RWA: The elephant in the middle

Author: YBB Capital Researcher Zeke

Foreword

"The tokenization of real-world assets (RWA) aims to enhance liquidity, transparency and accessibility, enabling a wider range of individuals to access high-value assets." This is Coinbase's explanation of the term RWA, and it is also a common explanation of RWA in popular science articles. But this sentence is not clear or completely correct in my opinion. This article will try to interpret RWA in the context of this era from my personal perspective.

1. Broken Prism

The combination of Crypto and real assets can be traced back to Colored Coins on Bitcoin more than ten years ago. By adding metadata to Bitcoin UTXO to achieve "coloring", a specific Satoshi is given the attribute of representing external assets, thereby marking and managing real assets (such as stocks, bonds, and real estate) on the Bitcoin chain. This BRC20-like protocol is the first systematic attempt by humans to implement non-monetary functions on the blockchain, and it is also the beginning of the blockchain's move towards intelligence. However, due to the limited operation codes of Bitcoin scripts, the asset rules of Colored Coins need to be parsed by third-party wallets, and users must trust the definition logic of these tools for UTXO "color". Centralized trust mixed with factors such as insufficient liquidity caused RWA's initial proof of concept to fail.

In the following years, blockchain took Ethereum as a turning point and ushered in the era of Turing completeness. All kinds of narratives have had crazy moments, but RWA has always been a situation of thunder and rain in the past decade, except for the legal stablecoin. Why is this?

I still remember that I wrote in my article about stablecoins that there has never been a real US dollar on the blockchain. The essence of USDT or USDC is just a "digital bond" given to you by a private company. USDT is much more fragile than the US dollar in theory. The reason why Tether can succeed is actually due to the urgent need of the blockchain world and the helplessness of being unable to create a stable medium of value.

In the world of RWA, there is no so-called decentralization. The trust assumption must be based on a centralized entity, and the risk control of this entity can only be entrusted to supervision. The anarchism in Crypto’s genes is essentially contrary to this concept. The underlying architecture of any public chain is to resist regulation. The difficulty of regulation on the public chain is the primary reason why RWA has never been successful.

The second point is the complexity of assets. Although RWA includes the tokenization of all physical assets, we can still roughly divide it into two categories: financial assets and non-financial assets. For financial assets, they themselves have homogeneous properties, and the bond between the underlying assets and the token can be established under a regulated custodian. For non-financial assets, this problem is a hundred times more complicated, and its solution can basically only rely on the IoT system, but it still cannot cope with sudden factors such as man-made evil and natural disasters. So in my opinion, RWA, as a prism of real assets, can not reflect infinite light. In the future, non-financial assets must meet the two prerequisites of homogeneity and easy valuation if they want to survive on the chain.

Third, compared with highly volatile digital assets, it is basically difficult to find assets with comparable volatility in real-world assets. The tens or even hundreds of APYs in DeFi make TradFi pale in comparison. Low returns and lack of motivation to participate are another pain point of RWA.

In this case, why is the circle focusing on this narrative again now?

Second, there are policies from above

According to the above, TradFi's promotion of supervision is a key factor for the existence of RWA. This concept can only be promoted when the trust assumption is established. Currently, regions that are friendly to the development of Web3, such as Hong Kong, Dubai, Singapore, etc., have basically implemented the relevant frameworks for RWA supervision recently. So when this starting point appears, the journey of RWA has just begun, but as far as the current situation is concerned, regulatory fragmentation and TradFi's high vigilance against risks still cast a layer of fog on this track.

The following is the details of the regulatory framework for RWA in major jurisdictions around the world as of April 2025:

United States:

Regulatory agencies: SEC (Securities and Exchange Commission), CFTC (Commodity Futures Trading Commission)

Core regulations:

Securities tokens: Must pass the Howey Test to determine whether they are securities, and apply the registration or exemption provisions of the Securities Act of 1933 (such as Reg D, Reg A+).

Commodity tokens: regulated by the CFTC, Bitcoin, Ethereum, etc. are clearly classified as commodities. Key measures:

1. KYC/AML: BlackRock's BUIDL fund is only open to qualified investors (net assets ≥ $1 million), and mandatory on-chain identity verification (such as Circle Verite).

2. Securities recognition expansion: Any RWA involving dividends may be identified as a security. For example: SEC’s penalty on tokenized real estate platform Securitize (unregistered securities offering in 2024)

Hong Kong:

Regulators: HKMA, SFC

Core framework:

The Securities and Futures Ordinance brings security tokens under regulation, subject to investor suitability, information disclosure and anti-money laundering requirements.

Non-security tokens (such as tokenized commodities) are subject to the Anti-Money Laundering Ordinance.

Key measures:

1. Ensemble Sandbox Program: Testing dual-currency settlement of tokenized bonds (HKD/offshore RMB), cross-border real estate mortgage (in cooperation with the Bank of Thailand), participating institutions include HSBC, Standard Chartered, Ant Chain, etc.;

2. Stablecoin Gate Policy: Only stablecoins approved by the HKMA (such as HKDG, CNHT) are allowed to be used, and unregistered currencies such as USDT are prohibited.

EU:

Regulatory agency: ESMA (European Securities and Markets Authority)

Core regulations:

MiCA (Market Regulation for Crypto Assets): effective in 2025, requiring RWA issuers to establish an EU entity, submit a white paper and be audited.

Token classification: Asset Reference Tokens (ARTs), Electronic Money Tokens (EMTs), other crypto assets.

Key measures:

1. Liquidity restrictions: Secondary market transactions require a license, and DeFi platforms may be defined as "virtual asset service providers" (VASPs).

2. Compliance shortcut: Luxembourg fund structures (such as Tokeny gold tokens) have become a low-cost issuance channel, and the compliance costs of small RWA platforms are expected to increase by 200%.

Dubai:

Regulatory agency: DFSA (Dubai Financial Services Authority)

Core framework:

Tokenization Sandbox (launched in March 2025): divided into two phases (intention application, ITL test group), allowing the testing of security tokens (stocks, bonds) and derivative tokens.

Compliance path: Exempt from some capital and risk control requirements, and apply for a formal license after a testing period of 6-12 months.

Advantages: Equivalent to EU regulation, supports the application of distributed ledger technology (DLT), and reduces financing costs.

Singapore:

Securities tokens are included in the Securities and Futures Act, and exemptions apply (small-amount issuance ≤ 5 million Singapore dollars, private placement ≤ 50 people).

Functional tokens must comply with anti-money laundering regulations, and MAS (Monetary Authority of Singapore) promotes pilot projects through sandboxes.

Australia:

ASIC (Securities and Investments Commission) classifies RWA tokens that grant income rights as financial products, requiring a financial services license (AFSL) and risk disclosure.

To sum up, European and American countries focus on compliance thresholds. Although Asia and the Middle East have attracted projects through experimental policies, the compliance threshold is still not low. Therefore, the current status of the RWA protocol is that it can exist on the public chain, but it must be supplemented by various compliance modules to adapt to the compliance framework. These compliance protocols cannot interact directly with traditional DeFi protocols. Secondly, based on different jurisdictions, a protocol that complies with the Hong Kong compliance framework cannot interact with compliance protocols in other regions. From the current status quo, the RWA protocol does not have sufficient accessibility and is extremely lacking in interoperability. It is like an "island" and runs counter to the ideal form.

So is it really impossible to find a way back to centralization within these frameworks? In fact, not really. Let's take Ondo, the leading protocol in RWA, as an example. The team built a lending protocol called Flux Finance, which allows users to use open tokens such as USDC and restricted tokens such as OUSG as collateral for lending. Lend a tokenized bearer note (compound interest stablecoin) called USDY, which is designed with a 40-50 day lock-up period to avoid being classified as a security. According to the Howey Test standard of the US SEC, securities must meet conditions such as "investing funds in a common cause and relying on the efforts of others to obtain profits". USDY's income comes from the automatic compounding of underlying assets (such as treasury bond interest), and users can passively hold it, without relying on the active management of the Ondo team, so it does not meet the element of "relying on the efforts of others". Ondo then simplifies the circulation of USDY in the public chain through a cross-chain bridge, and finally realizes a path to interact with the DeFi world.

However, such a complicated and non-reverse approach may not be the RWA we want. Another key factor for the success of legal stablecoins today is excellent accessibility, which can only achieve low-threshold inclusive finance in the real world. As for the island problem, RWA still needs TardFi and the project party to explore how to first achieve interconnection in different jurisdictions and interact with the on-chain world within some possible range. Finally, it can meet the general interpretation of the term RWA in the preface.

3. Assets and Income

According to rwa.xyz (RWA's professional analysis website), the total value of RWA assets on the chain is now US$20.69 billion (excluding stablecoins), mainly composed of private credit, US bonds, commodities, real estate, and stock securities.

In fact, in terms of asset categories, it is not difficult to see that the main target group of the RWA protocol is not DeFi native users, but traditional financial users. Head RWA protocols such as Goldfinch, Maple Finance, Centrifuge, etc., their target customer groups are mostly small and medium-sized enterprises and institutional users. So why do we move this to the chain? (The first four points only take the advantages of these protocols as examples) 1.7*24 hours instant settlement: This is one of the pain points of traditional finance that relies on centralized systems. Blockchain provides an endless trading system. At the same time, it can also realize instant redemption, T+0 lending and other operations; 2. Regional liquidity fragmentation: Blockchain is a global financial network, through which small and medium-sized enterprises in third world countries can also attract funds from external investors at the lowest cost by bypassing local institutions; 3. Reduce marginal service costs: Through smart contract management, the cost of an asset pool serving 100 companies is almost the same as serving 10,000 companies; 4. Serve mining companies and small and medium-sized exchanges: Such companies generally lack traditional credit records and find it difficult to obtain loans from banking institutions. Through traditional supply chain financial logic, equipment and accounts receivable can be used for financing; 5. Lower the entry threshold: Although the early successful RWA protocols were generally designed for enterprises, institutions or high-net-worth users, with the introduction of regulatory frameworks, many RWA protocols are also trying to split financial assets to lower the threshold for investors.

For Crypto, if RWA can succeed, it does have a Trillion-level imagination space. In addition, I believe that RWAFi will eventually come. For DeFi protocols, the underlying assets will be more solid after adding tokens with real returns, and for DeFi native users, new features have been added in asset selection and matching. Especially in this world of geopolitical turmoil and uncertain economic prospects, some real-world assets may be a better low-risk option than just using U for financial management. Here I offer some RWA product options that have been realized so far, or options that may exist in the future: for example, the increase in gold from the beginning of 23 to this month of 25 is 80%; the fixed deposit rate of the ruble in Russia is 20.94% for 3 months, 21.19% for 6 months, and 20.27% for 1 year; the discount of energy assets in sanctioned countries is usually above 40%; the yield of short-term US bonds is 4%-5%; various stocks that have been cut in half on Nasdaq may have better fundamentals than your altcoins; further refinement to charging piles and even Pop Mart's blind boxes may be some good choices.

Fourth, the Sword Holder

In the Three-Body World, Luo Ji uses his own life as a trigger mechanism to deploy nuclear bombs in the solar orbit and uses the Dark Forest Law to build a deterrence system against the Three-Body civilization. In the human world, he is the Sword Holder of the Earth.

"Dark Forest" is also another name for blockchain by most people in the industry, which is also the "original sin" inherent in the decentralized nature. For some special fields, RWA may be able to act as the sword holder of this parallel world. Although the story of PFP avatar and GameFi has now become a bubble, looking back at the crazy era three or four years ago, we have also produced projects such as Bored Ape, Azuki, and Pudgy that rival traditional IPs. But did we really buy IP intellectual property rights? The fact is that we never did. NFT is more like a consumer product to some extent, and the definition of 10K PFP in blockchain is vague. It did create some glorious IPs by lowering the investment threshold, but in terms of revenue and project development, the "Three Body Man" has the sole power.

Let's take Bored Ape as an example. The original intellectual property of Bored Ape clearly belongs to its issuer Yuga Labs LLC. According to the user agreement and official website information, Yuga Labs, as the project operator, owns the copyright, trademark rights and other core intellectual property rights of Bored Ape's works. Holders who purchase NFTs only obtain ownership and use rights to specific numbered avatars, not the copyright itself.

In terms of decision-making, Yuga Labs's route for Bored Ape is Metaverse, which exchanges funds for unlimited sub-IPs, breaking away from the original luxury narrative. Regarding this, NFT holders have neither the right to know, nor the right to make decisions, let alone the right to profit. In the traditional world, when investing in an IP, investors usually have the direct right to use the entire IP, direct profit distribution, decision-making participation and even development dominance.

Yuga Labs is at least one of the best PFP projects. There used to be a large number of NFT projects with more chaotic rights distribution. When a giant sword hangs over their heads, will they choose to respect their community more?

V. On the carrier

To sum up, RWA has the potential to reshape finance, and it can also bring opportunities contained in the real world to the chain. It may also be a new way out for rectifying the chaos of blockchain. However, limited by the current regulatory framework of TradFi, its form is still like a private protocol stored on the public chain, which cannot burst out the highest imagination space. As time goes by, I hope that there will be a guide or alliance in the future to break through this barrier.

The light that assets can release on different carriers is actually unimaginable. From the bronze inscriptions in the Western Zhou Dynasty to the fish scale atlas in the Ming Dynasty, asset rights confirmation ensures the stability and development of society. What would RWA look like if it could enter its final form? I could buy Nasdaq stocks in Hong Kong during the day, deposit money in the Russian Federal Savings Bank in the early morning, and invest in Dubai real estate with hundreds of shareholders around the world who don’t know each other’s names the next day.

Yes, a world running on a huge public ledger is RWA.