Jan van Eck, CEO of the prominent global investment management firm VanEck, believes there are two major hurdles hindering the tokenization of real-world assets (RWAs).
The CEO shared his insights on the matter during a recent interview with Raoul Pal. His remarks come in the wake of VanEck’s recent accomplishment of being among the 11 firms approved by the U.S. SEC to launch a spot Bitcoin (BTC) exchange-traded fund (ETF).
The tokenization of real-world assets, such as real estate, art, or commodities, has the potential to revolutionize investment strategies by providing increased liquidity, transparency, and fractional ownership. However, the challenges outlined by van Eck are significant hurdles that need to be addressed.
Liquidity provision requires sophisticated market-making mechanisms, and the regulatory environment needs to evolve to provide clear guidelines and a supportive framework for these innovations.
The liquidity problem
According to van Eck, the first and primary barrier to tokenizing real-world assets is liquidity — specifically, answering the question of “who provides the liquidity?”
Tokenization, the process of converting rights to an asset into a digital token on a blockchain, theoretically allows for any asset to be tokenized. However, van Eck said that the presence of a buyer and seller is not sufficient. He noted:
“Someone has to make a market in it [the tokenized RWA], and someone’s got to make money making a market in it, so it’s not just that [someone] can create a tokenized real-world asset of anything, it’s who’s providing the market structure around the liquidity.”
This highlights the need for a market maker, a role that requires not only pricing the asset but also profiting from the market-making process. This aspect brings forth the challenge of who would and could fulfill this role, especially for assets that are not as straightforward to price as major stock indices like the S&P 500.
Meanwhile, the second main issue hindering the tokenization of RWAs is the regulatory landscape.
According to van Eck, there is no clear answer to the question of where to establish a market for tokenized assets without encountering significant regulatory challenges.
The CEO said the U.S. currently presents a complex regulatory environment for such ventures and is unlikely to become the primary jurisdiction for such markets until the landscape changes. He added that despite regulators beginning to warm to tokenization, the lack of clear regulations for the industry means progress will remain subdued.
On the other hand, van Eck said that Europe’s combination of a large retail market and a more accommodating regulatory framework for crypto investing and trading makes it a more viable candidate for these developments.
Europe’s regulatory approach to cryptocurrency and blockchain technology has been more progressive compared to the U.S. The EU has been actively working on a comprehensive framework for crypto assets, known as Markets in Crypto-Assets (MiCA), which aims to harmonize regulations across member states and foster innovation while ensuring investor protection.