RWA: The Elephant in the Crack

Author: YBB Capital Researcher Zeke

Preface

"The tokenization of reality assets (RWA) is intended to enhance liquidity, transparency and accessibility, so that a wider range of individuals can access high-value assets." This is Coinbase's explanation of the term RWA and a general 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 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, it achieves "staining" and gives a specific Satoshi the attributes representing external assets, thereby marking and managing real assets (such as stocks, bonds, real estate) on the Bitcoin chain. This protocol similar to BRC20 is the first systematic attempt by humans to realize non-monetary functions on blockchain, and it is also the beginning of blockchain's move towards intelligence. However, due to the limited opcode of Bitcoin scripts, Colored Coins' asset rules need to be parsed through third-party wallets, and users must trust these tools to define UTXO's "color". Centralized trust is mixed with insufficient liquidity and other factors, which makes RWA's initial proof of concept end in failure.

In the following years, blockchain took Ethereum as a turning point, opening up the era of Turing completeness. All kinds of narratives have had crazy moments, but in the past ten years, RWA has always had a huge thunder and small raindrops. Why is this?

I still remember writing in an article about stablecoins that there is never a real 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 was successful was actually due to the urgent need of the blockchain world and the helplessness of the inability to create a stable media for value.

There is never so-called decentralization in the RWA world. The assumption of trust must be established on a centralized entity, and the risk control of this entity can only be placed on supervision. The anarchism in the Crypto gene is essentially contrary to this concept. The underlying architecture of any public chain is to resist supervision. The difficulty of supervision on public chains is the primary factor that RWA has never been able to succeed.

The second point is asset complexity. Although RWA includes the tokenization of all physical assets, we can still roughly divide them into two categories: financial assets and non-financial assets. For financial assets, they themselves have homogeneous attributes, and the link between underlying assets and tokens can be established under a regulated custodian. For non-financial assets, this problem is a hundred times more complicated. The solution can only rely on the IoT system, but it still cannot deal with sudden factors such as human evil and natural disasters. Therefore, in my understanding, as a prism of real assets, the light that RWA can reflect is not infinite. If future non-financial assets want to survive on the chain for a long time, they must meet the two premises of homogeneity and easy valuation.

Third, compared with highly volatile digital assets, it is basically difficult to find assets with volatility comparable to those in real-world assets. The dozens or even hundreds of APYs in DeFi have made TradFi look inferior. Low returns and lack of motivation to participate are another pain point for RWA.

Since that's the case, why should the circle focus on this narrative again now?

2. There are policies above

According to the above claims, TradFi's promotion of supervision is a key factor in the existence of RWA, and this concept can only be promoted when the trust hypothesis is established. Currently, regions friendly to Web3 development, such as Hong Kong, Dubai, Singapore and other places, have basically implemented relevant frameworks for RWA supervision in the near future. So when this starting point appeared, RWA's departure journey had just begun, but as far as the current situation is concerned, the fragmentation of regulatory and TradFi's high vigilance for risks still put a layer of fog on this track.

Here are the details of the regulatory framework for RWA in major jurisdictions around the world as of April 2025:

USA:

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

Core Regulations:

Securities tokens: It is necessary to pass the Howey Test to determine whether it belongs to a securities. The registration or exemption clause of the Securities Act 1933 (such as Reg D, Reg A+) is subject to it.

Commodity tokens: regulated by 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 US dollars), and mandatory on-chain identity verification (such as Circle Verite).

2. Expanded securities recognition: Any RWA involving dividends may be recognized as a securities. For example: SEC's penalties on tokenized real estate platform Securities (unregistered securities issuance in 2024)

Hongkong:

Regulatory agencies: HKMA, China Securities Regulatory Commission (SFC)

Core framework:

The Securities and Futures Ordinance includes securities tokens in regulation and must comply with 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 Plan: Test the dual-currency settlement of tokenized bonds (HKD/offshore RMB), cross-border real estate mortgage (cooperation with the Bank of Thailand), and participating institutions include HSBC, Standard Chartered, Ant Chain, etc.;

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

EU:

Regulatory authority: ESMA (European Securities and Markets Authority)

Core Regulations:

MiCA (Crypto Asset Market Supervision): It will take effect in 2025 and requires the RWA issuer to establish an EU entity, submit a white paper and undergo audit.

Token classification: Asset reference tokens (ARTs), electronic currency tokens (EMTs), and other crypto assets.

Key measures:

1. Liquidity restrictions: Secondary market transactions require license, and the DeFi platform may be defined as a "virtual asset service provider" (VASP).

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

Dubai:

Regulatory authority: DFSA (Dubai Financial Services Authority)

Core framework:

Tokenized sandbox (launched in March 2025): It is divided into two stages (intention application, ITL testing group), allowing the testing of securities tokens (stocks, bonds) and derivative tokens.

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

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 Law and exemptions apply (small issuance of ≤5 million SGDs, private placement of ≤50 people).

Functional tokens must comply with anti-money laundering regulations, and MAS (Monkey Office of Singapore) promotes pilot projects through a sandbox.

Australia:

ASIC (Securities and Investment Commission) classifies RWA tokens granted to income as financial products and requires a Financial Services License (AFSL) and discloses risks.

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 RWA protocol is that it can exist on public chains, but it must be supplemented by various scale-based blocks to adapt to the compliance framework. These compliance agreements cannot interact directly with traditional DeFi protocols, and secondly, based on the differences in jurisdictions, an agreement that complies with the Hong Kong compliance framework cannot interact with compliance agreements in other regions. Judging from the current situation, the RWA protocol does not have sufficient accessibility and is extremely lacking in interoperability. Its shape is like an "island" and runs contrary to the ideal form.

So can't we really find a path to find decentralization within these frameworks? Actually, it is not. Let’s take Ondo, the leading protocol in RWA as an example. The team has built a lending protocol called Flux Finance, which allows users to borrow using open tokens such as USDC and restricted tokens such as OUSG as collateral. Lend a tokenized bearer note (compound stablecoin) called USDY, which is designed to avoid being classified as a security through a 40-50-day lock-up period. According to the Howey Test standard of the US SEC, securities must meet the conditions such as "invest funds in common causes and rely on others to make profits." The income of USDY comes from automatic compound interest (such as treasury bond interest) of underlying assets, which can be held passively by users and does not rely 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 ultimately realizes a path to interact with the DeFi world.

But such a complicated and indirect way may not be the RWA we want. Another key factor in the success of French-owned stablecoins today is excellent accessibility, which can achieve low-threshold inclusive finance in the real world. On the issue of islands, RWA also needs TardFi and project parties to explore together how to first realize interconnection within different jurisdictions and interact with the on-chain world within some possible scope. Only in the end can it be consistent with the general explanation of the term RWA in the foreword.

3. Assets and Income

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

In fact, from the asset category, it is not difficult to see that the group RWA protocol mainly targets is not DeFi native users, but traditional financial users. Head RWA protocols such as Goldfinch, Maple Finance, Centrifuge, etc., target most of the customer groups they are even small and medium-sized enterprises and institutional-level users. So why do you need to move this matter to the chain? (The first four points only take the advantages of these protocols as examples)

1.7*24-hour instant settlement: This is one of the pain points of traditional finance relying on centralized systems, and blockchain provides an endless trading system. At the same time, it can also realize instant redemption, T+0 loan and other operations;

2. Separation of regional liquidity: Blockchain is a global financial network through which small and medium-sized enterprises in third-world countries can also bypass local institutions to attract external investors' funds through the lowest cost;

3. Reduce marginal service costs: Through smart contract management, the cost of serving 100 enterprises in one asset pool is almost the same as serving 100 enterprises;

4. Service mining enterprises and small and medium-sized exchanges: Such enterprises generally lack traditional credit records and are 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 are generally designed for enterprises, institutions or high-net-worth users, now with the introduction of the regulatory framework, many RWA protocols are also trying to divide financial assets to lower the investor threshold.

For Crypto, if RWA can succeed, it does have Trillion-level imagination space. In addition, I believe that RWAFi will eventually come. For the DeFi protocol, the underlying asset layer will be stronger after adding a token with real returns, and for DeFi native users, there are new tricks in asset selection and matching. Especially in the current world of geopolitical turmoil and uncertain economic prospects, some real-world assets may be a better low-risk option than just using U to manage their finances. I provide some RWA product options that have been realized, or may exist in the future: for example, gold has increased by 80% this month from the beginning of 2023 to 2025; the fixed deposit rate of ruble in Russia is 20.94% for 3 months, 21.19% for half a year, and 20.27% for one year; the discount on energy assets of sanctioned countries is usually above 40%; the yield of short-term US Treasury bonds is 4%-5%; various stocks that have been cut in half may have more fundamentals than your altcoins; and a little more refined to charging piles or even Pop Mart blind boxes may be some good choices.

4. The sword holder

In the Three-Body World, Luo Ji used his own life as the trigger mechanism to deploy nuclear bombs in the orbit of the sun, and used the laws of dark forests to build a deterrent system against the Three-Body civilization. In the human world, he is the sword-holder of the earth.

"Dark Forest" is also the nickname for blockchain by most people in the circle, which is also the "original sin" inherent in the decentralized characteristics. For some special areas, RWA may be able to act as a sword-holder in this parallel world. Although the story of PFP small avatar and GameFi has now become a bubble, when we look back on the crazy era three or four years ago, we have also produced projects such as Boring Ape, Azuki, Pudgy, etc. that match traditional IP. But have we really purchased IP intellectual property? The fact is never, NFT is more like a consumer product to some extent, and blockchain’s definition of 10K PFP is vague. It did use lowering the investment threshold to create some glorious IPs, but in terms of income and project development, the "Three-Body Man" monopolizes the power.

Let’s take Bored Ape as an example, the original intellectual property of Bored Ape clearly belongs to its publisher Yuga Labs LLC. According to the user agreement and official website information, Yuga Labs, as the project operator, owns core intellectual property rights such as copyright and trademark rights of Boring Ape's works. The holder purchases NFTs and only obtains ownership and use rights to a specific numbered avatar, not the copyright itself.

In terms of decision-making, Yuga Labs's route to designing boring apes is Metaverse, which uses unlimited additional sub-IPs to exchange for funds, leaving the original luxury narrative. Regarding this, NFT holders have neither the right to know nor the right to make decisions, nor the right to make profits. In the traditional world, investors usually have the right to use the IP as a whole, direct income distribution, decision-making participation and even development dominance.

Yuga Labs is at least the best among PFP projects. There were a large number of NFT projects that had even more confusing rights allocation. When a giant sword hangs over their heads, will they choose a community that respects their own more?

5. On the carrier

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

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

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