Over the last few years, we’ve seen a surge of interest in bringing real-world assets (RWAs) onto blockchain networks. The promise is straightforward: if we can represent tangible or otherwise “off-chain” resources as tokens, we might unlock new forms of liquidity, efficiency, and inclusivity in financial markets. However, one critical requirement often gets overlooked: fungibility. In simple terms, each token needs to be identical (interchangeable) with every other token of its class. This naturally limits which kinds of RWAs are easiest to tokenize.
In this post, we’ll explore why fungibility matters and the types of assets most suitable for a tokenization approach under these constraints.
Why Fungibility Matters
Fungibility means that units of the same asset are indistinguishable from one another. For instance, one ounce of LBMA-certified gold is the same as any other ounce of the same purity level. This property is crucial for a token on a blockchain because:
- Uniform Value: Traders can buy and sell tokens confidently, knowing each token represents the same claim on the underlying asset.
- Market Efficiency: Markets function better with standardized goods—prices stay transparent, and liquidity pools form more naturally.
- Regulatory Simplicity: Standardization can simplify compliance, as each token has an identical legal or regulatory footprint.
Non-fungible assets (like a single piece of artwork or a specific house) are harder to tokenize in a fully fungible manner, because each is unique. While non-fungible tokens (NFTs) can represent unique assets, the compliance and legal frameworks for “true” ownership transfer of unique RWAs remain complex.
1. Precious Metals (Gold, Silver, Platinum)
Why They’re Good Candidates
- Standardized Form: Precious metals like gold and silver often come in bar or coin form with well-defined weights and purity standards. An ounce of .9999 fine gold is effectively the same as any other ounce of .9999 fine gold.
- Existing Infrastructure: Vaults and bullion banks already hold large quantities of these metals, and legal frameworks for “allocated” and “unallocated” gold are well-established.
- Market Familiarity: Investors globally understand and trust gold’s role as a store of value, which may encourage adoption of a “digital gold” token.
Challenges
- Custodial Risk: The gold must be stored somewhere (in a vault), and token holders rely on the custodian’s trustworthiness.
- Regulatory Environment: Token issuers must navigate securities and commodities laws, differing by jurisdiction.
2. Fungible Commodities (Oil, Natural Gas, Wheat, etc.)
Why They’re Good Candidates
- Commodity Standards: Many commodities are traded under strict specifications that define grade and quality (e.g., WTI Crude vs. Brent Crude in oil markets).
- Mass Market: Commodity markets are among the largest in the world, with high liquidity and many participants.
- Transparent Pricing: Benchmarks and reference prices (like those from CME or ICE) help to easily value tokens tied to these commodities.
Challenges
- Storage & Delivery: Real-world commodities require physical storage and a robust logistics chain to confirm redeemability or settlement.
- Volatility: Commodity prices can be extremely volatile, which could impact how these tokens are perceived as stable collateral.
3. Fiat-Backed Stablecoins
Why They’re Good Candidates
- Direct Fungibility: One USDC or USDT is intended to be worth exactly one US dollar, making them fully interchangeable with each other.
- Widespread Adoption: Stablecoins are already among the most traded tokens on public blockchains, acting as a crucial on/off-ramp.
- Simplicity in Concept: Backing is (ideally) one-to-one with fiat held in reserve. This resonates with both traditional finance and crypto communities.
Challenges
- Regulatory Scrutiny: Authorities worldwide are paying more attention to stablecoins, especially regarding reserve transparency, consumer protections, and systemic risk.
- Counterparty Risk: Holders must trust that the issuer maintains sufficient reserves and can honor redemptions.
4. Bonds and Other Standardized Debt Instruments
Why They’re Good Candidates
- Well-Established Markets: The bond market is immense, with set coupons, maturities, and issuance structures that lend themselves to standardization.
- Fractionalization: Tokenizing a bond can lower the minimum investment size, opening participation to a broader base of investors.
- Transparency: Blockchain-based debt tokens can potentially offer real-time tracking of coupon payments and ownership.
Challenges
- Regulatory Compliance: Debt instruments are heavily regulated. Token issuers must abide by securities laws, know-your-customer (KYC) rules, and more.
- Complex Structuring: Some bonds have unique features (convertible, callable, etc.). Ensuring all such features map correctly to a token can be intricate.
5. Tokenized Index Funds or ETFs
Why They’re Good Candidates
- Uniform Exposure: Each share of an index fund or ETF represents the same fractional claim on the underlying basket of securities.
- Diversification: By tokenizing an entire basket (e.g., the S&P 500), investors can diversify easily.
- Potential for Global Access: Tokenization could allow cross-border investors to gain exposure to foreign markets without going through traditional brokerage channels.
Challenges
- Legal Recognition: The fund’s structure needs to be recognized by regulators, meaning the token must track the same rights and obligations as a conventional share.
- Custody of Underlying Assets: The fund’s manager still needs to hold the underlying stocks or bonds in a compliant manner.
6. Carbon Credits (in Standardized Programs)
Why They’re Good Candidates
- Standardized Carbon Markets: In regulated programs like the EU Emissions Trading System (ETS), each carbon allowance can represent the same legal right to emit one tonne of CO₂.
- Environmental Impact: Tokenizing credits can streamline trading and retirement (when companies or individuals decide to “burn” them), enhancing transparency.
- Growing Demand: Sustainability initiatives and corporate ESG goals are expanding carbon credit markets.
Challenges
- Verification: Not all carbon credits are created equal. Verification and certification standards vary widely.
- Regulatory Overlaps: Different countries and regions have different carbon markets and rules, complicating cross-border tokenization.
7. Money Market Funds and Commercial Paper
Why They’re Good Candidates
- Short-Term, High-Liquidity Instruments: Money market funds and commercial paper are often used for short-term financing, with predictable yields.
- Fungibility: Each unit in a money market fund has the same net asset value (NAV), assuming it’s set up under consistent rules.
- Institutional Familiarity: Many corporations and financial institutions already rely on these instruments for cash management.
Challenges
- Credit Risk: Commercial paper depends on the creditworthiness of the issuer, which can vary.
- Redemption & Regulatory Hurdles: Short-term instruments still must adhere to securities regulations for tokenized versions.
The Road Ahead
Tokenizing fungible real-world assets promises efficiencies like 24/7 trading, near-instant settlement, and broader global participation. However, the challenges aren’t just technical. Ensuring legal enforceability—where token holders truly own or have a clear claim on the underlying asset—requires robust custodial arrangements, regulatory compliance, and transparent auditing.
Despite these hurdles, we’re already seeing pioneering projects in each of these categories. As more jurisdictions develop clear regulations, and as traditional financial institutions grow comfortable with on-chain representations of their assets, we can expect accelerated growth and innovation in tokenized RWA markets.
Key Takeaways
- Standardization is crucial for tokenizing assets that are truly fungible.
- Legal and Regulatory Clarity will determine how rapidly these markets grow.
- Market Demand: The availability of liquidity and user adoption will dictate the success of these tokenized instruments.
In summary, precious metals, commodities, stablecoins, bonds, index funds, carbon credits, and short-term debt instruments are some of the most promising candidates for tokenization when fungibility is a top requirement. By focusing on these standardized assets and establishing robust frameworks for custody and compliance, the crypto ecosystem can gradually expand its bridge to traditional finance—unlocking new channels of liquidity and fostering more inclusive global capital markets.
Explore More:
Leave a Reply