Introduction

As the global acceptance and adoption of blockchain technology accelerates—highlighted by the U.S. approval of Spot Bitcoin ETFs—many companies remain hesitant to engage with this burgeoning field. This reluctance often stems from a lack of familiarity with blockchain’s benefits and its potential applications. While cryptocurrencies often dominate headlines, a quieter yet significant transformation is underway: the tokenization of real-world assets (RWAs). This development has profound implications for businesses across sectors.

In this article, we aim to demystify RWAs tokenization and outline why they deserve more than just cursory attention from corporate strategists.

Understanding Real-World Assets (RWAs) Tokenization

To grasp the concept of RWAs tokenization, it is essential to acknowledge that there is no fixed definition, given its evolving nature. Generally, RWAs tokenization can be understood as any asset—physical, digital, tangible, or intangible— from the real world that is tokenized and represented on a blockchain. Tokenizing an asset involves creating a digital twin on the blockchain, facilitated through digital tokens that represent ownership or a share of the RWAs. These tokens can then be traded, transferred, and integrated into smart contracts, offering novel ways to manage and leverage assets in a digital economy.

Why Should Companies Pay Attention to RWAs Tokenization?

Companies might then wonder why they should pay attention to RWAs tokenization and what the benefits are for their businesses. In this article, we will explore five key advantages of RWAs tokenization that can drive innovation and growth for companies: 

1. Speed and Efficiency: Tokenizing RWAs enables assets to be traded 24/7 globally on the blockchain without any time restrictions. This capability significantly increases the speed and efficiency of transactions since the system operates continuously, even outside traditional trading hours and on holidays.
2. Utilization of Smart Contracts: RWAs tokenization benefit from the integration of smart contracts, which are self-executing contracts with the terms of the agreement embedded in lines of code. Smart contracts are self-executing contracts with terms directly written into lines of code. Stored on a decentralized blockchain network, they automatically execute when predefined conditions are met. Smart contracts facilitate, verify, and enforce contract terms without intermediaries, providing efficiency and security, thus removing the need for third parties to facilitate, verify, or execute contracts, thereby ensuring full transparency and security between parties.
3. Reduced Costs: Since tokenized RWAs operate on blockchain and are supported by smart contracts, they eliminate the need for middlemen to facilitate, verify, and execute contracts, reducing traditional administration costs and transactional costs significantly.
4. Transparency: Transactions involving tokenized RWAs are recorded on blockchains, making all operations, deals, and activities fully visible to network participants. Furthermore, once a smart contract is deployed on a blockchain, it cannot be tampered with or changed, ensuring immutability in a transparent environment that fosters trust among parties and stakeholders.
5. Fractionalization: A largely underemphasized yet revolutionary benefit of tokenized RWAs is their ability to be fractionalized. This means assets can be divided into smaller portions, allowing multiple investors and individuals to co-own parts of the assets. Beyond efficiency, low transaction fees, speed, and transparency, the revolutionary benefit of tokenized RWAs lies in their ability to fractionalize assets, and it is a feature that companies cannot afford to overlook.

Potential Real-World Applications of Tokenized RWAs

Companies can harness the benefits of fractionalization by exploring various real-world applications of tokenized assets. Here are three examples of how companies can leverage the fractionalization of tokenized RWAs: 

1. Tokenizing Carbon Credits: Companies involved in environmental projects can tokenize carbon credits by converting them into digital tokens on a blockchain. For example, a company that manages reforestation or afforestation projects can receive certification from recognized environmental organizations for the carbon offsets generated. The certified carbon credits are then tokenized on a blockchain, with each token representing a specific quantity of carbon offset—typically, one metric ton of CO2 equivalent. These tokens can be traded, allowing companies and individuals to buy or retire them to offset their carbon footprint.
2. Tokenizing Real Estate: In this scenario, a property developer can tokenize an entire building, such as a corporate tower, offering token holders a share in the rental income generated by the property. This approach opens the door for a broader range of investors to participate in large-scale real estate projects. Instead of relying on a single major funder, who might require significant discounts, the fractionalization of real estate allows multiple investors to contribute smaller amounts. This flexibility can accelerate the funding process and make large real estate projects more accessible.
3. Tokenizing Financial Products: Tokenization can make financial products, like bonds or sukuks, accessible to a wider audience. Traditionally, some of these financial products have only been available to institutional or high-net-worth investors, limiting participation for those who don’t meet strict asset or income requirements. However, by tokenizing financial products, they can be divided into smaller, more affordable units. This democratization of financial products allows more investors to participate, thereby increasing market liquidity and diversifying the investor base.

These examples demonstrate how fractionalizing tokenized RWAs can create new opportunities for companies and investors by making assets more accessible, reducing barriers to entry, and promoting broader participation. The shift toward tokenization could lead to greater market efficiency, increased liquidity, and smoother investment processes across various sectors.

However, RWA tokenization remains a relatively new concept, subject to ongoing exploration and testing across different jurisdictions. While the potential benefits are significant—opening new business possibilities for companies—the novelty of the approach brings with it uncertainty in regulations. As a result, companies and, particularly, their general counsels should work closely with lawyers who have a deep understanding of blockchain and RWA tokenization. This collaboration will help ensure that companies navigate regulatory complexities and legal requirements safely and effectively.

For comprehensive guidance and legal insights regarding the dynamic landscape of RWAs, blockchain, cryptocurrency and/or Fintech, our team of experts is ready to assist you. Feel free to reach out to us for further assistance and a tailored approach to navigating the complexities of this decentralized future. We look forward to being your trusted partner on this transformative journey.

About the authors

Ong Johnson
Partner
Head of Technology Practice Group
Transactions and Dispute Resolution, Technology,
Media & Telecommunications, Intellectual Property,
Fintech, Privacy and Cybersecurity
johnson.ong@hhq.com.my

Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications, Intellectual
Property, Corporate/M&A, Projects and Infrastructure,
Privacy and Cybersecurity
ky.lo@hhq.com.my.