Real-World Assets (RWAs)

To do this, RWA issuers take a traditional asset — such as government bonds, commodities or private credit notes — and issue a token on a blockchain to represent it. While the underlying asset itself is stored with a custodian or other regulated financial institution, the token representing it can be freely traded onchain. This token represents ownership of, or a contractual claim on, the underlying asset.

The term RWA essentially covers any asset tokenized in this fashion. For example, tokenized Treasury products such as BlackRock’s BUIDL fund provide exposure to government debt; tokenized equities allow for 24/7 trading in public companies; tokenized real estate allows investors to trade fractional ownership of properties; and commodities such as gold and petroleum can also be represented onchain.

The major advantages conferred by RWA tokenization are faster settlement, 24/7 trading and fractional ownership. Together these can increase accessibility and affordability for market participants. Smart contracts can also be used to automate certain processes such as dividend payouts, while the transparency and immutability of public blockchain records can solve problems such as the double-pledging of collateral in credit markets.

However, these benefits rely on the infrastructure underpinning the system. Tokenization introduces counterparty risk related to the issuers and custodians managing the underlying assets. Importantly, owning an RWA token does not guarantee legal rights to the asset it represents — this depends on how that particular asset is issued and structured.

Since tokenization is still a relatively nascent technology, the regulatory frameworks for these systems are just beginning to take shape.