate hikes and also the desire to access the ‘risk-free rate’ without the hassle of traditional trade execution and settlement,” and said, “The same logic can apply to other real-world assets as the industry grows.”

“With tokenized treasuries, a form of security, being widely adopted by the industry, exploring other liquid-listed securities in a similar format will be not that different from a conceptual point of view,” he said. “In short, Matrixport’s vision extends to tokenizing real estate, corporate bonds, and fine wines.”

As for the outlook of the RWA tokenization industry, Stani said it “is expected to become a major theme for the digital assets ecosystem in the coming years, adding tens of trillions of dollars to the market.”

“RWA tokenization will greatly enrich the scale and variety of assets available on-chain as our industry matures,” he said. “With expectations of continued elevated ‘risk-free’ rates, the economic incentives for institutions to incorporate tokenized T-bills, accompanied with further DeFi innovations in market offerings can be expected in the coming quarters.”

He said that while we are still early in the tokenization cycle, Matrixport has observed an increasing level of interest from both crypto-native as well as traditional financial players.

“Some noteworthy developments include Singapore Central Bank’s Project Guardian successfully using DeFi for wholesale funding markets, executing trials for foreign exchange transactions and government bond trades, and Deutsche Bank testing tokenized funds on the Ethereum public network,” he said. “Adoption is on a rapid upswing. Continuous innovations in liquidation strategies and smart algorithms are fueling this momentum, promising significant industry milestones by year-end.”

Tokenization benefits and drawbacks

Stani said one of the biggest benefits of tokenization is that it “democratizes financial markets by removing intermediaries, speeding up transactions, and reducing costs.”

It also opens up investment opportunities that were previously only available to high-net-worth individuals, he added.

The main limitations are centered around the user experience, “especially around liquidity,” he said. “Our focus now is on offering 24/7 liquidity and streamlining the minting and redeeming process.”

“Tokenization has the potential to revolutionize the financial landscape, creating new revenue streams and even entirely new markets,” he said. “Once critical mass is reached, we could see a merging of TradFi and DeFi, setting the stage for a smarter, more programmable global economy.”

One of the biggest barriers to RWA tokenization at present is regulatory uncertainty, Stani said. “Legal frameworks are struggling to keep pace with the swift advancements in tokenization technology. This is especially pronounced in the realm of RWA infrastructure integrated with DeFi, where regulators must confront issues of blockchain scalability to accommodate TradFi market volumes,” he said.

To help overcome this roadblock, Stani recommends “a progressive regulatory approach” that focuses on “establishing comprehensive frameworks that are fully compatible with DeFi standards.”

“Such frameworks must rigorously enforce risk management protocols to fortify both transparency and security,” he said. “The success of Singapore’s pioneering stablecoin regulations illustrates the power of clear, robust guidelines. They not only safeguard investors but also create a conducive environment for issuers and financial institutions to innovate and tap into new investment avenues.”

As for how long it will take for companies to start upgrading their technology infrastructure to allow for tokenization, Stani said, “The technological part is actually the easier aspect of it” as there are “solutions out there that work today, as shown with STBT.”

“The bottleneck is more on the regulatory and compliance side,” he said. “We need to have clarity on what constitutes a security and how on-chain property rights can be treated off-chain. Some jurisdictions are more progressive than others, and I expect naturally we will see innovation and adoption drive in these.”

Stani said the biggest hurdle is “internal compliance teams wanting to overlay the same framework on these new asset classes while obviously a lot of things are less relevant (e.g. audit trail keeping) or even possible on-chain (e.g. reversing a transaction).”

While issues related to regulatory compliance are currently causing delays in the adoption of RWA tokenization, Stani said these obstacles will eventually be overcome, allowing RWA to flourish around the globe.

“The future holds promise for strong demand in deep liquidity on-chain, especially with large protocols,” he said. “While there are restrictions and licensing requirements around STOs [security token offerings], flexibility might be found in using securities as underlying assets for other products. The industry is exploring these possibilities, aiming for innovation.”

“Once we have the critical mass within our industry, the end-game will be where the world of TradFi and crypto joins as a single ‘finance industry,’” he said. “This is a different trend from past bull runs, and it will be phenomenal.”