2024 is poised to be the year of scaling up for the tokenisation of real-world assets (RWA). Real-world asset tokenisation, or the process of creating digital tokens representing ownership of tangible assets, has steadily gained momentum since its inception, with 2022 and 2023 serving as critical stages in its evolution.
2022 marked a year of tokenised private credit by decentralised finance (DeFi) protocols. Across protocols tracked by RWA.xyz, tokenised private credit peaked at US$1.5 billion, only to fall back to $256 million at the outset of 2023 as part of the systemic breakdown of the bear market caused by a series of large-scale failures such as Terra and FTX. Nevertheless, 2023 emerged as a transformative year for tokenised treasury bills amid the high interest rate environment. The total market cap of tokenised treasury products experienced a remarkable upswing from US$100 million to an impressive US$831 million by year-end. This surge underscored a growing interest in tokenised financial instruments and highlighted the potential for blockchain technology to streamline traditional financial processes.
2023 also marked the beginning of institutional interest in RWA tokenisation. Prominent investment firms like Franklin Templeton, Hamilton Lane and JP. Morgan made significant forays into the space. Franklin Templeton established OnChain U.S. Government Money Fund (FOBXX), the first U.S. registered mutual fund to leverage public blockchain technology for transaction processing and share ownership recording. Hamilton Lane launched a tokenised feeder fund which feeds into its Senior Credit Opportunities Fund. Tokenisation helps democratise access to senior private credit, reducing the minimum investment threshold from US$2 million to US$10,000, therefore opening doors for a broader investor base.
In November 2023, J.P. Morgan’s blockchain arm, Onyx, collaborated with industry startups under the Monetary Authority of Singapore’s Project Guardian, pioneering a proof of concept showcasing the potential of tokenisation in managing financial assets. This collaboration signalled a concerted effort to explore blockchain’s transformative capabilities within traditional financial ecosystems.
In Q2 2023, DigitalX Ltd (ASX:DCC) launched its DxART Fund, a diversified portfolio of RWA tokens. The DxART Fund invests in a portfolio of fractionalised RWA across multiple asset classes including cash, properties commodities, venture capital, private debt and bonds. The Investment Manager uses automation and digital tokenisation to deliver a more efficient and transparent investment process and enhance portfolio diversification.
This month (February 2024) witnessed Citi’s partnership with WisdomTree and Wellington Management to conduct a proof-of-concept trial of tokenising private assets on Avalanche’s platform. The new test by Citi included end-to-end and secondary token transfers to enable trading and validating new capabilities through collateralised lending. The bank’s proof-of-concept demonstrated how smart contracts could enable greater automation and potentially create enhanced compliance and controls for investors and issuers. This trial advanced the integration of blockchain technology into mainstream financial operations. As institutions increasingly recognise the benefits of tokenisation including lower transaction fees, enhanced liquidity, better transparency, broader accessibility and enhanced compliance, adoption is expected to grow.
Regulation
RWA tokenisation continues to evolve with regulatory acknowledgement surrounding RWA tokenisation in jurisdictions like Singapore, the EU, and the UK. Project Guardian has been sponsored by the Monetary Authority of Singapore to explore the potential of asset tokenisation. The EU released MiCA, a new regulatory framework guiding the issuance and trading of crypto-assets as well as the management of the underlying assets. In another notable effort, the EU DLT Pilot regime developed a framework for enabling multilateral trading facilities to utilise a blockchain for both trade execution and settlement, rather than through a Central Securities Depository. The UK has also launched a pilot regime seeking an even more advanced framework for issuing tokenised assets on public networks.
The rapid development of digital infrastructures has also enabled the scaling of RWA tokenisation. Chainlink collaborated with industry giant Swift to offer a solution to enable cross-chain settlement of tokenised assets. The development of account abstraction, a framework for smart contract wallets, helps make the on-chain experience much easier for customers – a key aspect for scaling up and mass adoption.
RWA tokenisation scaling up becomes feasible with the continued development of Zero-knowledge (“ZK”) rollups which offers a unique blend of scalability and confidentiality. ZK rollups significantly lower transaction costs by batching multiple transactions into a single succinct proof, thereby reducing congestion and gas fees associated with on-chain operations, removing a major roadblock for RWA tokenisation scaling. By leveraging ZK proofs, ZK rollups can obscure sender and recipient addresses, transaction amounts, and smart contract codes, thereby preserving the privacy of transaction details if required. This privacy-enhancing feature is very important for institutional players. Additionally, ZK rollups offer faster finality, as transactions are finalised as soon as their validity proof is published on the underlying layer-1 blockchain. This enhanced efficiency enables capital efficiency and potentially enables atomic settlement for RWA tokenisation.
With a convergence of technological innovation, institutional support, and regulatory frameworks, 2024 underscores the readiness of tokenisation to transition from proof-of-concepts to commercialisation. While RWAs currently primarily encompass the tokenisation of currency, money market instruments, and private assets, the trajectory points toward the tokenisation of all existing asset classes and a transformation of portfolio management. As blockchain continues to reshape finance as we know it, the journey towards mainstream adoption of tokenisation promises to redefine the landscape of global finance in the years to come.
DigitalX embraced RWA tokenisation through the launch of its DxART Fund. In 2023 the Fund offered investments in fractional co-ownership of Australian residential properties which helps improve housing deposit affordability for Australians seeking to buy a house. In 2024 the Fund will continue diversifying its offering to different asset classes beyond this first pool and contribute to the scale-up of RWA tokenisation.
About DigitalX Asset Management
DigitalX Asset Management Pty Ltd (DXAM) is the investment manager of three investment products that provide qualified investors with highly secure and streamlined access to digital assets. Our three funds: DigitalX Digital Asset Fund, Bitcoin Fund, and DigitalX Asset Reference Token Fund are led by an experienced team of finance professionals and digital asset specialists. The DigitalX Fund has a 5-year track record of securely managing Bitcoin and digital assets, while our Bitcoin Fund has been operating for over 3 years and has an institutional grade rating from the prestigious research house, SQM Research.
For further information, please contact our Business Development Manager David Mack via email at [email protected], or visit digitalx.fund.
