Could 2023 be the year of DeFi tokenisation?

DeFi

So far 2023 has been characterized by breakout narratives – from the AI boom to the hype around Chinese crypto. Could DeFi Tokenization of Real World Assets (RWA) be the next big thing?

Industry Players from across the space gathered at the 6th Annual Blockchain Economy Summit – the UK’s largest crypto conference – to discuss.

Lennix Lai – Managing Director of OKX – revealed that internal conversations surrounding the tokenization of RWA have focused on liquidity and fractionalisation as huge drivers of growth.

“Tokenization of real world assets will potentially bring in immediate liquidity for an asset,” claimed Lai.

“It’s a lot easier when the token is fungible … fractional shares [in RWA assets] could be a lot more cost effective for the user and more attractive to market makers.

“Through tokenisation we can potentially substantially drive down costs from centralized intermediaries … So fractional shares can work – and this could bring adoption and large liquidity to a much bigger audience”.

Private Blockchains Risk Fragmenting Industry Ecosystem

Prashant Malik, the Senior Technology Lead – Digital Assets at HSBC, has spent the last few years building out a tokenization platform (HSBC Orion) for the multinational bank. Malik went on to explain the challenges of tokenising assets for DeFi.

“The way you build a tokenization platform is quite different from a typical application, some of your KPIs need to grow faster or incrementally,” explained Malik.

“I think technology is probably the easier part, as we bring more of the products lifecycle on chain – the complexity of legal and regulatory requirements increases much more than on the technology side.

“More broadly, other digital assets are basically on private permission blockchains – but that private ledger is the legal register for the ownership of the tokens. If everyone builds their own private chains, it does bring diversity amongst assets – and while this does have benefits – we have to ask if we’re fragmenting an existing ecosystem.”

SEC Stalling DeFi Tokenization in US

One interesting perspective came from Jonathan Dunsmoor, Founder of securities specialists Dunsmoor Law. Speaking on the challenge of American regulatory hurdles in relation to DeFi tokenization, Dunsmoor revealed stalling by the SEC.

“Normally countries look to the USA to see what we’re doing – but over the past 10 years – the evolution from CeFi to DeFi has found difficulty in regulation,” said Dunsmoor.

“I think the problem with regulators, especially in the US – is that they’re not willing to hit the button and say ‘this is okay’.

“At the SEC, the previous Chairman saw 4 [crypto] action letters issued, under Gensler there have been 0 action letters issued … despite the fact that throughout Gensler’s time at the SEC there has been DeFi and NFT [booms]”.