Crypto Lawyer View: Why is RWA tokenization mostly unattainable?

Author: _gabrielShapir0, Crypto Lawyer, Director of Legal Affairs at Delphi Digital

Compiled by Felix, PANews

At present, the so-called "tokenization" of "RWA" is mostly impossible to achieve. Currently, RWA comes in three forms:

• (1) "Real" securities (e.g. stocks, bonds, etc.)
• (2) off-chain asset ownership (e.g., real estate deeds; Registered intellectual property rights can also fall into this category)
• (3) Receipt/proof of deposit of off-chain assets (e.g. specific gold bars)

Real estate ownership or any other titled asset cannot be tokenized without government endorsement of the relevant tokenization program. So in practice, the second category is actually equivalent to the first category, where people tokenize shares in an entity and that entity owns the asset.

For private intangible property, there may be some exceptions to the second category. For example, creating an NFT automatically assigns a certain copyright to the rightful holder of that NFT, which is a copyright that stems from morality and contract, not the government.

But it is also not realistic to create bearer securities, because bearer securities are mostly illegal, so in practice, the first category cannot be tokenized either. Instead, you get "souvenir tokens" like USDC or USDT, which approach the value of RWA through various indirect highly trusted mechanisms.

The third category is actually feasible. Bearer receipts are legal, and through private agreements, tokens can be considered to constitute such receipts. So the third category is almost the only true "RWA tokenization," and the Mattereum project is an example.

It is worth mentioning that some projects appear to belong to the first category, but actually belong to the third category. For example, Roofstock Onchain* (Note: a platform specializing in tokenized real estate, users can use NFTs to buy single-family properties**)*, Roofstock Onchain tokenizes the interests of limited liability companies:

• Create an LLC per property, and the LLC has ownership of the property
• LLC must be bought/sold in full

In this case, the interest in an LLC is not usually a security and therefore actually falls under the third category.

What about "tokenized securities"? **

Usually, this is a misnomer, because tokens are not securities. The SEC and other regulators require authoritative ledgers to be maintained by both transfer agents and brokers/dealers, rather than public blockchains. Tokens on the public chain may be used to commemorate ownership transfers, but are essentially a laggy/non-authoritative indicator. Tokens on the public chain are "souvenirs" of ownership recognized on the transfer agent's private ledger, and they are not securities or security tools in themselves.

Keep in mind that most people don't even own their "detokenized" securities, they own a "securities account" or "security rights" from a broker-dealer, and the broker-dealer does not own the security.

Overall, the whole chaotic securities ownership system should not be refactored on the blockchain, and it is also meaningless. Throughout the securities ownership system, claims can be tracked through multiple brokers, from banks to DTCC (Securities Centralized Depository and Clearing Corporation in the United States) and Cede & CO (Depository Trust Company candidates) for practical security.

The benefit, if any, of tokenizing security is the creation of a more direct and immediate form of ownership on-chain. Tokenization of securities is a very tricky issue that requires either very clever legal means that few currently do or significant changes to laws, regulations, and market habits.

The focus of blockchain is to reduce trust assumptions/requirements. In almost all current cases, the trust assumptions increased by "RWA tokenization" have far exceeded the trust assumptions required for normal off-chain ownership. As you've seen in USDR de-anchoring (and will see in the future), "yield" is not proportional to risk (often cleverly hidden).

But in the long run, the authors are actually bullish on RWA, and regulations will eventually adapt to market changes, but this requires bypassing the rules to achieve this. At the same time, the authors don't want people to buy or peddle any product they don't understand.

In addition, all RWA-related documents should always be fully public, but this does not appear to be the case at the moment. Participating in a private RWA is like using an unverified undisclosed smart contract.

Related reading: 10,000 words to analyze the implementation path of RWA today and the outlook of future RWA-Fi