RWA assets have received widespread attention in the cryptocurrency world. Since they are RWA, so-called "real world assets" are inevitably subject to the framework of the real world, especially the legal system and asset confirmation structure of the real world. Therefore, in order to solve related problems, the RWA token issuance framework and process are more complex than the previous token issuance implemented directly on the chain.
It is critical to differentiate between asset issuance models. For example, there are nearly ten similar projects for the same type of treasury bond tokens, providing almost the same benefits. How to distinguish their advantages and disadvantages? Especially for fixed-income products such as treasury bond products, which are often in demand for financial management, the allocation ratio is often not small. How to distinguish the risk points of similar products?
Taking the Treasury bond token as an example, the asset issuance model and related legal documents determine what the underlying assets that investors buy are: corporate debt of a company that invests in Treasury bonds, fund shares of a fund that invests in Treasury bonds, Treasury bond ETFs purchased through a certain entity, or real Treasury bond tokens that can eventually be redeemed at the U.S. Treasury Department? Different types of underlying assets correspond to different types of risks, and such risks may be difficult to perceive most of the time until a black swan event occurs.
This article will organize and analyze the common types of RWA token issuance in the market. It is hoped that readers can further understand the RWA asset issuance framework and effectively identify risks in the process of further integration between the crypto world and the real world.
Classification of asset issuance models
To understand the RWA token issuance model, let’s first look back at the issuance model of traditional assets. Taking securities as an example, the figure below is a typical Singapore company equity issuance model.
Figure 1: Traditional stock issuance model, source: DigiFT
A company will have multiple shareholders. The ownership of these shares will be registered with ACRA, and their transactions and transfer records will also need to be registered with ACRA.
ACRA is the securities registration agency in Singapore. If there are corresponding agencies in other countries, or different market mechanisms are involved, such as transfer agents in the United States, their function here is to register and register securities holders.
Figure 2: Direct issuance model, source: DigiFT
If tokens are to be issued on the blockchain, the blockchain is actually used as a ledger to register and record equity ownership and record each transfer process.
In a few countries and regions, financial innovation is relatively advanced, and they support direct registration of securities on the blockchain, such as the DLT Act in Switzerland. Therefore, in these regions and countries, securities can be directly issued through relevant authorized institutions using the blockchain as a ledger. However, in other major financial markets, such as the United States, Singapore, and Hong Kong, relevant laws do not currently support direct registration and registration of securities on the chain, so most assets need to "take a detour."
Therefore, the mainstream issuance models in the market can be classified into two categories: direct issuance model and asset backed model. In essence, both issuance models issue related bonds on the chain, but the issuance form and corresponding rights are completely different.
It should be noted that private securities can also be issued under the premise of compliance if they meet certain conditions, such as limited sales amount, limited types of investors, and very limited impact on the financial market. This is also the reason why most RWA projects are currently only for qualified investors.
Direct issuance model
In the direct issuance model, the asset issuer uses the blockchain as a bookkeeping tool to register the asset and issue the corresponding tokens on the chain. The tokens are the underlying assets themselves. Investors who purchase and hold such assets can directly obtain the relevant rights and interests corresponding to the asset, such as voting rights for stocks and repayment rights for bonds.
However, the direct issuance model still has many limitations in the current market environment. For example, such securities are tokenized, which is incompatible with the current mainstream stock exchange structure (Nasdaq, SGX, etc.), or has certain friction costs. At present, the relevant legal structure is not perfect, and there are not enough legal cases to serve as references for future cases.
case analysis
Many current RWA projects also use direct issuance models, such as using bonds to introduce real-world economic rights and interests onto the chain. Previously, DigiFT’s Diners Club Debt Security Token is one such example. Its issuance structure is as follows:
Figure 3: Diners Club Debt Security Token issuance structure, source: DigiFT
Diners Club International Ltd. is a direct banking and payment services company owned by Discover Financial Services, one of the most recognized names in U.S. financial services.
Diners Club (Singapore) Pte Ltd. (DCS) is a franchise entity of Diners Club International Ltd., established in 1973, and is a limited liability private company registered in Singapore. Its principal business is to provide credit and debit card services in Singapore under the brand name "Diners Club". DCS issued a one-month tokenized note on DigiFT as a trial of its financial management program, using a direct issuance model.
DCS is the issuer of the assets, and the tokens issued are the notes of its company. Any user holding the token can redeem the corresponding assets at DCS after maturity.
Asset-Backed Model
Due to the imperfection of current laws and the very limited assets on the chain, many projects have also chosen to adopt an asset-backed model for issuance. In essence, this type of token is a new security that represents the economic rights and interests of the underlying assets. The asset issuer issues and registers the assets in a system outside the blockchain. After the third party purchases the assets, it issues tokens in accordance with the corresponding proportion. The counterparty risk is the asset issuer (asset issuer) and the token party (asset-backed token issuer).
The asset-backed model is currently a more common RWA model, which can bring real-world returns onto the chain, but will introduce additional risks. Although the issued tokens can contain the economic value of the underlying securities assets, the rights and interests may differ from the actual securities rights and interests.
case analysis
Backed Finance is a regulated institution headquartered in Switzerland. Under the Swiss DLT Act, it is able to package real-world securities on the chain and grant tokens economic rights. Under the framework of the asset-backed model, the purchase of its tokens can only obtain the economic rights corresponding to the tokens. Backed Finance also stated in its legal documents that its tokenized assets are only tokens that track the price of the underlying assets, and do not include a series of rights owned by traditional securities, including voting rights. Its issuance structure is as follows:
Figure 4: Backed Finance product operation process, source: Backed Finance
Backed Finance buys the corresponding assets through a third-party institution, and after the assets are held by a licensed custodian, Backed Finance issues the corresponding tokens. Each token tracks the price of the underlying asset through on-chain and off-chain data, but does not involve other rights such as stock voting rights. Currently, its issued assets include assets such as Coinbase stocks and Blackrock iShares ETF. The asset issuer is the issuer of the underlying asset. For example, the issuer of Coinbase’s stock is Coinbase, and the token issuer is Backed Finance. There are at least two layers of counterparty risk here, from Coinbase and Backed Finance. Backed Finance is a typical project that uses an asset-backed model to issue corresponding tokens. It also clearly stated in legal documents that the token only tracks the price of the underlying asset (tracker of the underlying) and does not hold other rights to securities.
Summarize
The tokens issued by the direct issuance model are the underlying assets, which can provide investors with direct related rights and interests, and is a healthier issuance model. Since the current laws are not perfect and there are not enough court cases as references, the legal risks of directly issuing RWA assets are relatively high. The asset-backed model is to trust the token issuer of the mapped assets. This model has a very high trust cost. The project party improves its trustworthiness through various forms, such as obtaining a license, using an oracle as a proof of reserve, and regularly disclosing bank accounts. If there are complete legal documents, perfect operating procedures and sufficient information disclosure, the tokens issued by the asset-backed model can also give investors relatively complete rights and interests, and have relatively high flexibility. However, the asset packaging model is a "detour" under the existing framework, and we are more looking forward to the large-scale application of the direct issuance model.
Over the past hundreds of years, financial securities have evolved from paper securities to electronic securities. However, as a new financial accounting tool, we believe that blockchain will have more complete laws and related infrastructure in the future to tokenize securities to further improve efficiency and reduce costs.