Credbull CEO discusses the impact of RWA tokenization and its challenges

Jason Dehni, CEO and co-founder of Credbull, talked about how RWA tokenization is becoming a game changer in finance in an exclusive interview with crypto.news.

Real-world asset tokenization has become one of the hottest trends of 2024. It holds the promise of democratizing traditional finance.

Promoting a move towards a more inclusive financial system, the technology aims to open the market to frontier populations, removing barriers that have traditionally led to limited investment in assets such as US treasuries, real estate and works of art.

As these next-generation assets transition to blockchain platforms, they promise more accessible, real-time transactions at lower costs, away from traditional intermediaries. Something that could lead to a more efficient market characterized by better price discovery and lower transaction fees.

As of April 2024, the total value of real-world asset protocols locked was close to $8 billion.

However, increased liquidity and a larger investor base introduce complexities, for example in terms of regulatory compliance. With tokenized asset markets predicted to reach trillions by 2030, there is an urgent need for a solid infrastructure to support this emerging industry.

Dehni sees RWA tokenization as a transformative force and advocates for robust regulatory frameworks to unlock its full potential and ensure its sustainable integration into the financial environment.

What new economic models do you expect with the increasing popularity of asset tokenization?

Tokenization of assets offers new economic models that change traditional pricing and market behavior. While it increases accessibility, liquidity and transparency, it also increases complexity and challenges the efficient market hypothesis (EMH), which requires new financial models.

Tokenized assets enable 24/7 global trading, continuous price discovery, and mitigation of market closing effects. Blockchain transparency reduces information asymmetry as all participants have access to the same transaction and ownership data.

How might token economics change the fundamental principles of asset pricing and market behavior in the context of deviations from the efficient market hypothesis?

Market liquidity is increasing due to the ease of fractional share trading and continuous algorithmic trading. Diverse investor participation increases market depth, stabilizes prices and reduces volatility.

However, due to these innovations, EMH may become limited or obsolete. Easy access to tokenized assets can attract retail investors prone to behavioral biases such as herd behavior or overconfidence, causing price anomalies. Social media and online communities can significantly influence token prices and drive sentiment-driven market movements. Tokenized markets may experience higher volatility due to rapid trading and speculative behavior, potentially causing flash crashes in less liquid markets. Additionally, the value of some tokens goes beyond traditional pricing, further deviating from the EMH by aggregating utility across specific networks.

Do you think widespread tokenization of real-world assets is affecting central bank policies, particularly regarding money supply and inflation control? Could tokenized assets challenge the traditional tools used by central banks?

Widespread adoption of asset tokenization will accelerate the development of CBDCs. While CBDCs offer many benefits, poor design and rapid implementation can lead to unintended negative consequences, especially in terms of monetary policy. Issuing a wholesale CBDC would not change monetary policy objectives or operations but could significantly impact the flow of money, disintermediation of bank deposits, volatility in bank reserves, currency substitution and capital flows. Non-intermediary bank deposits pose a high-risk, high-impact threat to monetary policy if CBDCs are rolled out too quickly.

Countries most at risk are those with small retail-intensive banking systems, low levels of digital payments, and weak macroeconomics. Large reductions in commercial bank reserves could increase inflation and money market interest rates, destabilize financial markets, and complicate reserve estimates for open market operations. Continued disintermediation could force central banks to introduce more long-term and targeted lending operations, potentially undermining their role as lenders of last resort.

Tokenization can potentially disrupt established economic balances by democratizing access to asset investments. What difficulties does this cause?

Asset tokenization can significantly transform global economic dynamics, potentially reducing economic inequality, reducing investment barriers, and benefiting those in developing countries by providing partial ownership and global access to previously inaccessible assets. This could lead to new financial products and services that improve financial inclusion. This is our mission at Credbull; democratizing access to private credit, a high-performing asset class traditionally reserved for institutional and high-net-worth individuals.

Are there risks in making these tokenized assets so widely accessible?

Not all assets should be tokenized, and not all tokenized assets should have wider accessibility. Tokenized assets are complex and require significant education for investors. Quick and easy access can lead to speculative bubbles, attracting less knowledgeable investors.

Without proper regulation, there is a risk of market manipulation by resource-rich and technology-savvy individuals. Although tokenization aims to increase liquidity, secondary markets may not develop evenly, leading to inconsistent liquidity across asset types. Valuing tokenized assets, especially illiquid assets like real estate or art, can be challenging and prone to misinformation.

What does this mean for global regulatory and compliance environments?

Varying regulations across jurisdictions complicate global investment and issuance, increasing the challenges of compliance with anti-money laundering (AML) and know your customer (KYC) requirements. Seamless interoperability between token platforms and efficient transaction management of blockchain networks are crucial for widespread adoption. An alternative model that should be explored further is the centralization of assets. Rather than simply tokenizing the underlying asset, which often remains centralized, embedding the management of the asset on-chain and ensuring full transparency of its management is critical to building trust in the broader retail market and reducing overall risk.

Considering the potential integration of tokenized assets into more mainstream financial products such as mutual funds or ETFs, what are the expected regulatory hurdles and economic impacts of such integration?

Integrating tokenized assets into mainstream financial products involves overcoming legal and regulatory challenges. Traditional products such as mutual funds and ETFs require custodians for asset protection, and digital assets require a legal framework for custody. It is difficult to insure digital assets due to gaps in existing frameworks. Additionally, mechanisms to protect investors from volatility and potential fraud in tokenized assets are also vital.

Can you discuss the development of specific legal structures for tokenization? How can these structures navigate the dual demands of maintaining regulatory compliance and encouraging innovation in asset liquidity?

To navigate the dual demands of compliance and innovation, regulators and industry participants must engage in ongoing dialogue to understand mutual concerns and requirements, leading to more informed and effective regulation. It is crucial to support ecosystems where startups, financial institutions, regulators, and other stakeholders collaborate on the development and implementation of tokenization solutions. A risk-based approach to regulation should align levels of scrutiny with the potential risks of the underlying tokenized asset class. Regulatory sandboxes allow innovators to test new products and services in a controlled environment with the help of temporary regulation, subject to oversight and evaluation.

So what do you think are the regulatory strategies that balance innovation with financial security?

A layered regulatory approach that includes universal core compliance requirements and stricter regulations for high-risk activities can foster innovation while maintaining oversight. Regulations should be scaled to the size and complexity of tokenized asset markets, placing lighter regulatory burdens on smaller projects and tighter oversight on larger, complex projects. Educating investors about the risks and opportunities of tokenized assets enables well-informed investment decisions and reduces market disruptions.

Given the global nature of blockchain, what are the implications of tokenization in terms of cross-jurisdictional legal conflicts, particularly in terms of asset custody and enforceability of transactions?

The global nature of blockchain and tokenization poses challenges around cross-jurisdictional legal conflicts, asset custody, and transaction enforceability, requiring international cooperation, harmonized laws, and innovative solutions. Different countries have different regulations, causing conflicts when trading assets across borders. An asset that is considered a security in one country may not be classified the same way in another, complicating compliance and increasing costs. In the decentralized blockchain world, it is difficult to determine applicable laws and jurisdictions, especially for cross-border disputes and sanctions. Custody requirements vary by jurisdiction, making compliance burdensome.

How do you recommend global custodians deal with these challenges?

Global custodians need solutions that meet various legal standards for secure storage, auditing mechanisms and transparent reporting. Property rights in tokenized assets must be recognized across jurisdictions, requiring harmonized legal definitions and standards. Legal processes for transferring ownership should be clear and enforceable internationally, but the legal status of smart contracts varies by country. The enforceability of smart contracts also varies globally, complicating international transactions.

Dispute resolution mechanisms for smart contracts need to be established, possibly involving decentralized arbitration or traditional legal processes. Ensuring that cross-border token transactions comply with AML/KYC regulations and tax regimes is a complex task. Countries can mitigate these legal conflicts by harmonizing laws and regulations facilitated by international organizations such as FATF or IOSCO. Model laws and mutual recognition agreements can assist in this process. Developing interoperable blockchain platforms and using regulatory technology to automate compliance can also help.