Why do we need real world assets on blockchain anyway?
By Philipp Pieper and Timo Lehes, co-founders of Swarm
Blockchain is an amazing technology with the potential to transform the way that assets are traded. So far, it has been used largely by deregulated actors, often via centralised exchanges. The pre-eminent use case for tokenisation at the moment is trading real world assets, but its reputation has been dragged through the mud. FTX and Celsius highlighted the perils of unregulated trading, the opacity of centralised actors and that crypto assets are too highly correlated and easy to manipulate. This rings true with comments from Goldman Sachs’s digital assets chief, Mathew McDermott, who says markets are looking for a “flight to quality.”
The current crypto bear market and lack of diversified assets available on chain have resulted in fewer yield-bearing opportunities and products on chain. Rising interest rates have highlighted the attraction of interest-bearing assets from traditional markets, which are not yet available in the decentralised finance (DeFi) ecosystem. The promise of connecting real world assets to blockchain will make asset management and trading on-chain more robust. But connecting these assets with blockchain technology requires a favourable regulatory environment and guardrails around tokenisation to create a strong, trustworthy foundation on which to continue innovating. Institutions are already tokenising real world assets. HSBC and Northern Trust expect that by 2030, approximately 5% to 10% of all assets will be digital, which is not an insignificant amount considering global assets under management are expected to rise to $145.4 trillion by 2025 according to PWC. The European Investment Bank (EIB) recently issued a £50 million bond on HSBC’s Orion platform, making this the third time the EIB has issued a tokenised debt instrument. The EIB had already issued a €100 million bond using Société Générale's FORGE platform and a €100 million bond on Goldman Sachs’ tokenisation platform, GS DAP.
Unfavourable regulatory environments
Platforms like Uniswap are delisting certain security tokens. In July 2021, it removed 100 tokens that could be deemed to be unregistered securities, in anticipation of the SEC’s action by enforcement policy that it is seemingly applying to the digital asset industry. The regulatory regime in Europe for blockchain-based finance is more certain. Regulators have worked hard to come together and develop the markets in crypto assets (MiCa) legal framework, which at least offers entrepreneurs some clarity in how this asset class will be treated. Germany has also been at the forefront of digital asset legislation, updating its Banking Act in 2020 to bring crypto in line with financial products more generally. Anyone dealing with digital instruments, has to be regulated as such. Financial institutions in Europe can hold crypto on their balance sheets whereas US counterparts cannot under the US banking charter. The possibility to integrate the advantages of blockchain technology with traditional markets in the US is unlikely at this stage.
Blockchain’s killer use case
Blockchain is at the precipice of its killer use case - revolutionising the way we trade traditional markets. The whole blockchain ecosystem is made up of assets that seem to be more or less connected. By bringing outside, non-crypto assets on-chain, it creates a different asset universe and offsets some of those behaviours in the market that have led to widespread contagion. The cool thing about bringing a tech stock like Apple into DeFi is that its market cap is bigger than the entire crypto industry. It would overshadow the value of everything else already on-chain, including Bitcoin. Applying blockchain technology to traditional assets mobilises them in a way that cannot be done within current payment and trading rails. The composability of DeFi adds degrees of flexibility, fractionalisation and composability, which create value for investors. Not only can we wait for the price of our asset to go up or down, but now we can use it as collateral for lending and borrowing. Consumers will be able to do more with their assets using DeFi. Instead of just investing in brands that people use and love, they'll be able to do more with their shares. We see a future where the stock market will blend with the consumer product market, creating ‘insumers’. Imagine a future where you can buy a cup of coffee by lending against your Starbucks stock that lives in your web3 wallet.
The gold standard for tokenisation
Blockchain-based trading can’t continue unfettered and unregulated for very much longer, it is too fundamental a technology to risk it being conflated with unregulated actors and nefarious applications