Real world assets may be a safer option for financial advisors looking to invest in cryptocurrency.
Blockchain technology has many exciting use cases, one of which is referred to as Real World Assets or RWA. According to a report by Boston Consulting Group, the on-chain RWA market is expected to reach between $4 trillion and $16 trillion by 2030.
While we often discuss the value of crypto assets like bitcoin and ETH, RWA can drive trillions of dollars in adoption, is promoted by major players in finance such as JP Morgan, Citi, Boston Consulting Group, and Blackstone, and is crucial for advisors to understand.
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Are Real World Assets like crypto assets?
Most assets we discuss regarding blockchain are chain-native assets such as bitcoin, ETH, SOL, or UNI. This means that they are native to a public blockchain and their value derives from the use or performance of a protocol.
For instance, bitcoin is an incentive for miners to keep processing blocks on the Bitcoin blockchain, while ETH is used to pay for transactions on the Ethereum network.
When we discuss Real World Assets, we usually mean the integration of on-chain databases to track the assets, with performance and valuation coming from outside the blockchain.
For example, I could have a token that represents equity in a real estate investment or a pool that lends money to entrepreneurs in the developing world. While the token is on a blockchain, the assets and payments are in the real world.
The Real World Asset tokens are just representations of assets that are not necessarily blockchain-native and are NOT volatile assets like we think of in crypto. These RWA tokens, like all cryptographic tokens, are programmable, so we can encode lockup periods and accredited investor requirements.
Why use a blockchain?
Public blockchains are decentralized databases, suitable for storing information in an immutable manner. Currently, we store our data – money, private company equity, loans, financial records – in centralized databases with names like Google, Amazon, Chase, Schwab, and your local county title database. Therefore, we have to ask permission every time we want to access that data, and the data from one silo does not easily or natively work with data from another.
When we move that data onto a public blockchain, we can control it using a wallet, a self-custody technology that works hand in hand with blockchains. Once it’s there, we can take advantage of many of the benefits of public blockchains:
- Transparency: for understanding the true value of an asset
- Efficiency: for making distributions to owners via their wallets
- Liquidity: the on-chain nature allows for marketplaces so we can buy and sell previously illiquid assets.
- Self-custody: I can maintain control over my assets.
- Collateralization: I can use my assets as collateral, possibly even through decentralized finance ( DeFi ) protocols.
Why should advisors learn?
Clients are increasingly interested in alternative assets such as private credit, real estate, and collectibles. Often, RWA tokens represent some of these alternatives.
We already see private credit from Maple Finance and Goldfinch, as well as collectibles from Rally Road and 4K. For years, we haven’t seen many options for clients to find income in their portfolio. As interest rates have risen, many of the RWA options offer double-digit returns through interest, without the crypto volatility risk. They can make low-risk loans in markets where Traditional Finance can’t or won’t go, and keep the process efficient.
Advisors will need to understand the increased transparency and liquidity. Your clients may have the chance to sell half their real estate tokens after 12 months, and use that money to invest in a pool aimed at providing invoice factoring.
Advisors should also have a good knowledge of self-custody, and the efficiencies and security risks inherent to it, so they can help clients invest in these alternatives.
Additionally, the increase in activity around RWA will drive more use of the networks. For blockchains like Ethereum and Polygon, this may also trigger higher token prices since the native token – ETH or MATIC – is used to pay for the transactions.
The potential of blockchain technology has always been to enhance inclusivity and efficiency by using public databases. In contrast to dealing with native cryptocurrency assets, which can be unpredictable and prone to new regulations, on-chain Real World Assets are just more effective and transparent methods of representing investments that people are already familiar with.
Edited by Pete Pachal.