The tokenization of real world assets seems simple but in reality it really isn’t, a lot of time it is presented as if it were a simple technical maneuver, where you can mint a token, assign metadata and declare it “backed” by something tangible. But anyone who has worked in finance, compliance or any institutional asset management firm knows that this narrative is far too shallow, it is not what institutions can work with, they need more.

Don’t think for a second that tokenization is the creation of a digital representation of an asset and that’s it, it is far beyond that, it is the creation of an entire system of truth around an asset. This is what I see missing around a lot of the tokenization hype, if real estate is being tokenized then issuers need to take the steps to make sure that the details are transparent. But this also falls on the laps of the developer, the blockchain itself needs to allow for certain data to included in the smart contracts. This is why tokenization of real world assets should sit with organizations that can provide the infrastructure for it regardless of the blockchain network. They should create systems that can make sure the tokenized RWA can withstand legal scrutiny, market pressure and the expectations of institutions, remember that institutions cannot afford ambiguity, they need transparency.

Real world asset tokenization starts way before the token is ever minted onchain, that is the absolute last thing that should take place. The process starts with the asset itself, what it is, the nature of it, the structure of it, provenance, ownership and let’s throw in the risks while we are at it. So a building, a loan portfolio, a commodity or artwork, they all carry their own complexities and tokenization brings all those complexities into the light. So before any RWA is tokenized the asset itself must be understood on a foundational level and with precision, so questions such as is it encumbered?, who really owns it?, what rights comes with it?, they must be answered. The reality is that without this foundation then the tokenization of an asset becomes very opaque and not institutional grade.

Now let’s step into the verification process, this is where you will see a lot of RWA tokenization efforts shutter under pressure. Just saying something exist doesn’t mean that it does, so it needs to be proven to prevent fraud, this comes in the form of documentation, validated ownership, confirming there are no conflicts, lawsuits or anything that will encumber the asset. The reality is this, without the verification of the asset then the tokenization of that asset becomes speculation, with verification then it becomes infrastructure.

The legal rights, well that is the backbone of any tokenized RWA, who legally owns it and who has the rights to the asset. Does is show true ownership of the asset?, is it just a claim on the asset?, is it revenue entitled or is it a lien on the asset?, again more questions that need to be answered. What also needs to be looked at is what jurisdiction governs the asset, since tokenization is global in nature, understand that in many cases the asset is not. That asset may be held in the United States or Middle East or South America, that means a lot and will determine what law rules that asset. It will also allow for risk assessment because if an asset is land based or physically bound to a specific country then the political landscape of that country comes into play. It allows an institution to measure the risks and that data is critically important. Because let’s say there is a default, what are the resolutions and how are any disputes resolved, these are questions that should be answered and without those answers institutions will probably have a hard time engaging without clarity.

So another important part of this is the story of the asset, the provenance, that tells a lot about what is being dealt with. So basically where it came from, how it changed hands and how is it valued. By putting such data onchain, even if on a permissioned basis, it provides something that is immutable, auditable and transparent. This is a protective measure for investors as it reveals everything, nothing being swept under the rug and no hidden history. I have dealt with provenance issues in the gold and diamond trade globally over the past two decades and I have to say that if blockchain was used for proof of provenance back then that a lot of the fraud that took place would not have been possible. This is why DeBeers itself is going down the path of tokenization of diamonds. So understand that provenance isn’t just a story or it’s history, it is accountability.

Some RWA such as gold or certain real estate assets have simple and verifiable valuation methods, other assets do not. So it is up to the issuer to make it clear, what is the valuation methodology?, are there appraisals?, comparables?, risk adjustments? or liquidity considerations?, those questions should be answered. All of those things are impactful to the overhaul pricing valuation, so if an asset is highly liquid such as gold then pricing would be in line with market pricing but lets say it is land in a rural area, it may not be as liquid so that should be reflected in the price valuation, haircuts may have to take place.

The one thing that I have always put a focus on is data and not just a few things but high fidelity data, Bloomberg level but for tokenization. This is where all that I covered in this article comes together in one neat package. Where data is included in the smart contracts and data aggregators can gobble it up and distribute that data across thousands of institutions globally. It shouldn’t be optional, in my opinion this is the backbone of trust, if you show the data then investors will believe in it, make it a mystery and there may be a boomerang effect should any issue arise. In this case the issuer is being transparent and can have a defensible stance should something legal arise, otherwise they are in naked and afraid mode.

The long and short of it is this, if an issuer is going to tokenized a real world asset then find a platform that can provide what is needed to comply with institutional standards because the simple act of creating a token doesn’t cut it, there needs to be more to it in order for it to be taken seriously.

Louis Velazquez