In an exclusive interview with crypto.news, Jason Dehni, CEO and co-founder of Credbull, discussed how RWA tokenization is shaping up to be a game-changer in finance.
Real-world asset tokenization has become one of the hottest trends in 2024. It brings with it the promise to democratize traditional finance.
Prompting a move towards a more inclusive financial system, the tech aims to open up the market to a border populace, breaking down barriers that have traditionally limited investment in assets like U.S. Treasuries, real estate, and artwork.
As this new generation of assets makes the transition onto blockchain platforms, they promise more accessible, real-time transactions at reduced costs, free from traditional intermediaries. Something that could lead to a more efficient market characterized by better price discovery and lower transaction fees.
As of April 2024, the total value locked of real-world asset protocols was close to $8 billion.
Yet, the improved liquidity and bigger investor base introduce various complexities in terms of regulatory compliance for instance. With tokenized asset markets projected to reach trillions by 2030, there is a pressing need for a robust infrastructure to support this burgeoning sector.
Dehni views RWA tokenization as a transformative force, advocating for robust regulatory frameworks to unlock its full potential and ensure its sustainable integration into the financial landscape.
What new economic models are you expecting with the growing popularity of asset tokenization?
Tokenizing assets introduces new economic models that alter traditional pricing and market behavior. While enhancing accessibility, liquidity, and transparency, it also adds complexity and challenges the efficient market hypothesis (EMH), requiring new financial models.
Tokenized assets enable 24/7 global trading, continuous price discovery and reduced market closure impacts. Blockchain transparency lowers information asymmetry, as all participants access the same transaction and ownership data.
How could token economics alter the foundational principles of asset pricing and market behavior in the context of efficient market hypothesis deviations?
Market liquidity improves due to the ease of trading fractional shares and continuous algorithmic trading. Diverse investor participation enhances market depth, stabilizes prices, and reduces volatility.
However, EMH may become limited or obsolete due to these innovations. Easy access to tokenized assets may attract retail investors prone to behavioral biases like herd behavior or overconfidence, causing price anomalies. Social media and online communities can significantly impact token prices, driving sentiment-driven market movements. Tokenized markets might experience higher volatility due to rapid trading and speculative behavior, potentially causing flash crashes in less liquid markets. Additionally, some tokens’ value extends beyond traditional pricing, incorporating utility within specific networks, further deviating from EMH.
Do you think widespread tokenization of real-world assets impacts central bank policies, especially concerning monetary supply and inflation control? Could tokenized assets challenge the traditional tools used by central banks?
The widespread adoption of asset tokenization will accelerate the development of CBDCs. While CBDCs offer many benefits, poor design and rapid implementation could have unintended negative consequences, especially for monetary policy. Issuing a wholesale CBDC does not change monetary policy goals or operations but can significantly affect money velocity, disintermediation of bank deposits, volatility of bank reserves, currency substitution, and capital flows. Disintermediating bank deposits poses a high-risk, high-impact threat to monetary policy if CBDCs spread too quickly.
Countries most at risk are those with small retail-dominated banking systems, low digital payment levels, and weak macroeconomics. Large reductions in commercial bank reserves can drive up inflation and money-market interest rates, destabilize financial markets, and complicate reserve forecasting for open market operations. Persistent disintermediation might force central banks to offer longer-term and targeted lending operations, potentially undermining their role as lenders of last resort.
Tokenization could potentially disrupt established economic equilibriums by democratizing access to asset investments. What challenges does this pose?
Asset tokenization could significantly alter global economic dynamics, potentially reducing economic disparity, lowering investment barriers, and enabling fractional ownership and global access to previously inaccessible assets, benefiting those in developing countries. This could lead to new financial products and services, enhancing financial inclusion. This is our mission at Credbull – democratizing access to private credit, a high-performing asset class that’s traditionally reserved for institutional and high-net-worth individuals.
Are there risks involved in making these tokenized assets so broadly accessible?
Not all assets should be tokenized and not all tokenized assets should have broader accessibility. Tokenized assets are complex, requiring substantial education for investors. Easy access at a rapid pace may cause speculative bubbles, affecting less-informed investors.
Without proper regulation, there’s a risk of market manipulation by resource-rich and tech-savvy individuals. While tokenization aims to boost liquidity, secondary markets might not develop uniformly, leading to inconsistent liquidity across asset types. Valuing tokenized assets, especially illiquid ones like real estate or art, can be challenging and prone to misinformation.
What does this mean for global regulatory and compliance landscapes?
Varying regulations across jurisdictions complicate global investment and issuance, increasing compliance challenges with anti-money laundering (AML) and know-your-customer (KYC) requirements. Seamless interoperability between token platforms and efficient transaction handling by blockchain networks are crucial for widespread adoption. An alternative model that ought to be explored further is decentralizing assets. Rather than simply tokenizing it, which often retains the underlying asset centralized, placing the management of the asset on-chain and providing full transparency of its management is critical to generating confidence in the broader retail market and reducing overall risk.
Considering the potential integration of tokenized assets into more mainstream financial products, such as mutual funds or ETFs, what are the anticipated legal hurdles and economic impacts of such integration?
Integrating tokenized assets into mainstream financial products involves navigating legal and regulatory challenges. Traditional products like mutual funds and ETFs require custodians for asset safeguarding, necessitating a legal framework for digital asset custody. Providing insurance for digital assets is challenging due to gaps in current frameworks. Additionally, mechanisms to protect investors from volatility and potential fraud in tokenized assets are essential.
Can you discuss the development of bespoke legal structures for tokenization? How might these structures navigate between the dual demands of maintaining regulatory compliance and fostering innovation in asset liquidity?
To navigate the dual demands of compliance and innovation, regulators and industry participants must engage in ongoing dialogue to understand mutual concerns and requirements, leading to more informed and effective regulations. It is crucial to foster ecosystems where startups, financial institutions, regulators, and other stakeholders collaborate on developing and implementing tokenization solutions. A risk-based approach to regulation should align scrutiny levels with the potential risks of the underlying tokenized asset class. Regulatory sandboxes allow innovators to test new products and services in a controlled environment with temporary regulatory relief, subject to oversight and evaluation.
So, what regulatory strategies do you think balance innovation with financial security?
A layered regulatory approach, with universal basic compliance requirements and more stringent regulations for higher-risk activities, can encourage innovation while maintaining oversight. Regulations should scale with the size and complexity of tokenized asset markets, imposing lighter regulatory burdens on smaller projects and more rigorous oversight on larger, complex projects. Educating investors about the risks and opportunities of tokenized assets ensures well-informed investment decisions and reduces market disruptions.
Given the global nature of blockchain, what are the implications of tokenization for cross-jurisdictional legal conflicts, particularly in terms of asset custody and transaction enforceability?
The global nature of blockchain and tokenization presents challenges in cross-jurisdictional legal conflicts, asset custody, and transaction enforceability, necessitating international collaboration, harmonized laws, and innovative solutions. Different countries have varying regulations, causing conflicts when assets are traded across borders. An asset considered a security in one country might not be classified the same in another, complicating compliance and increasing costs. In the decentralized blockchain world, determining applicable laws and jurisdictions is challenging, especially for cross-border disputes and enforcement. Custody requirements vary by jurisdiction, making compliance burdensome.
How would you suggest that global custodians address these challenges?
Global custodians need solutions that meet diverse legal standards for secure storage, audit mechanisms, and transparent reporting. Ownership rights in tokenized assets must be recognized across jurisdictions, requiring harmonized legal definitions and standards. Legal processes for transferring ownership must be clear and enforceable internationally, but smart contracts’ legal status varies by country. The enforceability of smart contracts also differs globally, complicating international transactions.
Dispute resolution mechanisms for smart contracts need to be established, possibly involving decentralized arbitration or traditional legal processes. Ensuring cross-border token transactions comply with AML/KYC regulations and tax regimes is complex. Countries can mitigate these legal conflicts by harmonizing laws and regulations facilitated by international bodies like FATF or IOSCO. Model laws and mutual recognition agreements can aid this process. Developing interoperable blockchain platforms and using regulatory technology to automate compliance can also help.
