Financial History, Legal System, and Technological Cycles: The Trillion Narrative of RWA Cannot Withstand Scrutiny

Author: Beichen

As the crypto market enters a downturn, the concept of RWA (Real World Assets) has gained traction, becoming one of the few grand narratives acknowledged by all parties in the industry, even attracting the interest of traditional institutions like Goldman Sachs and Citibank.

The reason RWA is a trillion-dollar narrative is largely due to the fact that its realization is still far off, leaving ample room for imagination.

However, it must be said that RWA is far more confusing in its narrative than DePIN. To judge whether a DePIN project is reliable, you can simply rely on your common sense as a practitioner (for example, if you have any technical knowledge as an IoT practitioner or business sense as a crypto practitioner, you can assess how unreliable Helium is), while the RWA narrative involves financial history, judicial systems, and the cycles of blockchain technology. These common senses have no direct relation to the productivity of the crypto industry, thus becoming irrelevant knowledge blind spots.

This article starts from common sense to scrutinize the grand narrative of RWA, and rebuttals are welcome.

Financial History: From Securitization to Digitalization to Tokenization

"Put real-world assets on the blockchain!" This story is indeed enticing, especially in the current tightening liquidity environment.

Thus, you will see voices from the crypto industry to traditional financial institutions and even governments promoting the RWA narrative, which can be said to stem from a lack of financial historical knowledge, leading to a misjudgment of RWA, and unexpectedly forming a multi-voiced symphony in the market, further reinforcing their misjudgment.

When you place these voices (I refer to all the research reports and discussions promoting RWA) within the context of financial history, you will find that this hype is quite absurd—they have skipped over the historical processes of asset securitization and asset informatization, jumping straight to providing solutions for asset tokenization. The advantages of RWA can be summarized in three points: increasing liquidity, simplifying transaction processes, and eliminating financial intermediaries.

If blockchain technology had been discovered in the 1970s and a solution had been proposed to "package illiquid assets into tradable securities and place them on the blockchain," it could be considered a financial genius, but now it is 2023.

Taking the frequently cited BCG report as an example, they advocate putting real assets like real estate, cars, stocks, metals, and artworks on-chain, conservatively estimating that the value of tokenized assets will reach $16 trillion by 2030.

So the question arises: if the goal is to solve liquidity, do these assets need asset tokenization? The answer is that they need asset securitization. If the aim is to simplify transaction processes, do these assets need asset tokenization? The answer is that they need asset informatization.

Let’s briefly review the transformation of financial instruments since the 1970s from the perspective of asset carriers, and their fallacies will become clear.

Asset Securitization for Increasing Liquidity

Although mortgage bonds were issued by American farm railroads in the 19th century, true asset securitization began in 1970 when Ginnie Mae issued securities backed by mortgage pools. In simple terms, this involves packaging mortgages that banks have not yet collected and selling them to investors in the financial market, allowing banks to recoup funds early while investors gain stable financial products, directly spurring the prosperity of the real estate market.

The financial magic of asset securitization lies in the fact that those illiquid assets, which were originally idle, are activated through securitization. This method quickly expanded from bank loans to corporate bonds, receivables, and even parking fees—essentially, any asset can be securitized.

The wave of asset securitization released astonishing liquidity, creating countless financial empires during its growth (like the investment banks showcased in "The Wolf of Wall Street"), although it later triggered the financial tsunami of 2007 due to deregulation (mainly because the routes of junk bonds and leveraged buyouts became too wild).

Over decades of development, asset securitization has formed a very mature operational model (asset types, business logic, product principles, transaction structures, etc.) and market norms (issuance registration, listing, etc.), while the trillion-dollar market touted today for RWA is largely the market for asset securitization, as if they have forgotten that asset securitization exists.

Thus, we return to a very realistic and painful question—if those real-world assets need to solve liquidity, why choose the RWA market when they can opt for the larger and more compliant asset securitization market?

This question actually existed back in 2017 when ICOs were being promoted, but today the answer regarding ICOs is already clear: ICOs and IPOs occupy different ecological niches, with the irreplaceable advantage of ICOs being a lower entry threshold. Those promoting RWA today are still making the same mistake as those who once claimed ICOs would replace IPOs—they fail to recognize their ecological niche, not focusing on the irreplaceable advantages of RWA, but instead attempting to replace the asset securitization market with asset tokenization.

Asset Informatization for Simplifying Processes

Another advantage of RWA is its ability to simplify the cumbersome transaction processes in the real world, thereby enhancing capital efficiency. RWA indeed has this advantage, but we need to clarify which simplifications are brought about by blockchain technology and which have already been achieved in the wave of asset informatization.

For instance, Bitcoin uses blockchain technology to realize the global payment function of the SWIFT system, while Uniswap implements the functions of listing and trading on centralized exchanges with 500 lines of code on the blockchain. However, the efficiency revolution touted by RWA has already been realized in the wave of informatization, merely being moved back onto the blockchain.

When they talk about the RWA story, it seems they forget the wave of informatization, so it is necessary to trace back through history.

Intel launched the first commercial CPU in 1971, marking the official arrival of informatization, as the wealth created by society began to shift from material forms to information forms, and this wave also swept through the financial industry.

NASDAQ was established in 1971, and at that time it was not an exchange but a quotation system that integrated over-the-counter trading information, which you can understand as an online price comparison platform. Although its function was simple, it was already revolutionary compared to the paper tape quotation machines that were popular ten years earlier (and the paper tape machines were also a significant leap from the earlier practice of modifying prices on a blackboard), marking a leap in capital efficiency brought about by technological revolution.

As the wave of informatization continued, the financial industry gained more informatization tools. For example, with the adoption of electronic trading systems, investors can now complete the entire process from price discovery to trade execution themselves, no longer needing to call or fax their brokers to operate (thus ordinary traders can now trade dozens or hundreds of times a day, which previously only institutional professional traders could do), representing another leap in capital efficiency brought about by technological revolution.

Now let’s look at how RWA is touted to enhance capital efficiency—they directly compare assets that have not undergone informatization with RWA, of course arriving at conclusions favorable to them. However, most of the efficiency improvements can be achieved with traditional financial technology, without needing blockchain (for example, for RWA projects in real estate, spending a few thousand dollars to create a small program would suffice).

Asset Tokenization for Eliminating Intermediaries

Having reviewed the waves of securitization and informatization, it is not difficult to see that most of RWA's functions have already been filtered out. Now let’s examine how many real-world assets actually need to be tokenized.

Note that we first filter out a portion of real-world assets suitable for securitization, then from the already securitized assets, we filter out those that need informatization, and finally from the already informatized assets, we filter out those that need tokenization.

Citibank's report suggests that almost anything of value can be tokenized and predicts that by 2030, there will be $4 trillion to $5 trillion in tokenized digital securities, while trade finance transactions based on distributed ledger technology (DLT) will reach $1 trillion.

If they are not pretending to be confused (like CICC's annual top 10 predictions) or if financial workers are just going through the motions to meet KPIs, then Citibank is no different. Because it is the function of securitization that makes traditional assets divisible and tradable, and it is the function of informatization that lowers transaction costs, neither of which is the merit of RWA.

The true role of RWA lies in the decentralization of transactions. In traditional financial markets, the ownership and trading of assets typically require certification and supervision by intermediary institutions, which demand significant time and costs. RWA can reduce the need for intermediaries, as even the most classic blockchain, Bitcoin, can meet basic trading needs.

However, this is not a problem to be solved at the technical level, but rather a policy issue. In fact, if RWA is to target a trillion-dollar market, the traditional financial market requires the certification and supervision of intermediary institutions, and RWA cannot do without them; it does not simplify complex processes.

Thus, for real-world assets, there is no incentive to tokenize. The application scenarios touted by those promoting RWA, such as carbon credits and real estate, are akin to the metaverse cultural tourism projects proposed in small fifth-tier counties. As for the serious analyses claiming that multi-chain ecosystems will pose challenges to the RWA market, they can be viewed as a joke of overthinking.

Of course, as a believer in the crypto industry, I firmly believe in the future of tokenization. But common sense tells me that everything must follow historical processes; the vast majority of real assets currently need securitization and informatization, not tokenization, and the market available for tokenization is far from what they claim.

Legal System: From Regulation to Enforcement to Legislation

After sorting through the transformation of financial instruments, you will find that the true driving force behind RWA cannot rely on mature traditional assets; it must come from the black and gray markets (in legal terms, like DeFi) for motivation.

However, for those promoting the trillion-dollar narrative of RWA, the future seems bright, as more and more countries and regions express their support for RWA. This not only reflects a lack of knowledge in financial history but also a lack of understanding of how power operates and is maintained, which is why they are attracted to grand narratives.

The operation of the financial system cannot do without the cooperation of the legal system, which here refers to the broad sense of the legal system, including legislation, enforcement, compliance, and regulation. The modern financial system is multi-layered, and so is the corresponding legal system.

Due to its complexity and constraints of length and level, this article will not elaborate (but the next one will work with domestic law firms for a more in-depth explanation). However, we can briefly discuss the transition from regulation to enforcement to legislation.

Ordinary people interact with the legal system primarily at the regulatory level. The trillion-dollar narrative of RWA largely involves securitization and informatization, and these areas have already established very clear regulatory norms.

Whether in common law or civil law systems, or even in the Islamic customary law of the mountainous regions of Afghanistan, any local government must first ensure that order is not disrupted. Thus, although some places operate on a blacklist system (where anything not explicitly prohibited is allowed), and others on a whitelist system (where anything not explicitly allowed is prohibited, and even those that are allowed must undergo multiple approvals), they all form their own financial regulatory systems.

If RWA extends its reach into these already regulated areas, it faces only two possibilities—either it is allowed, but that would be as high a barrier as traditional finance, or it is not allowed, directly becoming part of the black or gray market. Therefore, whether allowed or not, there is no need for substantial real-world assets to engage in RWA.

Some may argue that countries/regions like Hong Kong, Malta, and El Salvador are open, but the RWA they are implementing, aside from operating on the blockchain (which is still a consortium chain), what difference does it have from traditional finance?

However, if you intend to evade regulation, it does not necessarily mean you will be enforced against unless a dispute arises (like jumping off a building to protest) or if the enforcement agency's confiscated income can cover their operational costs.

If RWA is to fundamentally resolve regulatory and enforcement issues, it must be addressed at the legislative level. But the resources required to promote legislation (from legal to financial market gears that need to be changed) are far from proportional to the market size of RWA.

Crypto practitioners often know nothing about the world beyond the high walls (domestic practitioners even feel guilty when encountering police), and their understanding of "RWA needing legislative confirmation" seems as simplistic as opening a massage parlor in a red-light district and needing to pay off. In short, they are using their limited life experiences to understand the structural game of institutions, leading to common sense errors.

Here’s a very simple yet effective test to identify naive believers—do you believe in the authenticity of Mr. Zhou from Jiangxi? The answer is that anyone who believes that the persona crafted by Mr. Zhou in his social circle is real can basically be judged as ignorant of the power system. Due to space constraints, I won’t elaborate on the specific reasons; in short, the level of understanding and perspective that Zhou Jie focuses on is that of someone who has never encountered privilege, which is why it allows others who also have never encountered privilege to believe.

Thus, those promoting the trillion-dollar narrative of RWA, if they are not pretending to be confused, are essentially naive believers.

In 2019, a trading platform dealing with traditional assets confidently told me that they should be the ones to obtain the licenses for the first batch of digital currency exchanges in China, not Huobi or OKEx (at that time, there were indeed rumors of licenses being issued). However, the reality proved to be absurdly wrong. I believe that they, having worked in exchanges in Beijing for many years, were not lying at that time; they must have communicated with regulatory authorities, but at most, they only communicated with the director who decides whether to stamp approval, a position with high authority but no decision-making space, let alone pushing for legislative matters.

Therefore, even experienced insiders may underestimate the difficulty of financial regulation, largely due to their ignorance of financial history, relying solely on short-term successful experiences to form path dependencies for decision-making.

Indeed, there are many regulatory cases in various industries (like mobile payments and internet medicine) that start from self-regulatory norms forming industry rules, eventually transforming into regulatory rules or even laws. However, the problem is that this competition to establish facts and then obtain legal recognition only exists at the channel end, while RWA involves mapping real assets to the digital world and circulating them, requiring a complete restructuring of the institutional framework (from upstream to downstream, from business to regulation).

Only countries/regions like Hong Kong and Dubai, primarily focused on external markets, can announce their embrace of RWA without psychological burdens, as it would not be surprising for them to open casinos.

The institutions promoting the trillion-dollar narrative of RWA are hoping for a policy shift, but those policies related to Web3 are at most just small resource allocations to create a highlight in governance, and their weight is not significant. Just as Hong Kong's so-called Web3 new policy is merely a few sentences in Li Jiachao's governance program, it seems to imply that Hong Kong is going all-in on Web3.

The momentum for RWA in Hong Kong is largely driven by technocrats eager to meet KPIs, then being used as a lifeline by the crypto industry, forming a local signal distortion that blinds the naive believers in the crypto circle. In fact, the energy that Hong Kong officials can mobilize to promote this matter is comparable to that of the director in Beijing who decides whether to stamp approval—there is no decision-making space, let alone pushing for legislative matters.

Let’s predict the future trajectory of RWA in Hong Kong. Crypto industry institutions are like vendors that have spontaneously grown in the black market, facing competitive pressure to relocate, leveraging their accumulated experience to be invited to perform in the corners of large shopping malls. It appears as if they have upgraded from black market stalls to mall kiosks, but the autonomy of their operations has also been handed over to the mall, transitioning from vendors to employees.

In other words, if RWA transactions still rely on the traditional financial system (payment systems, clearing and settlement systems, etc.), then it is merely a kiosk remodeled from a shopping mall, not a truly free-flowing stall.

Technical Cycle: From Network Layer to Application Protocol Layer to Application Layer

Having reviewed financial history, the conclusion is that the market potential for RWA is not that great. After sorting through the legal system, the conclusion is that the survival space for RWA is not that large either. Now let’s analyze the current stage of the crypto industry’s technical cycle and where RWA stands.

Since the inception of Bitcoin, the crypto industry has evolved into a very complex landscape. The general evolutionary path starts from the most basic public chains (which include network layers, data layers, consensus layers, and incentive layers), then to the most basic application layer protocols based on public chains (various smart contracts that are used infinitely and monetize "access"), and finally to actual applications.

However, public chains are also continuously iterating, from the earliest Bitcoin to sidechains based on Bitcoin, then to Ethereum and later Polkadot and Cosmos, up to today’s public chains based on ZK concepts, with applications based on different public chains being diverse. But whether it’s public chains, application layer protocols, or applications, those with true vitality must be reconstructed with crypto logic, rather than simply copying things from the internet.

At this stage, we can only say that we have the most basic public chains, while there are still few application layer protocols based on public chains (which are the key components that can achieve "minimum functionality"). For example, in the social domain, only Lens is still exploring directions, and various applications based on protocols are far from an explosion.

So at what stage is the trillion-dollar narrative of RWA occurring? It is happening when blockchain infrastructure is very well developed. Clearly, that is not the case now, nor will it be in the next bull market.

Of course, this article is not entirely pessimistic about RWA; it merely emphasizes that the trillion-dollar narrative of RWA is unreliable. RWA still has opportunities in the crypto industry, which is to reconstruct real-world assets with crypto logic, allowing blockchain to endow them with irreplaceable functions (rather than engaging in securitization or informatization, which already have better solutions).

For instance, projects like Maple Finance and Helix for corporate lending, or Solv Protocol exploring decentralized bonds, all have functions that can only be realized as "non-blockchain不可." This is the true direction for RWA to take root in the crypto world, rather than directly appropriating things that are already very mature in traditional finance.

The evolutionary path for RWA in this direction will resemble the transformation of the financial industry brought about by the wave of informatization in Web2—not only transforming asset forms but also altering the business models, organizational structures, and even operational strategies of the financial industry, and more importantly, directly giving rise to new wealth and creating new wealth empires.

Conclusion

This is the most laborious article I have ever written; often, a small judgment carries the weight of the world's knowledge and experience.

The currently popular trillion-dollar narrative of RWA largely reflects the market for traditional asset securitization and securities asset informatization, and it also requires legislative confirmation to advance smoothly, a cost so high that it is nearly impossible to achieve (if there are resources to promote legislation, doing RWA would be a waste).

Thus, we must return to the original evolutionary logic of the crypto industry to view RWA, which is still in the stage of building application layer protocols, just as the Web3 social domain needs protocols like Lens that can achieve "minimum functionality," RWA also needs similar key components, from which future new elites will emerge.

As for the trillion-dollar narrative of RWA, it is still far from mature; financial informatization only developed after the implementation of the "Information Superhighway Plan," and blockchain is still in its infancy.

At this juncture of stagnation in technological innovation in the crypto industry, the narrative of RWA is undoubtedly very enticing. When Moses told the Israelites laboring in Egypt that he was chosen by God to lead them to the promised land flowing with milk and honey, RWA is the promised land of the crypto industry. However, the RWA narrative is evidently more sophisticated, as Jesus had to use five loaves and two fish to feed five thousand people, while promoting RWA is akin to drawing a pie that people believe in.

Therefore, the volume of industry discourse does not represent correctness; in many cases, it may even serve as a reverse indicator more effectively. I even believe this applies not only to the crypto industry but also to the traditional financial industry. For example, the recent collapse of Zhongzhi was actually destined three years ago, yet high-net-worth individuals still rushed in, indicating that there are still many opportunities in this era.