An Explanatory Report on Real World Assets
13 min read
Introduction
Real World Assets (“RWA”) in blockchain are digital tokens that represent physical and traditional financial assets such as currencies, commodities, equities and bonds, credit, artwork and Intellectual properties. The tokenization of RWAs mark a market shift towards assets which can be accessed via blockchain technologies on which assets can be exchanged, managed and unlock an array of new opportunities and use cases.
The total available market is projected to reach a value of 638 trillion USD. This market capitalization can be realized once the technological infrastructure is established, leading to inevitable widespread adoption.
Security Tokens and RWA
A security represents a share of ownership or rights to an asset or company. Think of security tokens (“STO”) as the digital version of traditional investments like stocks or bonds.
In the past, companies issued paper stock certificates to investors. These certificates were physical tokens showing who owned the stock and what rights they had. Today, STOs serve the same purpose but are digital. They’re created using blockchain technology, making them a modern, digital version of those paper certificates.
Therefore, STOs are important for RWA because they enable the digital representation of physical and traditional financial assets. These assets include things like currencies, commodities, stocks, bonds, credit, artwork, and intellectual property.
Asset Tokenization
Asset tokenization is a term for the use of smart contract and blockchain technology to represent ownership or rights to an asset as a tradable, on-chain token.
Digital asset tokenization is the process when ownership rights of an asset are represented as digital tokens and stored in the blockchain systems. In this manner tokens can act like digital certificates of ownership that can represent nearly any object of value, including but not limited to physical, digital, fungible, and non-fungible assets. Due to the fact that they are stored on a blockchain owners can maintain custody over their assets.
In order to understand how asset tokenization works, we need to revisit the basics of Web3:
To issue tokens, a developer writes a smart contract that maps out positive balances on to a series of smart contract addresses (“wallets”) along with the functions which enable control of these wallets to add and/or subtract from those balances.
1- Identify the asset you want ot tokenize. This could be a myriad of different assets spanning from equities, commodities, currencies, securities, fine art, carbon credits, intellectual property, or another asset class.
2- Token Type once the asset is identified that asset needs to be fir into a token type. Token types range from ERC-20, ERC-721, ERC-1155, etc.
3- Identify the blockchain on which the tokens will be issued. There are a few criteria to consider two of which are whether to use a public or permissioned blockchain or whether to use a custom network or a rollup (e.g ZKsync).
4- Auditor to verify off-chain Assets tokenized assets backed by RWA collateralization data needs to be relayed on-chain from off-chain bank accounts or vaults to ensure that the tokens are backed by an equivalent amount of collateral assets.
Benefits of Asset tokenization
1- Liquidity historically illiquid assets such as real estate, cars, antiques, art-work, Intellectual property etc., can be turned into tokens which can be widely-available and accessible via exchanges.
2- Accessibility this would be similar to crowdfunding, but within a model where the group of investors funding or purchasing an asset also reap the financial rewards of their participation.
3- Transparency many high-value assets suffer from a lack of reliable and easily-available information regarding returns, ownership history, sale history, and other key metrics users need to be able to make informed economic decisions.
Legal Assessment of Smart Contracts under Turkish Law
Smart contracts are self-executing contracts with the terms of the agreement directly written into code.
While there isn’t a legislation governing RWA under Turkish law there is the Turkish Code of Obligations No. 6098 (“TCO”) which govern contracts.
Provisions on the regulation of contracts in the Turkish legal system are included in many relevant legislations, especially in the TCO.
In order to explain the validity of smart contracts according to Turkish law, it is necessary to explain the “principle of contractual freedom” that applies to contracts in Turkish law.
In accordance with Article 26 of Turkish Code of Obligation, the parties of a contract are free to determine to conclude a contract and to determine the content of the contract as long as;
the contract is not contrary to public order
the contract does not violate any personal rights
the subject of the contract is not impossible
Furthermore, in accordance with Article 48 of Turkish Constitution
“Everyone has the freedom to work and conclude contracts in the field of his/her choice. Establishment of private enterprises is free. The State shall take measures to ensure that private enterprises operate in accordance with national economic requirements and social objectives and in security and stability.”
Under the light of the foregoing, contracts structured in accordance with free will of the parties and which do not breach limitations determined under TCO are valid contracts.
While Turkish law generally acknowledges the principle of freedom of contract, certain contracts are subject to specific formal requirements. The application of these requirements to smart contracts is a matter of debate. For example, a preliminary contract for the sale of immovable property must be notarized, yet it is currently impossible for notaries to create smart contracts using blockchain code. Consequently, contracts that require an official form for their validity cannot be executed as smart contracts.
However, it can be argued that smart contracts satisfy the requirement for ordinary written form. To meet this requirement, a contract must be written and signed by the parties. Even though smart contracts are coded, the terms and actions of the parties are recorded on the blockchain. Therefore, failing to recognize smart contracts as fulfilling the writing requirement could hinder the integration of technological advancements into the legal system.
Given that secure electronic signatures are legally acknowledged as equivalent to handwritten signatures, it can be inferred that a similar analogy might apply to personal keys. However, since there is no existing regulation on this matter, it remains uncertain how judicial authorities will interpret the use of personal keys as a form of a signature.
Legal and Regulatory Framework (US, UK and the EU)
Legal and regulatory uncertainty is often cited as a significant obstacle in industry discussions. However, in the UK, this uncertainty is diminishing. The Financial Conduct Authority (“FCA”) and the Bank of England have recently announced the establishment of a Digital Securities Sandbox, and the legal framework for tokenized assets has been clarified.
The UK Law Commission (“Commision”) has proposed a draft bill that would introduce a new "third category" of personal property under English law, specifically designed to accommodate certain digital assets, including tokenized assets on a blockchain. Currently, English law recognizes two main categories of personal property:[1]
1- "things in possession" (tangible objects)
2- "things in action" (legal rights or claims).
However, the Commission identified that some digital assets, such as crypto-tokens, possess unique characteristics that do not fit neatly into these existing categories.
The proposed legislation would establish this new category to legally recognize digital assets that can exist independently of legal enforceability and are rivalrous, meaning their use by one person precludes equivalent use by others at the same time. This would provide legal recognition and protection for property rights in tokenized assets. Notably, the draft bill does not define exactly what falls into this new category, leaving its interpretation and development to the courts through case law.
Hence, under English law, tokenized assets on a blockchain would be recognized as property, much like any other assets. Legally, these assets do not differ from their traditional counterparts. While their real-world characteristics might vary, this variation is not dependent on whether they are on-chain or off-chain. The distinction between bonds, equities, or other securities is not substantive; it lies solely in their representation, whether digital or physical.
Conversely, the situation in the United States under the SEC's SAB 121 ruling,[2] custodians in the U.S. are still required to recognize all types of digital assets as liabilities on their balance sheets. This regulatory approach complicates operations for custodians and other operators in the digital asset market.
The regulatory landscape in the EU has become more defined with the introduction of the Markets in Crypto-Assets Regulation (“MiCA”), which is currently in its initial implementation phase.[3] MiCA specifically addresses both crypto assets and the service providers that offer new types of services, which previously did not exist in their current form for these assets.
Despite various national and regulatory advancements, as well as new regulations addressing specific digital asset questions and use cases, there are still gaps in the overall regulatory framework. For instance, Exchange-Traded Products (“ETP”s) typically involve both primary and secondary markets. In certain jurisdictions, trading on the secondary market requires the ETP to be recorded in a central register. However, for tokenized assets to be tradable on the secondary market, existing regulations need to be updated, as blockchain technology eliminates the need for a centralized register.
RWA Use Cases
1 Real Estate
1.1 Blockchain and Real Estate
A. Smart contracts on the blockchain make buying and selling property more efficient. They reduce the need for intermediaries and cut down on transaction times, speeding up the process.
· Blockchain uses smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. These contracts automatically enforce the terms of a property transaction once certain conditions are met.
B. Blockchain technology keeps property ownership records clear and unchangeable. This reduces the chances of fraud and disputes by providing a reliable, permanent record of ownership.
· Blockchain’s decentralized and immutable ledger records property ownership in a way that cannot be altered or tampered with. Once a property title is recorded on the blockchain, it’s secure and permanent, ensuring clear and undisputed ownership records.
C. Blockchain can automate tasks like rental agreements, maintenance requests, and payments. This makes property management more efficient and lessens the administrative workload.
· Smart contracts can also be used in property management to automate routine tasks. For example, a rental agreement can be coded into a smart contract that automatically collects rent payments
D. Tokenization, or turning property into digital tokens, allows for fractional ownership. This means smaller investors can buy a share of a high-value property, which increases market liquidity and opens up investment opportunities.
1.2 Real Estate Tokenization
a) Blockchain allows real estate to be split into smaller, tradable tokens. This means you don’t need a large amount of money to invest in expensive properties, as you can buy smaller shares.
b) Unlike traditional real estate investments, which can be hard to sell quickly, tokenized properties can be traded more easily on secondary markets. This makes it easier to convert your investment into cash.
c) Blockchain’s secure and transparent ledger records all transactions. This reduces fraud risks and ensures accurate property records, giving investors confidence in the integrity of ownership and transactions.
d) Smart contracts automate and simplify property transfers, legal documents, and payments. This cuts administrative costs and speeds up transactions, making deals more efficient.
e) Tokenization allows people from anywhere in the world to invest in real estate. With just an internet connection and the ability to buy tokens, investors can access global real estate markets and diversify their portfolios.
1.3 Case Studies
i. RealT[4] provides fractional ownership in real estate properties through security tokens, offering democratized investment opportunities. Investors can purchase tokens that represent a share in a property and receive rental income proportional to their holdings. RealT’s platform facilitates an easy and efficient way for investors to engage in real estate investments and earn passive income.
ii. The St. Regis Aspen Resort in Colorado was tokenized,[5] enabling investors to purchase shares in this luxury hotel through digital tokens. Utilizing the Ethereum blockchain, ERC-20 tokens were issued to represent fractional ownership of the resort. These tokens can be bought, sold, and traded on secondary markets, offering liquidity and accessibility that traditional real estate investments typically do not provide.
2 Decentralized Finance (“DeFi”)
2.1 Blockchain in DeFi
Blockchain technology serves as the essential infrastructure for DeFi, enabling peer-to-peer transactions, minimizing the need for intermediaries, and providing transparency and security. It supports decentralized applications (“dApps”) and smart contracts, which automate and secure various financial processes.
2.2 Tokenization in DeFi
Tokenized assets can be traded and utilized within DeFi ecosystems, making traditionally illiquid assets divisible, accessible, and transferable. Tokenization in DeFi democratizes access to investment opportunities, broadening participation in asset ownership. The use cases of tokenization of DeFi instruments are:
· Fractional ownership which allows broader access to high-value assets, such as real estate and art, by enabling investors to purchase fractional shares.
· Blockchain technology facilitates real-time settlement, allowing transactions to be settled almost instantaneously, which significantly enhances efficiency. Additionally, it enables cost-effective and efficient cross-border payments, reducing barriers in global trade.
· Real-world assets, such as property and commodities, can be used as collateral within DeFi protocols, thereby expanding financial opportunities.
2.3 Legal Regulation Surrounding DeFi
The European regulatory landscape, particularly through the MiCA regulation, harmonizes the regulatory framework across the EU, making it easier for companies to operate within the crypto market. However, depending on the type of asset, tokens may fall under different regulatory regimes, which can influence their classification and the obligations of issuers. This poses regulatory challenges, as the classification of tokens under various regimes, such as Markets in Financial Instruments Directive (“MiFID”)[6] and MiCA, significantly affects the legal obligations and the potential for broader adoption.
3 Carbon Credits
3.1 Blockchain in Carbon Credits
The entire lifecycle of a carbon credit, from its initial project to its final transfer of ownership, can be permanently recorded on a blockchain. This facilitates real-time monitoring of credit creation, verification, and retirement, ensuring that all stakeholders have access to consistent and accurate information.
Smart contracts, which are automated programs on the blockchain, can handle verification tasks. This reduces the need for centralized oversight and paperwork, potentially streamlining procedures and reducing errors.
The immutable nature of blockchain makes it extremely difficult to alter data or forge credits. This bolsters market integrity and builds confidence among participants.
3.2 Tokenization of Carbon Credits
Tokenization allows a single carbon credit to be divided into smaller tokens, making it more accessible to smaller investors and project developers. This can enhance market liquidity and broaden participation.
Unlike traditional certificates, tokenized carbon credits can be traded in smaller increments. This flexibility accommodates various investment needs and preferences.
Blockchain platforms offer secure and efficient trading of carbon credits. Smart contracts can automate transactions based on predefined criteria, reducing both transaction costs and operational friction.
3.3 Benefits for Carbon Credit Stakeholders:
Tokenization provides access to a broader range of investors, potentially boosting project funding and scalability. Additionally, blockchain technology can simplify verification processes and enhance project credibility.
Increased transparency enables buyers to accurately assess the authenticity and effectiveness of their carbon offsets. Secure and efficient trading platforms also streamline the purchasing process.
Blockchain offers regulators a transparent audit trail for carbon credits, aiding in the oversight and enforcement of environmental regulations.
3.4 Use Cases
Verra Registry[7]
I. Verra is working with the blockchain platform ENA to pilot a system for tracking carbon credits from forestry projects. This system uses blockchain technology to record and monitor the issuance, ownership, and retirement of these credits. The goal is to showcase how blockchain can improve transparency and minimize the risk of double counting in the carbon credit market.
a. The Verra Registry case study underscores the value of collaboration between established market players and blockchain technology providers. Such partnerships can combine expertise in carbon credit standards with blockchain innovation to enhance tracking and verification processes.
KlimaDAO[8]
KlimaDAO operates as a decentralized autonomous organization (“DAO”) focused on regenerative agriculture projects. Users invest in the DAO’s governance token (“KLIMA”), which provides voting rights on project selection and investment decisions. KLIMA token holders also benefit from a share of the carbon credits generated by the DAO’s projects. Blockchain technology is used to ensure operational transparency and the legitimacy of the generated carbon credits.
a. The KlimaDAO case study illustrates how blockchain can democratize access to carbon offset projects. Through a DAO structure and tokenized governance, KlimaDAO enables individual participation in climate action and allows users to benefit from the carbon credits' value.
4 Supply Chain
4.1 Blockchain in Supply Chain
Blockchain technology improves supply chain operations by offering enhanced transparency, traceability, and trust. It provides a decentralized and immutable ledger that records every transaction and movement of goods. This capability addresses issues such as counterfeit products, inefficiencies, and lack of visibility in complex supply chains.
4.2 Tokenization in Supply Chain
Tokenization in the supply chain involves converting physical goods or assets into digital tokens on a blockchain. This process facilitates secure, verifiable, and efficient tracking and trading of assets. By recording every step from production to delivery, tokenization ensures greater transparency and accountability throughout the supply chain.
4.3 Case Studies
A. Walmart Food Traceability Initiative[9]
- Problem: Challenges in tracing the origin and movement of food products.
- Solution: Walmart collaborated with IBM to develop a blockchain platform for tracking produce from China.
- Benefits: Enhanced traceability, improved food safety, reduced costs, and increased consumer transparency.
- Challenges: Scalability and standardization across a global supply chain.
B. Maersk’s TradeLens Platform[10]
- Problem: Inefficiencies caused by paper-based documentation in international shipping.
- Solution: A blockchain platform designed for secure document sharing and real-time tracking.
- Benefits: Faster customs clearance, reduced costs, improved visibility, and enhanced security.
- Challenges: Industry adoption and integration with existing systems.
C. Ford Motor Company[11]
- Problem: Ensuring ethical sourcing of cobalt for electric car batteries.
- Solution: Implementation of a blockchain ledger to track cobalt from mining through to manufacturing.
- Benefits: Verified ethical sourcing and enhanced transparency.
- Challenges: Achieving industry-wide adoption and technological integration.
D. Home Depot Supplier Relationship[12]
- Problem: Resolving vendor disputes and building trust with suppliers.
- Solution: Use of blockchain technology to increase supply chain visibility.
- Benefits: Faster dispute resolution and stronger supplier relationships.
- Challenges: Scaling the solution across all suppliers.
5 Energy
5.1 Blockchain in Energy
Blockchain technology is increasingly applied in the energy sector to improve transparency, efficiency, and security.
· Enables consumers to buy and sell surplus energy directly with one another.
Enhances the tracking of energy production and distribution.
Supports efficient grid management and integration of renewable energy sources.
Facilitates new financing models for renewable energy projects through blockchain-based platforms.
Converts energy assets into digital tokens, simplifying trading and investment.
5.2 Tokenization in Energy
Tokenization involves transforming energy assets or rights into digital tokens that can be traded on blockchain platforms. This process:
Represents Energy or Carbon Credits: Simplifies the trading and tracking of these assets.
Enables Partial Ownership: Allows investors to purchase shares in renewable energy projects.
Facilitates Microgrid Management and Energy Trading: Supports more localized and efficient energy distribution.
5.3 Benefits of Tokenization in Energy
Tokenization provides several benefits in the energy sector:
Blockchain’s immutable ledger enhances trust among stakeholders.
Reduces reliance on central power grids, improving reliability.
Expands access to capital and financial services for energy projects.
5.4 Case Studies
I- Sun Exchange (South Africa)[13]
Sun Exchange is a solar leasing platform that utilizes blockchain technology to facilitate solar investments. Individuals have the opportunity to purchase solar panels and lease them to schools, businesses, and communities. The blockchain ensures transparent tracking of ownership and payments, which enhances trust and accountability in the process. This approach not only provides clean energy to underserved areas but also offers a sustainable investment opportunity. The experience underscores the importance of engaging stakeholders and having robust regulatory support for successful implementation.
II- Power Ledger (Kenya)[14]
Power Ledger is a platform that enables peer-to-peer energy trading using blockchain technology. Households equipped with solar panels can trade their excess energy with others, optimizing the distribution of energy within local communities. This system improves energy availability and affordability while promoting the use of renewable energy sources. The implementation of decentralized energy trading demonstrates significant potential but also highlights the need for strong security measures and comprehensive regulatory frameworks to ensure its effectiveness.
III- BMW and PG&E Pilot Project[15]
The pilot project between BMW and PG&E tests the feasibility of using blockchain to manage electric vehicle (“EV”) charging and grid resources more efficiently. The project has shown a 20% improvement in energy distribution efficiency and a significant reduction in transaction times and costs. By allowing EVs to charge during off-peak hours when electricity is cheaper and more abundant, the pilot explores how blockchain can optimize the charging process. This collaboration highlights the potential benefits of blockchain in enhancing grid resource management and reducing operational costs, though continued development and integration are necessary for broader application.
[1] https://lawcom.gov.uk/project/digital-assets/
[2] https://www.sec.gov/regulation/staff-interpretations/accounting-bulletins/old/staff-accounting-bulletin-121
[3] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1114
[5] https://marketspace.capital/real-estate-tokenization-st-regis-aspen-resort-2/
[6] https://www.esma.europa.eu/publications-and-data/interactive-single-rulebook/mifid-ii
[7] https://verra.org/verra-registry/
[8] https://www.klimadao.finance/
[9] https://tech.walmart.com/content/walmart-global-tech/en_us/blog/post/blockchain-in-the-food-supply-chain.html
[10] https://www.tradelens.com/
[11] https://technologymagazine.com/data-and-data-analytics/ford-pushes-supply-chain-transparency-cobalt-mining-using-ibm-blockchain-technology
[12] https://www.ibm.com/case-studies/the-home-depot
[14] https://www.powerledger.io/
[15]https://www.press.bmwgroup.com/usa/article/detail/T0328209EN_US/bmw-group-and-pg-e-plug-in-to-leverage-renewable-energy-and-sustainably-power-electric-vehicles?language=en_US