Delphi Labs General Counsel: Most tokenization of RWAs is not feasible

Original author: @lex_node, Delphi Labs

Original compilation: Luccy, BlockBeats

RWA (Real World Assets) is undoubtedly one of the hottest concepts in the crypto industry right now. As of October 3, MakerDAO's total RWA assets reached $3.246 billion.

As a pioneer, Maker has capitalized on the high-interest cycle by opening up a revenue window for U.S. Treasury bonds, thereby amplifying the market demand for DAI and ultimately pushing its market value higher even as the overall market declined. Subsequently, projects like Canto and Frax Finance have also achieved some success through similar strategies, with the former doubling its token price within the month and the latter seeing impressive growth in the scale of its newly launched sFRAX in version V3.

Related reading: 《Is There Overhyped Speculation? RWA Is Not That Easy to Operate》

Paolo Ardoino, who is set to become the CEO of Tether, announced on social media on October 14 that he plans to launch an RWA platform. Additionally, tokenized RWA platforms DigiShares and Untangled Finance have announced successful funding rounds of $200 million and $13.5 million, respectively. However, Delphi Labs' Chief Legal Officer @lex_node pointed out on social media that most tokenization of RWA is not feasible and provided a detailed analysis, which BlockBeats has compiled as follows:

In this tweet, we will explore three types of RWA tokenization:

1. "Real" securities: such as stocks, bonds, etc.;

2. Ownership of off-chain assets: such as real estate, registered intellectual property, etc.;

3. Receipts/deposit certificates for off-chain assets: such as specific gold bars.

However, without a government-approved tokenization plan, it is impossible to tokenize ownership of real estate or other property with ownership rights. Therefore, in practice, Type 2 is essentially Type 1. What people are tokenizing are shares of a physical entity, which owns the relevant assets.

For private intangible property, there may be some exceptions for Type 2. For example, I can create an NFT and automatically assign certain copyright rights to the legitimate holder of that NFT. In this case, the rights stem from moral rights and contractual rights rather than government authorization.

However, in most cases, without creating bearer securities, Type 1 cannot be tokenized, which is likely illegal. Therefore, in practice, you may receive "souvenir tokens" similar to USDC or USDT, whose value is closely related to the value of RWA, but achieved through an indirect and highly trusted mechanism.

In fact, Type 3 (tokenized receipts/CoDs) is feasible. Bearer receipts are legally valid, and through private agreements, tokens can be considered as constituting such receipts. Thus, the third type is almost the only true way to achieve "physical asset (RWA) tokenization."

Reference reading: 《Switzerland: Bearer Shares Banned: What To Do》

Moreover, sometimes what appears to be Type 1 is actually Type 3. One example is Roofstock Onchain, which tokenizes membership interests in limited liability companies. In this case, the LLC owns a single-family home, and the purchase and sale are "all or nothing," meaning you must buy the entire LLC or buy nothing at all.

In this case, the membership interests in the LLC are generally not considered securities, so this actually falls under Type 3. It's just that you are not receiving a tokenized receipt from the property custodian; instead, you are purchasing the entire property custodian.

Reference reading: 《Roofstock Onchain Documentation》

So, is the term "tokenized securities" accurate? Generally speaking, it is a misnomer because the tokens themselves are not securities. The U.S. Securities and Exchange Commission (SEC) and other regulatory bodies require that authoritative ledgers be maintained by transfer agents and brokers or dealers, rather than as tokens on a public blockchain. The blockchain may record ownership transfers, but it is essentially a lagging or non-authoritative indicator. Public blockchain tokens are merely ownership "souvenirs" recognized on the private ledger of the transfer agent; they are not securities or security instruments themselves.

Note that most people do not even own their "non-tokenized" securities; they own a "securities account" or "securities interest" with their broker-dealer. In fact, broker-dealers do not own the securities either, which is precisely the issue that the WallStreetBets movement focused on.

To summarize the entire securities ownership pyramid, you can track ownership claims through multiple broker-dealers and then reach DTCC and Cede & Co to obtain the actual securities, which is not something we should be executing on the blockchain. If anything, the advantage of securities tokenization lies in creating a more direct and simpler form of ownership on-chain, which is quite meaningless. This is a very complex issue that requires very clever legal hackers to change laws, regulations, and market practices, but currently, almost no one is practicing it.

The key to blockchain is to reduce trust assumptions or requirements, while "tokenizing RWA" actually increases trust assumptions far beyond what is required for normal off-chain ownership. We should avoid this situation like the plague, as seen in the collapse of USDR and other similar collapses that may occur in the future, where "yields" are not a reasonable price for hidden risks.

But I want to clarify that, in the long run, I am actually optimistic about RWA. I believe regulations will eventually adapt, which will be achieved as people gradually circumvent the rules. At the same time, I do not want people to buy or sell a panacea they do not understand.

All RWA documentation should always be fully public, but this is not the case at present. It is like using unverified unpublished smart contracts; it should also be accurately described, but this has not been achieved in most cases.