Sep 12, 2024 6 min read

The RWA Tokenization Revolution: Insights from BlackRock’s Entry into Tokenization

With traditional financial giants like BlackRock, Fidelity, and JPMorgan actively expanding into the space, the concept of RWA (Real World Asset) tokenization has gradually moved from the periphery to the mainstream, garnering widespread attention. Recently, the Hong Kong Monetary Authority also launched the Ensemble Sandbox to support institutions in experimenting with RWA tokenization, testing, and developing blockchain-based innovative solutions. This signals that RWA tokenization will become a significant trend in the future financial markets.

RWA tokenization refers to the process of registering ownership of tangible assets, such as real estate or gold, or intangible assets like bonds or equity, on the blockchain and converting them into digital tokens. This article will focus on the successful implementation of BlackRock’s tokenized fund, BUIDL, to explore why major players are rushing to enter the RWA market.

BUIDL: BlackRock’s RWA Initiative

BUIDL (BlackRock USD Institutional Digital Liquidity Fund) is the first tokenized fund launched by BlackRock, the world’s largest asset management company, in March of this year. This marks a significant milestone in the asset tokenization process, representing a successful exploration of recording the transfer and modification of real-world asset ownership on the blockchain. It provides a glimpse into the future where blockchain technology integrates digital assets with real-world assets seamlessly.

Each BUIDL token maintains a stable value of $1 and has “security” attributes. The fund invests 100% of its total assets in cash, U.S. Treasury bills, and repurchase agreements, and token holders receive monthly “airdrop” dividends based on daily accruals, allowing investors to earn returns while holding blockchain tokens. BUIDL’s initial ecosystem participants include Anchorage Digital Bank NA, BitGo, Coinbase, and Fireblocks, along with other market players and infrastructure providers in the crypto industry.

So how does the BUIDL fund operate? Typically, RWA tokenization involves five steps: asset verification, asset valuation, token issuance, token management, and asset redemption. Let’s take the BUIDL fund as an example.

Asset Verification: This step confirms the ownership of the asset and ensures its legality and traceability. BUIDL’s underlying assets include U.S. Treasury bills, Treasury bonds, other Treasury-backed securities, repurchase agreements, and cash.
Asset Valuation: The asset’s value is assessed to determine its worth in the tokenization process. PricewaterhouseCoopers (PwC) has been appointed as the fund’s auditor.
Token Issuance: The asset is converted into digital tokens that can circulate through smart contracts on the blockchain. The fund is issued as an ERC20 token on Ethereum with a KYC and AML-compliant “whitelist” mechanism, allowing tokens to be traded only among addresses approved by the Securitize Markets whitelist.
Token Management: This involves managing token-related operations such as transactions, holding, and transfers to ensure liquidity and security. BlackRock will serve as the fund’s investment manager, and BNY Mellon will act as the fund’s custodian and administrator. Securitize Markets serves as the placement agent, offering the fund to qualified investors. Securitize also acts as the transfer agent and tokenization platform, managing tokenized shares and reporting on the fund’s subscriptions, redemptions, and distributions.
Asset Redemption: This allows the token to be converted back into the original asset when needed, facilitating the flexible use and recovery of value. To enhance the liquidity of BUIDL tokens, BlackRock partnered with USDC issuer Circle to establish a USDC pool controlled by smart contracts, enabling 24/7 redemption with BUIDL tokens. This demonstrates the high efficiency and transparency of tokenized assets.

According to tokenization company Securitize, BUIDL has paid out $7 million in dividends to investors since the launch of its fund in March 2024. The latest data from RWA asset analysis platform Rwa.xyz shows that BUIDL has managed over $500 million in assets, making it the largest tokenized fund to date. BUIDL’s success has provided on-chain players with a channel to access real-world returns, and it has made it possible for stable returns from real-world assets to flow into DeFi.

The RWA Tokenization Revolution and Regulation

The Boston Consulting Group (BCG) mentioned in a 2022 report that “most of the world’s wealth is currently locked in illiquid assets, and it is predicted that by 2030, the total scale of illiquid assets, including real estate and natural resources, could reach $16.1 trillion.” The emergence of RWA tokenization addresses this issue by removing the drawbacks of traditional asset illiquidity.

RWA tokenization links non-digital assets with the blockchain, creating a more transparent, efficient, and liquid financial system with lower systemic risk. Token issuers use distributed ledgers (i.e., blockchain) to mint digital tokens, ensuring transparent and immutable ownership; tokens increase asset transfer efficiency via smart contracts; high-value assets are fractionalized into tokens, providing more investment opportunities; and on-chain circulation reduces the need for intermediaries, eliminating centralized registration requirements and avoiding reconciliation costs.

Despite blockchain’s aim to build a more open and trustless financial ecosystem, each innovative product that combines with it is constrained by the legal jurisdiction and regulatory framework of its specific application scenario.

Just like BUIDL, which is subject to the U.S. Patriot Act, only investors who have passed “whitelist” verification can participate, to prevent its use for money laundering, terrorism, or other illegal activities. A Steakhouse Financial research report shows that all U.S. Treasury RWA products (except Flux fUSDC) require permissioned token issuance to meet compliance requirements. This highlights the importance of KYC and AML in RWA tokenization.

Bitrace’s Support for RWA Tokenization Compliance

According to DeFi Llama, the total market capitalization of stablecoins, which were the first to apply tokenization technology to the blockchain, has surpassed $170.2 billion. Meanwhile, participants in illegal activities such as online gambling, black market activities, and money laundering are increasingly using cryptocurrencies like USDT for money laundering. This has forced institutions involved in the RWA tokenization wave to inadvertently accept risky funds, exposing them to compliance risks.

Against this backdrop, Bitrace has launched the Detrust on-chain risk fund monitoring and management platform to provide effective compliance support for companies participating in the RWA tokenization wave:

During Token Issuance: Detrust uses on-chain KYT (Know Your Transaction) and KYA (Know Your Address) capabilities to help clients conduct risk investigations on technical service providers and token custodian addresses in advance, identifying the proportion of risky transactions.
During Token Circulation: Detrust offers 24/7 real-time automatic detection of on-chain transactions and comprehensive risk assessments. Through pattern analysis, behavioral deviation analysis, and clustering analysis, it detects risky funds and assists in prompt action to mitigate compliance risks related to criminal funds.
Token Redemption: Based on Detrust’s criminal risk tagging database, address profiling, and risk fund monitoring and alert capabilities, the platform conducts compliance checks on incoming and outgoing funds, helping companies minimize the negative impact of risk management on business operations.

As expressed in Grayscale Research’s view on the future of RWA tokenized finance, “Many digital finance systems are transitioning from closed platforms, hosted by centralized intermediaries, to open and decentralized platforms built on public blockchain infrastructure.”

In the future financial landscape, where RWA tokenization combines with blockchain, regulatory compliance will remain crucial. Industry participants, while embracing the new era and actively engaging in RWA tokenized finance, should also strengthen their risk control awareness. They should actively collaborate with local law enforcement agencies, connect with threat intelligence services provided by security vendors, and work to detect, identify, prevent, and block risky crypto funds to protect their business and user addresses from contamination.

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