In the past year, there’s been a growing interest in crypto markets for tokenizing real-world assets. Traditional financial institutions have joined this trend by adopting blockchain technology and tokenization for their own investments.
In a conversation with CryptoMoon Markets, Victor Sanchez and Alan Keegan, the founders of the blockchain project Kinto focusing on Realized Widely Applicable (RWAs), discussed the investment opportunities in tokenized RWAs. They expressed their perspectives on what’s driving the surge in popularity for RWAs and why they think major financial players like BlackRock are optimistic about this asset class.
CryptoMoon: What would you say is the driving factor behind the rapid growth of RWAs this year?
Victor Sanchez: The appeal of this approach has been evident due to its benefits: eliminating intermediaries and their fees, providing a highly liquid and continuously operating marketplace, and ensuring transparency through a publicly accessible record. RWAs and Traditional Finance have discovered a reliable, secure, adaptable, and functional environment in platforms like the ones we established at Kinto.
CT: Can you share your views on why BlackRock has suddenly become quite bullish on RWAs?
RWAs represent a vast potential market valued in the trillions of dollars, and major players recognize that blockchain technology could rapidly advance from insignificant to transformative during a bull market.
Despite the unwelcome surprises on my first day, including a Tornado Cash dusting, I firmly believed I couldn’t miss the train.
PT: What are some specific forms of liquidity that can be derived from Regulatory Capital (RWAs), and how does accessing this liquidity enhance profitability for financial managers?
Alan Keegan: The capability to move assets around the world instantly, without delays, and settle transactions in real-time through blockchain technology is a significant advantage once the regulatory challenges for transferring securities using it are resolved.
The capability to neutrally and atomically execute any transaction increases the ease and cost-effectiveness for various types of transactions. This includes overcollateralized lending, yield optimization, seizing collateral on defaulted debts, and even creating dollar-backed stablecoins as liquidity against treasury collateral at nearly 100% loan-to-value ratio. These transactions can be executed with a simple click or activated based on specific conditions.
Any type of financial transaction could benefit significantly from being processed on a blockchain once the necessary regulations are in place and the blockchain is utilized as the foundational layer for financial infrastructure, unleashing its full potential.
Regarding the issue of fragmented and isolated liquidity, which pockets of capital can risk weighting adjustments (RWAs) release, and what could be the methods for accomplishing this?
In contrast to RWAs, the DeFi infrastructure for institutions presents a solution to the challenges of liquidity and utility. The past bull and bear markets have highlighted the advantages of DeFi over traditional methods for specific transactions. For instance, in passive liquidity provision and overcollateralized lending, DeFi functions effectively even during market turmoil.
Despite being tokenized, most Real-World Assets (RWAs) remain unusable for on-chain transactions. To unleash their value and meet institutional demands, it’s necessary to perform Know Your Customer (KYC) checks directly on the blockchain while maintaining an open network.
CT: Is there a difference between DeFi and RWAs?
Few regulatory-compliant Real World Assets (RWAs) are being tokenized currently, which were previously heavily regulated and had stringent partner conditions in reality.
“Historically, RWAs were missing a key aspect of DeFi: composability. We are fixing that.”
CT: Can you explain how RWAs fix the composability issue that plagues DeFi?
Currently, Decentralized Autonomous Organizations (DAOs) or Recurring Whitelisted Addresses (RWAs) have the responsibility of establishing their own regulatory frameworks, including KYC systems. In simpler terms, they act as gatekeepers, verifying your identity and monitoring what you possess and who you can transfer it to. When considering this issue on layer 1 or non-compliant layer 2 networks, it essentially means that for similar use cases across different DApps or protocols, you must undergo their unique processes, which do not communicate with each other.
We hold that an appropriate abstraction model lies in conducting Know Your Customer (KYC) procedures at level 2, ensuring a unified regulatory framework and equivalent functionalities for all parties involved. This setup facilitates seamless risk weighted assets (RWAs) transactions, composability, and more.
“How do traditional financial industry (TradFi) regulations presently pose difficulties when it comes to handling counterparty risk?”
In any networking context, be it L1 or L2, you have the freedom to transmit data to any recipient at any time. Cryptography ensures this liberty in nearly all situations, making it an excellent solution.
In a strict compliance setting, identifying the sender, the reason, and the relevant information can prove to be a challenging and complex task.
“In our conversations with Trad-Fi, this counterparty issue is one of the most cited reasons for not being on-chain, followed by security and usability.”
CT: What is Kinto doing to bridge the gap between TradFi and RWAs?
PS: In Kinto, every user or organization goes through a thorough identity verification process at the blockchain level, ensuring safety and compliance with Know Your Business (KYB) regulations. This sensitive data remains under the control of the KYC provider only with explicit consent from users, making it a user-owned KYC solution that effectively addresses counterparty requirements.
In addition, this action taken at the chain level opens up a new capability: the ability to compose these Read-Write Assets (RWAs) for the very first time. Consequently, unique offerings that are exclusive to Kinto become possible.
Q: it appears that Real Weighted Allocations (RWAs) primarily benefit institutional investors and investment fund managers. When and how can individual investors, or retail investors, access these RWA opportunities?
Because of the regulatory framework discussed in earlier queries, it became straightforward for these financial institutions and accredited investors to obtain these investment opportunities.
Although we ensure the fulfillment of counterparty demands and implement various security measures like AML and fraud detection, among others, our protocols enable us to extend our offerings to a broader customer base in Kinto compared to other platforms.
Q: How do you envision a complete integration of RWA (Real-World Assets) in Traditional Finance (TradFi), and what advantages would this bring to typical investors?
AK: In the future vision of Kinto, you could access tokenized traditional ETFs for liquidity in automated marketplaces like Uniswap or Curve. Additionally, connecting your bank to your digital wallet would allow for payroll payments on the blockchain and the seamless issuance of mortgages using funds from an on-chain money market and the digitized deed to your house as collateral.
In the digital realm, corporations can store their treasuries as on-chain assets, and debt issuance can transpire through decentralized applications (DApps). The issuance and trading of any contemporary financial asset, as well as the provision of modern financial services, can take place on the blockchain.
“Our mission is not just to provide the first permissionless, decentralized network capable of supporting every traditional financial institution and every decentralized finance protocol. It is to provide the best infrastructure option for hosting the entire future financial system.”
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2024-04-24 00:19