5 Crypto Sectors That Will Lead the Market in 2024 — Part 2: RWAs

The bullish trend in Real World Asset (RWA) tokenisation is confirmed by the over $8 billion in loans originated thus far and notable endorsements from major financial institutions

Key takeaways:

  • The collateralization of centralised stablecoins, like Tether’s USDT ($84B in market cap) and Circle’s USDC ($25B) with U.S.Treasuries served first as a precursor to the growing trend of asset tokenisation. Today, this bridging activity between TradFi and DeFi markets, extends to money market fund shares, securities ETFs, and reverse repo deals, enhancing global liquidity and accessibility to those financial instruments. Real World Asset (RWA) tokenisation also aims to unlock liquidity in emerging markets and promote financial inclusivity.
  • The biggest and most successful projects that today operate in the RWA niche are undoubtedly the likes of Maker DAO, Paxos and Frax Finance.
  • This Dune dashboard, put together by Impossible Finance, shows the on-chain volume of assets issued by other major players in the niche such as: Tokenised Securities Issuers Backed Finance, Ondo Finance, OpenEden Labs, Matrixdock and Infrastructure for on-chain Credit — TrueFi, Maple Finance, Clearpool, Centrifuge, Goldfinch Finance.
  • The following regulatory jurisdictions exhibit varying degrees of progress and engagement with RWA tokenisation, each contributing to the broader global movement towards adopting blockchain technology:
  1. Switzerland: Pioneering in Security Token Offerings (STOs) and other blockchain-friendly regulations to facilitate the tokenisation of assets.
  2. United States: Significant player in blockchain technology and tokenisation with systems like RealT enabling real estate tokenisation and states like Wyoming passing blockchain-friendly laws.
  3. Singapore: The Monetary Authority of Singapore introduced guidelines for security token issuance and a sandbox for tokenisation projects.
  4. Abu Dhabi: The FSRA developed a framework for security tokens and established a Digital Securities Exchange (DSX).
  5. United Kingdom: The Financial Conduct Authority (FCA) supports a model for tokenizing asset management funds.
  6. Canada: Showcased promise with the Canadian Securities Exchange launching a blockchain-based clearing house for issuing digital tokens representing conventional equity and debt.
  7. Luxembourg: Aligned with the European Union's vision regarding digital tokens, establishing itself as a hub for financial services operations.
  8. Malta: Embraced blockchain technology and took initiatives in establishing official regulations for cryptocurrencies and engaging the community to improve digital securities.
  9. Liechtenstein: Established itself as a leader in blockchain regulation with the implementation of the Blockchain Act, that facilitates the tokenisation of various assets and rights
  • Many more jurisdictions are generally stating to embrace blockchain technology and becoming more welcoming as regulatory frameworks emerge to respond to innovation
  • The bullish trend in Real World Asset (RWA) tokenisation is confirmed by the over $8 billion in loans originated thus far and notable endorsements from major financial institutions
  • BlackRock has engaged in tokenisation activities, including utilising JPMorgan's platform for a derivative trade and tokenising an ETF on the Ethereum network.
  • Other traditional financial giants like ABN Amro, Goldman Sachs, Société Générale, Santander, and J.P. Morgan have also explored RWA tokenisation through bond issuances and cross-currency transactions.
  • The backing from these major traditional financial institutions, together with the growing adoption trend, underline a bullish outlook for RWA tokenisation, suggesting a bright future for this intersection of traditional finance and blockchain technology.

The RWA space is considered to be nascent with pioneering protocols like Maker DAO, Paxos and Frax Finance taking the lead and setting the pace, both in terms of innovation and adoption of their respective products. To fully grasp why we view the trend in this sector as overwhelmingly bullish, it's essential to conceptually take key players like Tether and Circle into consideration for our analysis.

We believe it’s reasonable to claim that the initial use of U.S. Treasuries to collateralize centralized stablecoins, such as Tether's USDT (with a present market cap of $84 billion) and Circle's USDC ($25 billion, respectively), marked the beginning of the asset tokenisation trend, even though the yields from those securities were privatised.

Source: Coinmarketcap
Source: Coinmarketcap
From top to bottom: USDT market cap on 23/11/2023, USDC market cap on 23/11/2023

Nowadays, the intersection between TradFi and DeFi has grown wider and it’s starting to include tokenised money market fund shares, securities ETFs, and reverse repo transactions, thereby gradually making both the exposure to those financial instruments, and the relative yields, more liquid and accessible within different jurisdictions and to different cohorts of investors.

To track the adoption trends within the RWA sector, we have developed a Dune dashboard as a comprehensive resource to provide data from some of the most significant and innovative protocols within the niche, including:

Tokenised Securities Issuers

Infrastructure for on-chain Credit

These charts show us how the cumulative loan origination for all on-chain credit issuers has reached significant volumes with more than $8B in total.

Source: Dune.com
Cumulative Loan Origination Volume USD on 23/11/2023

With $4.6B worth of loans having been successfully repaid,

Source Dune.com
Cumulative Loan Repaid Volume USD on 23/11/2023

This amounts to $3.6B in current outstanding loans and very slim rates of default, portraying a healthy picture both in terms of growth and sustainability.

Source: Dune.com
Cumulative Active Loans USD on 23/11/2023

The Tokenised Treasury Securities niche, instead, definitively younger compared to the above one, has recently grown up to $300M in size with Ondo Finance and Matrix Dock driving the most amount of demand for their products, likely catching up due to the current high rates environment. The numbers remain distinctly lower because of how the participation within these protocols and access to these securities remain constrained for non-accredited individuals, unfortunately. We believe though, that with the advent of more composable, and adequately decentralised solutions, built on top of these issuers, both accessibility and growth will benefit these instruments or derivatives tightly pegged to the relative instruments.

The Tokenised Treasury Securities niche, instead, although relatively newer compared to the aforementioned infrastructure for on-chain credit origination, has recently expanded to a size of $300M following a similar positive adoption trend, with Ondo Finance, Matrix Dock and Backed Finance driving the most amount of demand for this type of products, likely spurred by the current high-interest-rates environment.

However, comparatively, the TVLs are still lower, plausibly because participation in these protocols and access to these securities remain limited for non-accredited individuals, even on-chain.

We anticipate that the introduction of new composable, and adequately decentralised solutions, built on top of these issuers will positively affect both accessibility and growth.

Source: Dune.com
Product Market Cap by Protocol on 23/11/2023

Globally, different regulatory jurisdictions are demonstrating varied degrees of adoption and involvement in the RWA tokenisation industry. This diversity in the approach and commitment is a key factor influencing the worldwide trend towards embracing blockchain technology. This reinforces our bullish stance on the sector, as it highlights the growing global acceptance and integration of blockchain technology in mainstream finance.

Switzerland is at the forefront, pioneering in Security Token Offerings (STOs) and implementing blockchain-friendly regulations to ease asset tokenisation.

The United States has emerged as a significant player, with innovations like RealT for real estate tokenisation and states such as Wyoming enacting blockchain-supportive laws.

The Monetary Authority of Singapore issued a comprehensive set of guidelines for the issuance of security tokens, and it also established a sandbox environment for testing new tokenisation projects.

The Abu Dhabi’s Financial Services Regulatory Authority (FSRA) has developed an extensive framework for the issuance of security tokens and has set up a specialised Digital Securities Exchange (DSX).

  • ADGM Publishes Detailed Guidance on Digital Securities | ADGM

The UK's financial regulator, the Financial Conduct Authority (FCA) has supported a model to enable asset management firms to tokenise their funds.

  • UK regulator advocates for asset managers to tokenise funds | Cointelegraph

Canada has shown its potential by launching a blockchain-based clearing house via the Canadian Securities Exchange, facilitating the issuance of digital tokens representing traditional equity and debt.

  • Canadian securities exchange launching blockchain-based Clearing house, challenging TMX | CBC

Luxembourg aligns with the European Union's digital token vision, positioning itself as a financial services hub. Liechtenstein has introduced comprehensive regulations governing the token economy, focusing on customer and asset protection and overseeing various service providers within this economy.

  • Luxembourg, a market leader in tokenisation | Paperjam

Malta, embracing blockchain technology, has taken steps to establish official cryptocurrency regulations and has been actively engaging its community to enhance digital securities.

  • Are token assets the securities of tomorrow? | Deloitte

Liechtenstein has established itself as a leader in blockchain regulation with the implementation of the Blockchain Act, which became effective on January 1, 2020, and facilitates the tokenisation of various assets and rights.

Each one of these countries, and many other jurisdictions like: the British Virgin Islands, Bermuda, Portugal, Germany, Belarus, Slovenia, El Salvador, and Hong Kong, are becoming more welcoming and adopting permissive and experimental frameworks to allow innovation to flourish and blockchain technology to be adopted. The momentum behind the RWA sector is also confirmed to be bullish by the significant endorsements from major financial institutions, like BlackRock, Goldman Sachs, and JPMorgan:

BlackRock, the biggest asset manager in the world, has actively participated in tokenisation activities by using JPMorgan's platform for derivative trades to tokenise an Exchange Traded Fund (ETF) on the Ethereum network.

  • BlackRock, Barclays use JPMorgan blockchain app in milestone trade | Blockworks

Other financial powerhouses such as ABN Amro, Goldman Sachs, Société Générale, Santander, and J.P. Morgan have ventured into RWA tokenisation as well, exploring bond issuances and cross-currency transactions, further underscoring the growing interest and confidence in the potential of RWA tokenisation within the traditional financial sector.

  • 4 Reasons Banks Are Embracing the Tokenisation of Real-World Assets | Forbes

The proactive involvement of major traditional financial institutions, coupled with the encouraging trend of global adoption, strongly reinforces our bullish perspective on this sector. We believe the intersection between TradFi and DeFi is poised to grow stronger, and that the two opposing sides will become more intertwined with time.

As regulatory frameworks continue to evolve and adapt, new blockchains and DeFi protocols propose new solutions to cater to the needs of institutions as well. For example the Avalanche blockchain, integrating ‘Evergreen’ subnets as permissioned environments to act as sandboxes for experimentation as well as production-ready infrastructure for many different purposes including asset tokenisation.

We think these developments have the potential to create more solid and trustworthy rails between TradFi and DeFi, and we foresee those consequently leading to a significant influx of capital into the crypto markets. We believe this transition will not be a temporary trend but a substantial shift, signalling the readiness of regulated entities to embrace and support this innovation. Consequently, the RWA niche, at the intersection of traditional finance and blockchain technology, is set to significantly benefit from these developments, marking a promising and robust future for the tokenisation of real-world assets.

Impossible’s Predictions for 2024

90% Prediction

RWA tokenisation keeps up the growth pace. With the approval of the Bitcoin and Ethereum’s ETFs in the US, the capital flowing into the industry to build the rails connecting TradiFi and DeFi pushes innovation forward and sets the pace for other jurisdictions as well.

50% Prediction

As per Truflation’s Index projections, Inflation reverts back to 2%, causing the Fed to pivot to rate cuts, but not up to a complete revert back to ZRIP.

Within this relatively lower-rate environment, the attention to US debt decreases but the Fed pivoting isn’t enough to revert the tokenisation trend of US debt instruments, which keeps growing in on-chain TVL, driving an increase in the rate of adoption of tokenised RWAs and in Blockchain tech as a whole.

10% Prediction

US TBills volatility picks up because of Fiscal Policies mistakes, causing significant havoc within Defi and disrupting the adoption trend.

About Impossible Finance

Impossible is an on-chain native, research advisory firm with a DeFi launchpad and accelerator. We help projects kickstart, fundraise, scale and launch their tokens while enabling users to learn, discover and invest in high quality crypto opportunities.

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