RWA Summit 2024: Tokenization Insights, Innovations, and Future Considerations Take Center Stage

#The Unique Characteristics of the Current Tokenization Cycle

Image provided by Superstate

Superstate CEO Robert Leshner, in his opening fireside chat, emphasized the potential of blockchain technology in finance, stating, “Blockchains are really good for finance. By issuing assets onchain, we can replace the processes that currently exist offchain.” The transactional efficiency of blockchains was often cited. This was juxtaposed to the current financial infrastructure, which only recently reverted to T-1 settlement, the same efficiency with which it operated a century ago.

Supporting this assertion, Leshner noted that “DeFi protocols have proven themselves able to create autonomous, efficient markets. We’ve only seen a smidge of what’s possible [onchain].”

Lucas Vogelsang from RWA platform Centrifuge echoed this sentiment, highlighting the importance of creating market infrastructure for real-world assets during these early days of asset tokenization. Centrifuge’s recent raise of $15 million will only accelerate the financialization of tokenized assets. Leshner and Vogelsang conveyed the growing consensus that asset tokenization is at an inflection point. They agreed that the current tokenization cycle differs from previous ones, as it focuses on building essential infrastructure and reflects the growing maturity of DeFi in relation to the traditional financial industry (TradFi).

Looking out into the future, Leshner predicted, “We’ll see [Superstate] products make it through SEC registration—it’ll happen,” highlighting the company’s commitment to compliance and navigating the evolving regulatory landscape in the United States.

#Asset Innovation to Drive Demand

Image provided by Huma Finance

Asset innovation was a recurring theme throughout the RWA Summit, with panelists emphasizing the need to create unique investment opportunities and leverage blockchain technology’s benefits to unlock new markets and attract investors.

Carlos Domingo from Securitize stressed that tokenization can add value by enabling new functionality to securities rather than simply serving as an alternative ledger. However, Domingo was dismissive of so-called utility token assets, calling them “fantasy tokens” that serve to muddy the waters between security token issuances and speculative blockchain-based investments.

Erbil Karaman from Huma Finance, a company focused on leveraging tokenization in the payments industry (termed PayFi), stated that the company had already processed over $1.4 billion of onchain volume. Karaman stated that Huma’s goal “is to create products onchain that are composable and scalable.”

On the same panel, Raj Brahmbhatt from Zeebu showcased their platform’s flagship launch in the telecommunications industry and their approach to parsing real-world yield to onchain holders of their native token.

#What’s Been Built and What’s Still Needed

The current state of the tokenization industry suggests progress. However, there remains much to be desired in terms of compliant infrastructure that meets the needs and desires of traditional financial incumbents.

Mike Giampapa from Galaxy Ventures opined on the role of institutions as primary consumers of block space, which will drive immense value to L1s and L2s as tokenization scales. He noted that “the ones that capture the market and facilitate the customer experience are the ones that capture the largest amount of value.” Galaxy’s involvement as a market-making partner for projects and their Euro-denominated stablecoin, All Unity, demonstrates their commitment to building the necessary infrastructure for tokenization on a global scale.

Ben Forman from ParaFi Capital stressed that “tokenization is, at its core, a type of formatting for assets”, and that asset management firms will benefit from the reduced settlement costs brought about by the still-emerging modularity made possible by blockchain technology. He envisioned using XMTP to communicate with shareholders rather than relying on traditional paper-based methods, showcasing the potential for increased efficiency that goes well beyond the recent T+1 settlement improvements in contemporary TradFi.

#Increasing Allocations to Tokenized Assets

Institutional interest in tokenized assets continues to grow, but ongoing challenges need to be addressed to increase allocations to the nascent asset class further. This panel explored the many facets of these dynamics and illuminated some of the best potential ways forward to drive broader adoption.

Anthony Bassili from Coinbase noted that while allocators recognize the potential of tokenized assets, it takes time for these products to reach broad adoption. He emphasized the need for market structure development, including global issuance, collateralization and lending, and efficient secondary trading. Bassili also highlighted the difference in risk tolerance between crypto natives and traditional investors, humorously stating, “Chainlink is a stablecoin to some crypto investors.”

Image provided by RWA World

Matt Halstead from the Teacher Retirement System of Texas pointed out that the current size of the tokenized asset market is too small for large institutional investors to consider it as part of their long-term investment thesis. However, he acknowledged that digitally native revenues present a unique opportunity for onchain products and services, as there are no entrenched competitors in this space.

Michael Bucella, from Neoclassic Capital, emphasized the importance of reducing custodial risk and increasing liquidity through faster settlement times as ways to bridge the investability gap for institutional investors. He noted that the speed at which collateral can be released decreases the cost of capital, making tokenized assets more attractive to investors and laying the groundwork for more institutional investor interest.

#Navigating Regulatory Uncertainty

Regulatory uncertainty remains a significant challenge for the tokenization industry. However, recent developments, such as the passage of FIT21 in the House and the approval of Ether ETF 19b-4 filings, indicate growing support for blockchain technology in the United States. Indicative of the positive trendline but continued challenges is the SAB 121 repeal. The SAB 121 repeal passed both the House and Senate with bipartisan support, but subsequent to the RWA event, the President vetoed the measure - an outcome that was previewed as likely by panelists.

Kristin Smith from the Blockchain Association emphasized the need for policymakers to understand blockchain’s unique attributes and create frameworks that work for the industry while protecting investors. She stated, “We want policymakers to look at the unique attributes of blockchain and figure out how to work with that system. We’re not trying to dodge the rules; we want the rules to make sense.”

Image provided by RWA World

TuongVy Le from Anchorage Digital highlighted an unutilized approach: leveraging the SEC’s exemptive authority granted by Congress in the 1990s. This authority has been virtually unused for the crypto industry but could adapt existing regulations to support new products and systems. The SEC has previously utilized this authority in instances of technological shifts, such as Alternative Trading Systems and asset-backed securities. This contrast highlights the disconnect between regulators and the rapidly evolving digital asset industry in the United States.

Rebecca Rettig from Polygon highlighted their recent report, ”Genuine DeFi as Critical Infrastructure: A Conceptual Framework for Combating Illicit Finance Activity in Decentralized Finance,” which offers a three-part framework for compliance and reporting. The framework, which applies to both DeFi and real-world assets, provides a clear path forward for the industry to address regulatory concerns and foster trust among stakeholders.

#The Future of Tokenization

Mike Cagney from Figure Markets closed the summit by sharing his vision for the future of tokenization, emphasizing the potential for blockchain to replace intermediaries and enable direct interfacing between buyers and sellers. He also discussed the economic benefits of using blockchain, such as reducing audit costs and increasing collateral efficiency.

Cagney’s insights align with Superstate’s long-term vision for the tokenization industry. As Leshner noted, “Over time, the market will reward those that do it right, but it’s a barbell. Some of the far-end risk curve products will do really well in surprising ways.” By focusing on compliance and building robust infrastructure, industry participants will position themselves as leaders in the maturing tokenization space.