Tokenization growth to depend on use cases, benefits

Though Ripple is in talks with financial institutions exploring real-world asset tokenization, there remains work to be done before mass traditional finance migration to this space occurs.

James Wallis, who leads business development for RWA tokenization with financial institutions at Ripple, told Blockworks that trillions of dollars worth of assets coming onchain — and the speed at which that happens — will depend on institutions seeing enough value in the use cases that emerge.

The tokenized RWA segment has grown to about $12 billion. That excludes the stablecoin market, which sits at roughly $170 billion.

Some of the cited benefits of tokenization, such as creating efficiencies and broadening investor access to certain assets, “have yet to be fully proven, may not be uniquely achievable through tokenization, and may involve trade-offs that might negate the benefits,” according to a Tuesday report by the Financial Stability Board (FSB).

Fractionalization mechanisms (like securitization) already aid investor access to certain assets, for example. Atomic settlement may increase liquidity demands on market participants, the FSB report explains. Then there’s the challenge of scaling adoption, which the potential gains of tokenization are likely to depend on.

The FSB adds there is likely to be a blending of tradition and blockchain systems, with the latter used for “asset classes for which the cost-benefit trade-off for tokenization is most clear.”

Back in April, Ripple revealed its plan to launch a USD-pegged stablecoin backed by US dollar deposits, short-term US Treasurys and other cash equivalents.

Last week, the company shared the exchanges and platforms on which the stablecoins — RLUSD — would be available: Uphold, Bitstamp, Bitso, MoonPay, Independent Reserve, CoinMENA and Bullish.

One of the few stablecoins issued under a New York Trust Company Charter, Wallis said the company is working closely with regulators to launch RLUSD “soon,” but declined to comment further.

Keep reading for excerpts from Blockworks’ interview with Wallis.

Blockworks: What have been some of your main takeaways as you speak with institutions that are exploring the tokenization space?

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Wallis: There are a few proof points now that there’s a business case to do this.

Collateral management efficiencies and operating costs and efficiencies are on that side of the equation. And then, in parallel, we’re seeing with those examples traditional institutions launching on public blockchains, which I think is a fairly big shift in the last six to 12 months.

The utopia for me is where you have onchain assets and then obviously onchain settlement and payment capabilities. That’s Web3, so this is the start of Web3 really becoming a reality.

Blockworks: You mention more institutions getting comfortable with public blockchains. Why do you think that is?

Wallis: There was always a nervousness around the public chains because of the transparency, which is one of the benefits of blockchain. I think now people have seen they can issue on those technologies in a sort of controlled way, and there are benefits around things like liquidity and market access.

A private ledger is, by definition, private. So if you ultimately want to get to the world where you have broader access capability, then the public chain is definitely the way to go.

Blockworks: We have seen the tokenized money market funds from Franklin Templeton and BlackRock. What do you expect to see next in this category?

Wallis: Those have been a great place to start.

There have been tons of projects over the years tokenizing gold and tokenizing commodities. When you get into securities, it gets to be a little more complicated because you’ve obviously got a tighter set of regulations.

I think you’ll see more and more types of securities being tokenized in the next few years. Where it ultimately gets interesting, though, is when you start thinking about secondary markets.

Blockworks: What do you make of some of the big projections, such as Standard Chartered saying it expects that the tokenized RWA market could hit $30 trillion by 2034?

Wallis: I’m always a glass half full kind of guy. But I think it comes down to what’s the use case and the benefits. It really is that simple; it sounds obvious, but if you have an existing fund in the traditional market and you want to tokenize it, why would you do that? What is the benefit? So people are working through that.

Read more from our opinion section: We should be tokenizing assets with substance, not speculation

A lot of these new funds are designed for the crypto-friendly participants, so it makes it an easier sell. I think that’s the difference between the $2 trillion and the $20 trillion [projection], is how many of the existing traditional assets will make it onchain?

There’s an operational benefit or collateral management efficiency for the issuer. That’s good, they can lower their cost; but then they could either pass on some of the benefit to their clients or just make more margin.

Blockworks: What concerns might some of the institutions you are chatting with have about tokenizing assets?

Wallis: I wouldn’t say there are many concerns. It’s more about understanding and education.

If you look at the traditional institutions, they always have one eye on the regulatory and the risk. So they’re always thinking, “If I pick XYZ asset class, what are the rules of the road and how would I do that on a blockchain? How do I ensure a suitable level of privacy?”

So those are all design considerations that we get into conversations, and we go through that.

Blockworks: What regulatory developments are you watching out for?

Wallis: On the Ripple stablecoin — RLUSD — we made the decision that we wanted to go for the absolute highest-quality regulator, so our regulator for that will be the New York DFS. Many other stablecoins are running more on money-transmitter licenses.

You have to embrace the regulators. When you go with a new technology, you can either fight or collaborate; our philosophy is to collaborate. I think also, not to be forgotten, all of these big institutions — whether they be in this country, in Europe or in Asia — they work with the regulators the whole time, so they’re actually best positioned.

They have to get comfortable. It’s a partnership; it’s not Ripple pushing anything, it’s not the client pushing anything. It’s like, let’s figure this out together. Let’s figure out what the characteristics are on the XRP Ledger that are a good fit. How does Ripple as a private company help with getting these things moving?

And then obviously the regulator is always part of the equation.

This interview was edited for clarity and brevity.

A modified version of this article first appeared in the daily Forward Guidance newsletter. Subscribe here so you don’t miss tomorrow’s edition.

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