Is RWA a Product or a Trade

Source: Leaf Kai Wen
What is RWA (Real World Asset Tokenization) exactly?
Crypto purists argue that RWA should not be so mundane. We have previously stated that the premise of RWA discussions is a practical compromise between traditional finance and Crypto.
Many people criticize RWA as a vague concept, where everything is being stuffed into RWA without producing any real RWA assets.
This issue boils down to a question of semantics: Is RWA a product or a transaction?
If it’s a product, then is RWA similar to a Bitcoin spot ETF or a T-Bill product backed by US Treasury securities?
If it’s a transaction, then is it trading RWA products or engaging in Crypto financial asset trading similar to Traditional Finance (TradFi) asset exchanges?
Considering our emphasis on RWA’s core essence being corporate financing and institutional markets, the products resemble corporate bond products while the transactions resemble financial asset trading, revolving around the assets package for corporate financing and the institutional market for products.
In specific cases, products like Bitcoin spot ETFs, tokenized money market funds, RWA stablecoins, etc., are primarily product-oriented and not related to corporate financing. On the other hand, tokenized corporate bonds, fixed-income bonds, and digital REITs (tokenized cash distributions) are more aligned with corporate financing.
Why discuss the differences between products and transactions?
Products lean towards Web3.0 and are more retail-oriented, particularly in the realm of Web3.0 retail investors who are accustomed to investing in certain tokens. Currently, many Crypto projects are leveraging the concept of RWA. Products tend to be more standardized, focusing on product design, TGE issuance, etc., whether it’s a T-Bill backed by US Treasury securities or a tokenized concept under the RWA umbrella, or the involvement of DePIN and AI as infrastructure in narrative concepts. These are all part of the standardized product routine and ecosystem.
On the other hand, transactions are more institution-oriented, with financial asset trading primarily focusing on corporate financing and institutional investments. It operates within a non-standardized product trading ecosystem, where the trading targets are designed as financing products. Asset trading issuance is just the first step, followed by interbank markets, OTC bond markets, institutional financing and securities lending, reverse repurchase agreements, equity redemptions, etc. Sometimes, there are local markets catering to retail investors.
From a Crypto perspective, it resembles industry trading triggered by corporate financing and the digitization and encryption of upstream and downstream channels.
In essence, it may seem redundant to say that RWA is like a product but not a product, a model but not a model. Real-world asset tokenization involves the transfer of traditional financial investment and financing to the world of virtual assets and tokenization. The appeal of real-world assets and the involvement of traditional funds and users signify that RWA is either a form of real-world asset that traditional funds can comprehend or a new form supported by real-world assets.
The integration of product and transaction in the RWA model
The convergence of old and new may be seen as a compromise and moderation in the early stages of RWA. Traditional bonds (RA) cater to institutional clients, bulk transactions, and off-market trading, while Web3.0 exchanges focus mainly on retail customers.
By merging products and transactions, RWA might resolve this issue: using RWA products (such as US Treasury ETFs, Bitcoin ETFs, etc.) as underlying assets to create new yield or arbitrage tokens (or protocols), multi-tiered trading markets for primary and secondary arbitrage, further expanding RWA derivative tokens such as collateralized financing and interest rate swaps.
This integrated model can target both institutional clients and retail investors trading coins.
Most of the RWA projects launched in Hong Kong under regulatory compliance are initially focused on real estate fixed-income bonds or corporate credit bonds, wrapped with a tokenized shell, representing the most basic form of a simple product.
In reality, the complexity of real-world asset products is intertwined with industrial trading and finance, and asset tokenization extends beyond just tokenizing real-world assets to tokenizing the entire industry and financial chain associated with those assets.
From this perspective, RWA may have several directions:
1) Corporate financing direction, mostly in the form of RWA products, focusing on digital bonds and digital REITs related to corporate financing. The design could be diversified, incorporating credit bonds, income rights, cash flows, and other different design patterns.
2) Industry trading direction, emphasizing the business design of RWA exchanges, how to combine trade and liquidity to achieve period and spot trading and tokenized arbitrage, gradually shifting the token pricing power of real-world assets to Crypto leverage, replacing interbank business with OTC exchange markets and collateral lending agreements, designing liquidity pools, drawing inspiration from airdrops and mining models, developing digital investment banking services in conjunction with Crypto funds, with a key focus on attracting and facilitating upstream and downstream links within the industry.
3) Investment and wealth management direction, focusing on global fund and institutional fund cost and interest rate swap demand, designing RWA investment and wealth management products, be it Crypto fixed-income products, hedging arbitrage, seniority and subordination, TRS, or yield tokens, to replace traditional financial investment products.
4) Native token direction, focusing on tokenizing emerging assets that traditional finance cannot value, such as renewable energy, AI computing power, especially combining renewable energy with DePIN and VPP (Virtual Power Plant) to enable P2P trading of renewable energy and green energy stablecoins. This presents a huge market opportunity, especially after the G7 countries collectively pledged in May of this year to gradually phase out the existing coal-fired power plants by the first half of 2035.
How to transition from the B2B market to the B2C market?
Since the traditional corporate bond market is a B2B market, while Web3.0 represents a B2C market, the success of RWA hinges on how to transition from a B2B market to a B2C market. This is a challenge faced by early licensed and compliant exchanges with Web3.0 attributes, as they primarily focus on the Crypto retail market, neglecting the traditional centralized institutional market. However, RWA inevitably requires compromise and moderation. With the education provided by projects like Bitcoin spot ETFs, more licensed and compliant exchanges, including native Crypto exchanges, are beginning to pay attention to RWA and the institutional market.
Is it difficult to understand how the institutional market can transition to the retail market?
a) TRS serves as the foundation for arbitrage or brick-laying familiar to the Crypto community. Institutional clients and retail investors have different cost of funds and risk strategies, creating a natural market space for interest rate swaps between institutions and retail investors.
b) The traditional bond market comprises private placements, war deployment, issuance (wholesale), and secondary markets (retail) in the institutional market, with retail investors at the end. There exists an arbitrage space between wholesale and retail, but tokenizing RWA could allow both institutions and retail investors to enter simultaneously through different modes like NFTs, airdrops, and mining. It might even be possible for retail investors to enter earlier than institutional clients based on DAO communities, DEX, and AMM.
c) The institutional market naturally involves lock-up restrictions and cash-out strategies, or quantitative arbitrage, where cash-out leads to retail investors taking over, while institutions might absorb retail investors’ chips and liquidity.
Therefore, RWA products and trading ecosystems essentially leverage financial institutions’ familiarity with assets and product forms but elevate them to new forms and liquidity through tokenization and virtual asset trading, especially through diversified secondary markets (token trading markets), continuously attracting more traditional financial institutions and old money.