Tokenization of real-world assets (RWAs) is a topic of interest among financial institutions and enterprises, which saw some explore the process in the previous months, and more are likely to follow suit following a report from the World Economic Forum (WEF) highlighting how tokenization is spearheading a radical transformation in the global finance and investment sector.
In its annual meeting, WEF stakeholders deliberated a viable path toward tokenization as the process achieves near-mainstream adoption among enterprises after years of experimentation and multiple proofs-of-concept (PoCs).
Outlining the prospective benefits of tokenizing assets on blockchain technology, the WEF stated that a blockchain-based system will shorten settlement cycles, which will have the ripple effect of high liquidity and low systemic risks.
The non-governmental organization opines that collateral management will receive a significant upgrade, potentially creating capital of over $100 billion annually. Meanwhile, the wholesale application of smart contracts for automation is expected to save as much as $20 billion in operational costs.
“Distributed ledger technology can bring our capital markets infrastructure into the 21st century by streamlining and automating manual and time-consuming processes,” read the report.
Aware of these possibilities, Euroclear and the World Gold Council have taken the initiative to explore tokenizing RWAs, and banking regulators in Hong Kong and England are emulating the move. The Bank of England (BoE) is pushing forward with central bank digital currencies (CBDCs), while the Hong Kong Monetary Association (HKMA) is testing the waters with digital bonds.
Additionally, asset managers Templeton and BlackRock (NASDAQ: BLK) are experimenting with tokenized mutual funds, but ecosystem players have to grapple with several issues.
Privacy and security concerns are among the top potential challenges facing the mainstream application of tokenization. To address these issues, the WEF report points to the rise of governance bodies like the Global Synchronizer Foundation, which is leading the charge for transparency among ecosystem players.
Floodgates of adoption thrown wide open
Experts say that the tokenization of RWAs may become a $15 trillion market within a decade, while others are optimistic that the figure will be closer to $30 trillion. GlobalData predicts that blockchain revenues could reach $291 billion in 2030 from $12 billion in 2023, fuelled by the institutional and government adoption of tokenization.
Central banks are scrambling to insert tokenization capabilities into CBDCs while others are rolling out new regulations to govern the emerging sector. Some countries are, meanwhile, charting their path toward tokenization, and several international agencies are jostling to create uniformity for the ecosystem.
Tokenizing real estate
With tokenization gaining popularity worldwide, digital asset platform Progmat has joined several others in adopting the process, with its new initiative focusing on the real estate sector outside Japan.
Backed by Japanese financial powerhouses Mitsubishi UFJ Financial Group (NASDAQ: MUFG), Sumitomo Mitsui Banking Corporation (SMBC) (NASDAQ: SMFNF), and Mizuho Bank (NASDAQ: MFG), Progmat revealed that overseas real estate is the next milestone in its roadmap and is looking at ways on how to expand security tokens, a concept that Progmat has significant experience.
Progmat has previously explored the issuance of tokenized versions of real estate properties based in Japan. After racking up successes in the field, the MUFG-backed platform has its sights on properties outside the country, with experts predicting a rough patch with regulators.
The decision to explore foreign-based real estate culminated in a lengthy internal process involving researchers at Progmat. Analysts began the search for a new direction from a pool of sixteen options before pruning the list to a shortlist of five asset classes.
In the end, overseas real estate ranked first among real estate construction, solar infrastructure, funds, and wind power infrastructure.
Progmat clarified the rationale for its choice, putting each option through a four-stage litmus test to ascertain its viability. Each option was judged on its commercial demand and the potential for profits for investors. Furthermore, Progmat’s team assessed each option by its feasibility and against the backdrop of an existing structure while weighing the risk of a full-scale adoption.
True to the democratic spirit of Web3, a 20-man working group voted on their preferred option, with real estate based abroad ranking in first place. Each option reportedly showed promise for tokenization, hinting at a future exploration as it continues its expansionist ambitions.
Still a trust system
Progmat’s previous experiments with real estate security tokens leaned on a trust structure involving a special purpose vehicle (SPV) to hold assets. Experts say the tokenization of foreign real estate will most likely employ the same route but will be complicated by relying on a two-tier trust structure.
The offering will feature a domestic and foreign real estate trust for their issuance. After scaling the two-tier risk, the move may be plagued by complex regulations, exchange rate disparities, and liquidity risks.
Progmat’s working group may opt for single property against real estate portfolios, balancing the tradeoffs between a fund or a real estate investment trust (REIT) to sidestep the potential downsides.
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