Don’t Just Tokenize Assets, Build The Institutions To Back Them

Opinion by: Alex Zhang, co-founder at Pharos

Tokenizing real-world assets (RWAs) is not a self-contained solution to traditional finance problems. To claim such a thing would be one-dimensional. As it stands, RWA tokenization is under immense pressure to perform despite showing clear value and signs of progress. 

Despite its progressive trajectory, the criticism leveled at RWA tokenization is immense. Critics say that decentralization alone is enough. 

It’s too complex for the masses. Regulatory hurdles are insurmountable. The infrastructure is lacking. Fraud is rampant. Manipulation is achievable. There’s a lack of auditing. A lack of standardization. It goes on.

These critics fail to acknowledge that we might need to break a few eggs along the way to establish an institution-grade framework that can position RWA tokenization at the heart of the new global economy. The rough before the smooth.

Bridging the global financial divide

There is significant, deliberate work being done to establish compliant, top-level RWA systems that overcome the inefficiencies of traditional finance. Developments can help to bridge the global divide, especially regarding treasuries and real estate. International investors are not succumbing to the flaws of paper-based contracts, intermediary deal opacity and general dispute management. 

RWA tokenization is on its way to providing an antidote, but like some medicines, the initial taste could be incredibly bitter. People’s inherent resistance to change leads them to criticize or undervalue RWAs, rather than seeing their potential. Nevertheless, transforming tangible assets into programmable, divisible and instantly settled digital tokens is necessary for blockchain maturity. Institutional funds require institutional thinking.

As Coinbase co-founder, Fred Ehrsam, famously stated: 

“Everything will be tokenized and connected by a blockchain one day.” 

Consider the stablecoin market. It is already worth over $260 billion, proving strong RWA demand and a huge market opportunity. The naysayers are remarkably quiet regarding RWA tokenization’s biggest success story.

Building the compliant foundation

Unlocking a trillion-dollar market will be fraught with hurdles, as it hinges on developing robust regulatory frameworks and meticulously designed tokenomics. These, in turn, must align incentives with sustainable growth. Inefficient architectures that fail to integrate the carrot and the stick and overlook existing laws may leak value to equity holders and lead to failure.

Related: Animoca launches NUVA marketplace to unify ‘fragmented’ RWA sector

Critics who cite complexity and a lack of infrastructure are blind to the remarkable work already done. Onchain Know Your Customer, Anti-Money Laundering, identity management and institutional-grade infrastructure for custody, settlement and reliable valuation are all key components being developed and launched. What’s left to complement them now are standardized compliance templates with limited liability structures and rapid cross-border compliance pathways. It’s only a matter of time.

RWAs in the real world

Real-world momentum is already visible. These aren’t pilot projects; they’re signs of a shifting paradigm already underway.

The idea that uncertain regulations are a deterrent is changing, with the situation becoming notably clearer in recent weeks and months. The implementation of the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act) in the US is a clear signal that defined regulations can bring greater legitimacy. 

The EU’s Markets in crypto-Assets regulation is coming into force in phases through 2025. It sets clear, comprehensive rules for token issuance, asset-backed tokens and stablecoins across all 27 member states. This harmonization will unlock more compliant RWA products across European financial hubs. In Asia, Singapore’s Project Guardian has already piloted tokenized bond issuance and fund tokenization with major banks such as DBS and JPMorgan. The Japan Financial Services Agency has also introduced specific guidelines for stablecoins and security tokens, building a proactive, regulated path forward for asset tokenization in East Asia.

The US is not alone, with Hong Kong, another major innovator in the blockchain space, enforcing new stablecoin regulations. Japan has also introduced its own regulatory frameworks, hoping to shift more capital to the East and participate in financial innovation.

These critical recent developments, alongside growing support from traditional financial partners and markets, indicate a clear path forward for RWA to achieve mainstream adoption. The mood is changing, the market is growing exponentially, and sentiment could be set to reverse by the end of the year. We’re moving up in the world, away from the lawless Wild West and into the realm of well-governed and legitimate markets.

While the naysayers have made valid points at times, those closer to the action know that the criticism has served as actionable feedback. Everything negative said about RWA tokenization has helped to inspire new regulatory frameworks, new institutional partnerships and new pieces of infrastructure. Ironically, the more criticized and disregarded it is, the more important and reliable it has become. 

RWA tokenization is not a local trend but rather is happening across the globe’s financial hubs. It is everything TradFi is not, and people are starting to come to this realization. 

The market has grown fivefold in just three years. Whether skeptics like it or not, the RWA vision is fast becoming tangible. We’ve moved past speculation. We’re building infrastructure. We’re forging regulatory alignment. The road has been rocky, but today that road is paved. Everyone can reimagine how value is created, owned and exchanged onchain.

Opinion by: Alex Zhang, co-founder at Pharos.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.