Real-world asset tokenisation has the potential to transform financial markets

The tokenisation of real-world assets, or RWAs, is essentially the conversion of tangible assets into digital representations. In practical terms, a variety of items, including art, commodities, real estate, government bonds, debentures, stocks, and more, are suitable for tokenisation.

Gaining momentum, the sector is gradually advancing through initiatives from the world's major financial institutions and central banks. Brazil stands out as a country with great medium-term potential for evolution due to the development of Drex, the Digital Real project.

Below, we delve into the key points of this technology.

Real-World Assets (RWAs)

RWAs earn their name when tokenised assets become integrated into the blockchain infrastructure. Through DeFi technology, or decentralised finance, these assets become divisible, transferable, and negotiable.

For financial institutions, this technology has the potential to optimise systems and reduce asset management costs. For clients, this means experiencing less red tape when investing, enjoying exemptions or reductions in intermediary fees, and having greater access to a variety of products.

"This is a technology that has been evolving over the past three years and has the potential to change the way we understand and interact not just with our finances but with any valuable asset in the physical world," says Ricardo Santos, VP Engineering at Parfin.

Tokenised assets

In theory, any asset can be tokenised. Currently, in financial markets, the tokenisation of government bonds, fund shares, and gold, among other assets, is particularly prominent. Due to the lack of specific regulation, systems operate RWAs in controlled environments.

Below are some of the main use cases:

• Precious metals: tokenisation allows for the acquisition of fractional shares of gold, silver, and other precious metals.
• Stocks, bonds, and fund shares: tokenisation introduces a more efficient way to trade and settle securities.
• Commodities: tokenisation makes investing in commodities like oil or natural gas more accessible.
• Venture Capital: startup tokens simplify ownership transfer and can attract more investors.
• Intellectual property: tokenised patents or copyrights can be acquired in a more straightforward and secure way with minimal paperwork.
• Luxury goods and art: tokenised high-end goods allow investors to buy shares in these items. These goods can also be used as loan collateral.
• Energy credits: tokenisation can be applied to renewable energy projects, enabling investors to participate in the financing and ownership of green energy initiatives.

Adoption among financial institutions

Broadly, RWAs represent the democratisation of access to financial services by potentially facilitating loans, transfers, and investments. This is why some of the world's largest financial institutions are advancing projects that use blockchain and smart contracts specifically targeting services related to tokenisation.

JPMorgan, which started blockchain research in 2015, is optimising Quorum, its private platform developed as an Ethereum soft fork. Citibank, meanwhile, makes advances with Citi Token Services for cash management and commercial financing focused on institutional clients.

In Brazil, Parfin has been providing technical support to major institutions: Santander, during the Central Bank's Lift Challenge, and Banco BV, in the Drex pilot project. Both are pilot tokenisation projects designed to make vehicle purchasing and financing easier.

"Today, we already have some decentralized finance (DeFi) platforms that are ready and have the infrastructure necessary to provide tokenized loan solutions to traditional financial market assets. New partnerships are likely to emerge, and certainly, the innovation happening at high speed in the decentralised world will boost the traditional market. Some essential components, such as compliance criteria and the creation of a cryptographic identity, are already in development," says Santos.

RWA-specific token standard

The possibility of interconnecting systems in a tokenisation infrastructure being studied by financial institutions worldwide paves the way for the creation of a global token market.

A significant step forward in this challenge was taken in mid-December 2023, when the Ethereum network community approved the ERC 3643 standard, the first developed specifically for RWA tokens.

Adopting a standard protocol encourages the development of applications and projects that manage tokenised assets more efficiently. "This approval has the potential to attract even more financial institutions and companies to tokenization, thus accelerating the integration of the Ethereum blockchain into traditional finance," says Santos.

The connection between Drex and RWAs

While this sector has made significant progress in recent years, tokenised assets will only bring about a true change in the financial market when money itself is tokenised.

In this context, Brazil is a step ahead globally with its promotion of the Drex project - the creation of a Digital Real, spearheaded by the Central Bank and slated for release in 2025. "Once a tokenised legal tender circulates in a unified system, private institutions and clients will be able to reap the benefits of this technology," points out Santos.

In practice, for instance, an individual could tokenise a high-value luxury good, like a watch, and offer it as collateral for a loan. "It's real possibilities like these that will accelerate the creation of specific regulations for the sector, potentially unlocking this market not only in Brazil but also globally by 2026," says Santos.