Opinion by: Vincent Kadar, CEO of Polymath
A company that tokenized shares for numerous homes in Detroit, which it never actually owned, highlighted a significant scandal in real estate and served as a cautionary tale for the real-world asset (RWA) sector.
While the arrangement seemed innovative, incorporating blockchain tokens and fractional ownership with promises of rental income, many properties were either vacant, poorly maintained, or not even legally owned.
Though the blockchain recorded each token transfer accurately, it lacked vital checks to ensure the assets were legitimate and producing income.
A sector-wide risk
This situation illustrates the danger of innovation outpacing regulatory oversight. Tokenization offers efficiency, liquidity, and broader access to markets, but without adequate protections, longstanding issues can worsen.
The vulnerabilities observed in the Detroit case are present in all RWA categories. A tokenized bond is valueless if its cash flows are insecure. Similarly, a tokenized commodity holds no worth if the underlying asset is unverified and unaccounted for. Without these safeguards, the entire system can collapse.
Tokenization does not inherently ensure transparency, enforceability, or investor protection; it can speed up transactions, allowing fraudulent actors to operate as swiftly as legitimate participants. In traditional markets, it might seem prudent to pause and reassess tokenization’s value.
Related: What is tokenomics? A beginner’s guide on supply and demand of cryptocurrencies
However, the correct approach isn’t to hinder the advancement of tokenization but to establish frameworks built on trust. This will prevent bad actors from hiding and significantly mitigate the risk of fraud.
An ecosystem of trust
For tokenization to succeed in traditional markets, it must follow guidelines that build trust. Transactions should facilitate verified participants, and ownership must link to verified identities instead of anonymous wallets. Trading rules need to be integrated within the technology, dictating who can buy, when to sell, and under what conditions, ensuring compliance is not bypassed.
Governance is crucial as well. Markets require transparent mechanisms to address disputes, recover assets in emergencies, and safely upgrade systems. These features are essential.
They are fundamental for attracting sustained institutional investment in tokenized assets.
With compliance, governance, and security embedded in the structure, investors and regulators will recognize the system’s design to protect them. Absent this trust, even the most sophisticated technology will find it challenging to gain lasting traction.
The opportunity in emerging markets
This issue extends beyond developed financial centers. In emerging markets, outdated infrastructure complicates and raises the cost of capital access. Tokenization has the potential to resolve these challenges, enabling the development of digital, flexible, and globally linked markets.
Many of these economies already exhibit high mobile usage, alongside increasing demand for investment and interest in digital assets. These conditions make it an opportune moment for tokenization.
However, this opportunity may vanish without adherence to local regulations and strong investor protections. Establishing compliant and globally compatible infrastructure from the outset can foster growth and prevent the pitfalls that have hindered traditional finance in these areas, like unclear ownership records, sluggish cross-border settlements, high corruption risks, and weak investor safeguards.
Embedding transparency and robust governance directly into market infrastructure achieves this.
Responsible growth over hype
Some initiatives are already advancing positively, utilizing permissioned blockchains tailored for regulated assets, adopting token standards that enforce compliance, and partnering with reputable custodians to protect the underlying assets. These are essential safeguards, not mere additions, that render tokenized markets credible in sectors like commodities, private credit, and real estate to global capital markets.
The potential within real-world assets is significant, capable of unlocking trillions in value, fostering inclusive markets, and enhancing efficiency in asset issuance and trading. Yet, the absence of proper frameworks could undermine trust before the sector matures.
The emphasis should not be on who can launch quickest; rather, it should focus on who can construct systems capable of enduring scrutiny for decades. Frameworks do not impede progress; they are what ensure its sustainability.
Decisions made today will shape whether tokenization fulfills its potential or becomes yet another squandered opportunity.
Opinion by: Vincent Kadar, CEO of Polymath.
This article serves general informational purposes and should not be construed as legal or investment advice. The views and opinions expressed herein are solely those of the author and do not necessarily reflect or represent those of Cointelegraph.
