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For Financial Advisors, Real World Assets Could Be a Safe(r) Path to Crypto

By Adam BlumbergAccessTimeIconJun 1, 2023 at 6:20 p.m. UTCUpdated Jun 1, 2023 at 8:56 p.m. UTCBy Adam BlumbergAccessTimeIconJun 1, 2023 at 6:20 p.m. UTCUpdated Jun 1, 2023 at 8:56 p.m. UTCshare on Facebookshare on LinkedInshare on TwitterBy Adam BlumbergAccessTimeIconJun 1, 2023 at 6:20 p.m. UTCUpdated Jun 1, 2023 at 8:56 p.m. UTCshare on Facebookshare on LinkedInshare on Twittershare on Facebookshare on LinkedInshare on Twitter

One of the most exciting use cases for blockchain technology is commonly referred to as Real World Assets, or RWA. Based on a report from Boston Consulting Group, the on-chain RWA market is expected to reach between $4 trillion and $16 trillion by 2030.

We spend so much time talking about the value of crypto assets like bitcoin and ETH, especially when it applies to financial advisors, but RWA can drive trillions of dollars in adoption, is touted by some of the biggest names in finance (JP Morgan, Citi, Boston Consulting Group, Blackstone) and will be extremely important for advisors to understand.

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Are Real World Assets like crypto assets?

Most assets we talk about with regard to blockchain are chain-native assets like bitcoin, ETH, SOL, or UNI. This means they are native to a public blockchain and derive their value from the use or performance of a protocol.

For example, bitcoin is an incentive for miners to continue processing blocks on the Bitcoin blockchain, while ETH is used to pay for transactions on the Ethereum network.

When we talk about Real World Assets, we usually mean the integration of using 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 in 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 simply 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 simply decentralized databases, good for storing information in an immutable manner. We currently 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 doesn’t 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 – private credit, real estate, collectibles. Often RWA tokens will 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 promise of blockchain technology has always been about increasing inclusion and efficiency through public databases. Unlike addressing native crypto assets, which can be volatile and subject to new regulations, Real World Assets on-chain are simply more efficient, transparent ways to denote what people are already comfortable investing in.

Edited by Pete Pachal.

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