By Eitan Katz, Co-Founder and CEO of Kima
When HSBC, one of only four London-based banks offering bullion gold, announced its entry into the tokenized in late October, it symbolized the growing influence and acceptance of distributed ledger technology (DLT) within mainstream finance. While both small and large banks have been experimenting with the nascent technology for years, the announcement marks the first time a bank will offer tokenized gold.
And HSBC isn’t just any bank—it is one of the world’s oldest and most influential multinational financial institutions. Its Head of Digital Assets Strategy John O’Neill stated after the institution’s announcement that there is “an appetite for tokenization solutions that can maintain a link to specific real-world use cases.” Interest in tokenized gold, among other real-world assets (RWAs) by retail and institutional investors lays the foundation for a more efficient and accessible financial system. But are institutions fully equipped to make it a reality?
An RWA gold rush
The short answer is not yet, but it’s important to highlight the efficiencies DLT or blockchain-based assets can bring to the financial system. Most notably, these include real-time transaction settlements, affordability, 24/7 accessibility, transparency, and immutability. These characteristics can provide mainstream finance, which already has better risk management and credibility than crypto-native solutions, with the necessary arsenal to begin offering a wide range of RWAs.
Tokenized gold and other precious metals are a logical asset class for tokenization— considering it takes a physical asset that is heavy, hard to move, and expensive to store, and digitally liquifies it. By being more liquid and easily accessible, it would open up demand for assets that are widely viewed as safe-haven investments that will, in theory, enjoy steady growth over time.
But physical gold is far from the only RWAs being put on the blockchain—real estate and fine art were some of the first assets to be tokenized. It appears that mainstream finance, after years of careful research into digital assets and DLT, is now ready to capitalize on its own experience with asset management to facilitate the mass adoption of tokenized RWAs.
Keen to tap into that “appetite for tokenization solutions,” the financial world is well positioned to meet investor demand, partly because the vast majority of potential investors tend to trust their bank more than any crypto-native company. The credibility factor that mainstream institutions enjoy can’t be overstated.
The tokenization of RWAs will also enable younger or less financially flexible individuals to finally participate in markets with growth potential by providing a real influx of much-needed liquidity. Amid a sluggish economy, a still somewhat bearish crypto market, untamed inflation, and an uncertain geopolitical landscape, it’s sensible to anticipate heavy demand for tokenized RWAs from this cohort.
As a once-excluded class of investors seeks stability, it's been well documented that tokenized RWAs can unlock trillions of dollars in value, possibly facilitating a more egalitarian economic system. With all that economic potential and the inherent pluses DLT offers, one can only wonder: What are we waiting for?
Making interoperability a reality
Restructuring the way the financial industry operates is no walk in the park as it takes time and requires a lot of moving parts to align in order to establish a foundation. For example, in the 1970s, the financial industry migrated from paper-based assets to electronic assets represented by an identifier in a database.
This process was challenging, complex, and demanded significant changes in technology, infrastructure, and regulatory frameworks. DLT can improve this process while enhancing the wider financial ecosystem, but it’s naive to think it will happen overnight. Effectively leveraging DLT in finance would require the establishment of bilateral and multilateral integrations among different proprietary systems.
Blockchains are silos of data by design and therefore require bilateral and multilateral integrations to ensure that systems using them can function as a trusted intermediary. To ensure these integrations can serve as a trusted hub, there is a need to read and write the data structures, and each chain status changes across different protocols while maintaining transaction atomicity communication security.
For every financial institution, crypto project, or decentralized autonomous organization (DAO) interested in minting tokens representing RWAs, it’s safe to assume they will use a variety of blockchain networks to make that a reality. Without fostering inter-blockchain and inter-ecosystem communication that connects private and public DLT implementation to traditional banking systems, there will inevitably be islands of liquidity restricting the flow of assets.
These islands ultimately limit the adoption of tokenized RWAs as a tool for retail investors due to lack of liquidity, deficient distribution, and overall inaccessibility, especially for less financially flexible investors. This will also create roadblocks for the wider adoption of DLT solutions within finance.
Forging not only cross-chain interoperability but also interoperability between digital assets and fiat currencies should be the prime goal. But connecting these vastly detached ecosystems and bridging these islands of liquidity requires a different type of approach— one that doesn’t center around the standardization we see in mainstream finance. This comes with too much bureaucratic red tape including bilateral and multilateral agreements that take years, if not more, to implement alongside political concessions and technical modifications.
The best solution here is one that fosters interoperability through network-based loosely coupled integrations, which simplifies the integration process by minimizing the direct dependencies between systems. This reduces the complexity of integration and maintenance, making it simple to manage as the number of DLT systems grows.
This could manifest through a unified financial settlement layer that can handle a wide range of applications beyond surface-level interoperability. Having a layer akin to this provides a basis so that innovative developers and engineers can create an open infrastructure to enable direct transfers between digital-asset wallets and fiat-based accounts.
With this construct in place, developers can then build protocols, bridges, universal wallets, and cross-chain and off-chain tools that will contribute to a more robust, secure, and interoperable ecosystem to host tokenized RWAs.
As more financial institutions and other organizations seek to offer tokenized assets, the need for interoperability will become even more clear. Without it, and more importantly the necessary technology infrastructure, the exchange and trading of these assets will remain limited, diminishing its economic potential. Advocating for DLT interoperability through an open infrastructure will facilitate and expedite a steady stream of innovative and user-friendly solutions capable of redefining how we interact with financial instruments while expanding who can participate in them.
About the author:
Eitan Katz is the CEO and Co-Founder of Kima. Prior to Kima, Eitan served as a seasoned executive with a distinguished background and leadership roles with the IDF (intelligence/Unit 8200), HP, HPE, and BMC. His list of accomplishments includes building HP’s Global Innovation and Incubation program, leading HPE’s Enterprise Mobile platform, and being a 3X founder, as well as a founding member of Aegis, the first MPC-based Bitcoin wallet. Eigtan’s training in the elite Israeli intelligence forces along with his experience, has instilled in him a unique perspective on deep technology, leadership, strategy, and execution.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.