RWA Tokenization vs. Traditional Asset Management

Asset management is changing rapidly these days. For many years, traditional asset management models have been the foundation of investment strategies, depending on intermediaries, administrators, brokers, and a centralized way of managing and trading assets. However, this technique has high costs, slow transaction times, limited liquidity, and accessibility barriers.

With the growth of blockchain technology, a new concept is emerging called RWA Tokenization (real-world asset tokenization). RWA tokenization turns physical assets like real estate, art, or commodities into digital tokens on a blockchain. This technique aims to fix many problems found in traditional asset management.

The development toward tokenization is already quite popular. A report from the World Economic Forum says that turning traditional assets into tokens could bring an extra $24 trillion in value to global markets by 2027.

This article will look at the main differences between RWA tokenization and traditional asset management and how tokenization is changing the investment. We will look at how tokenizing real-world assets is changing asset management, including liquidity, transparency, cost savings, and accessibility. Here are the key differences between RWA tokenization and traditional asset management.

1. Intermediaries

➤ Traditional Asset Management:

Traditional asset management depends a lot on middlemen like brokers, administrators, exchanges, and banks. These types of organizations are important for helping with transactions, managing assets, and making sure trades and settlements are reliable. But every middleman adds more costs and makes the process more complicated. For example:

Brokers: Brokers help you buy and sell assets, making money through commissions or fees for their services.

Custodians: those who keep and protect assets for investors, which can sometimes increase costs.

Clearinghouses: Clearinghouses serve as middlemen in trade settlements, making sure that both the buyer and seller fulfill their agreement's terms.

All these parties result in slower transaction times and increased administrative costs.

➤ RWA Tokenization:

Tokenization, which is based on blockchain technology, is aiming to minimize or eliminate middlemen entirely. By using smart contracts and blockchain technology, we can transfer ownership of the assets directly between two parties. 

Decentralized Ledger:

Blockchain is a distributed ledger that maintains ownership records and validates transactions through consensus mechanisms, thereby reducing the need for centralized intermediaries.

Smart Contracts:

These are contracts that are self-executing, with the terms being written down into the code. They automate the process, like asset transfers, dividend distributions, and more, ensuring faster, error-free, and low-cost execution without the need for a middleman.

This decrease in intermediaries reduces costs and speeds up transactions, eventually improving asset management efficiency.

2. Liquidity

➤ Traditional Asset Management:

Liquidity can be an issue in traditional asset management for things like real estate, private equity, or collectibles. These assets lack liquidity, requiring significant effort and time to buy or sell. Selling a traditional asset can take several days, weeks, or even longer.

Private Market Assets:

Assets such as private equity or real estate are not straightforward to trade, and it can take time to find a buyer.

Illiquid Investment Products

Mutual funds can be easy to cash out, but sometimes there are fees for taking your money out early or charging high fees.

This lack of liquidity limits investment opportunities for smaller investors, who may lack the funds to buy high-value items.

➤ RWA Tokenization:

RWA tokenization has a capacity to increase liquidity in previously illiquid markets. Turning real-world assets into digital tokens makes them easier to split. This lets investors buy smaller parts of an asset instead of having to buy the whole thing. For instance:

Fractional Ownership:

Real estate, for example, can be tokenized into hundreds or thousands of smaller units, offering investors the opportunity to own a fraction of a property rather than the whole thing.

24/7 Trading:

Blockchain allows for the trading of tokenized assets on decentralized exchanges at any time, in contrast to traditional stock markets that have fixed trading hours.

This fractionalization and flexibility to trade 24/7 increase liquidity, make it easier to enter and exit assets, and let more investors participate in previously unavailable markets.

3. Transparency

➤ Traditional Asset Management:

Traditional asset management lacks transparency because it depends on central record-keeping and middlemen. Investors commonly rely on fund managers, custodians, and clearinghouses for correct reports, but the information could not be updated. The main problems are:

Opaque Reporting: Investors might not be able to see how their assets are handled or the current situation of their investments in real time.

Risk of Fraud: Centralized records can be changed or misused, leading to mistakes or fraud, especially if there isn't enough monitoring.

➤ RWA Tokenization:

RWA tokenization uses blockchain for open and transparent information. All the transactions on the blockchain are directly recorded in an immutable ledger. This means that everyone who has access to the blockchain can see every asset transfer. 

Immutable Records: Once the transactions are recorded on the blockchain, they can't be changed. This makes a secure and tamper-proof history of asset ownership.

Real-Time Monitoring: Investors can monitor the present state of their investments using blockchain, which shows all movements of their assets.

4. Accessibility

➤ Traditional Asset Management:

Traditional asset management usually has high initial costs. Many types of investments need a lot of money, which makes them available only to rich people or big companies. 

High Minimum Investment: Investing in real estate, private equity, or hedge funds usually requires a significant amount of money to be put in at the start.

Geographical Limitations: Investors may only have chances to invest in their own country or area because dealing with international deals can be difficult and costly.

➤ RWA Tokenization:

Tokenization decreases the barriers to entry by allowing fractional ownership and giving global access to investment opportunities. Investors can put in smaller amounts of money, and because blockchain is transparent, anyone can invest in tokenized assets from anywhere. 

Fractional Investments: Investors can purchase a small share of costly assets like real estate. This lets them spread out their investments without needing a lot of money.

Global Access: Blockchain eliminates location barriers, letting buyers from around the world invest in the same assets.

5. Time for Settlement

➤ Traditional Asset Management:

In traditional asset management, it can take a long time to complete transactions. When you buy or sell assets, there are generally multiple steps involved—such as clearing, verification, and regulatory checks—all of which can delay the final settlement of the transaction.

T+2 Settlements: Stocks generally settle within two business days (T+2), but other assets like real estate can take much longer to settle.

➤ RWA Tokenization:

Tokenized assets let blockchain settle transactions quickly. Blockchain transactions are automatic and transparent, getting finalized in just minutes after the conditions are fulfilled. 

Instant Transfers: When a transaction begins, the blockchain quickly reviews and completes it, removing the need for middlemen and speeding things up.

6. Cost Structure

➤ Traditional Asset Management:

The traditional asset management model can be costly because of the fees from middlemen like brokers and fund managers, as well as administrative costs. These include:

Management fees: Management fees are usually a percentage of the total funds that are managed. These fees can build up over time.

Transaction Fees: Each transaction comes with a fee, and since many people are involved, these fees can add up as time passes.

➤ RWA Tokenization:

By removing middlemen and using smart contracts, RWA tokenization lowers transaction fees and administrative costs. Main benefits are:

Lower Fees: With no middlemen involved, transaction costs go down, and investors end up paying less in fees.

Automated Processes: Smart contracts handle tasks like distribution or asset transfer automatically, reducing the need for manual checks and the costs that come with them.

Conclusion

RWA tokenization transforms traditional asset management by providing more liquidity, transparency, and accessibility using blockchain technology. Unlike traditional markets, which rely on middlemen and slow processes, RWA tokenization enables fractional ownership, faster transactions, and lower costs.

Although traditional asset management remains important, its limitations indicate the need for its updating. By 2027, it's expected that there will be $24 trillion in tokenized assets, which will change how assets are managed in global finance using blockchain technology. Change is coming—will you take the chance to invest in what's ahead?