Real World Assets, or RWAs, are physical or traditional financial assets like bonds, commodities, or even real estate, but represented on the blockchain network. As such, they act as a bridge between traditional physical assets and DeFi. However, unlike many other blockchain products, they have real economic value, rather than just a speculative one.
As such, they can offer greater stability and can be a good way to diversify one’s portfolio. The problem with RWA investment comes from fake or misrepresented assets. Many projects aim to misuse the intangible nature of blockchain products and assets to exaggerate ownership, value, liquidity, and even legal enforceability.
It is worth noting that some RWAs are simply not structured well, but in many cases, they are outright scams. To avoid becoming a victim of either a scam or a poorly designed product, investors must verify frameworks before putting their money on the line.
What Are Real World Assets (RWAs)?
Source: Pixabay
The simplest way to define RWAs is to say that they are physical and financial assets represented on a blockchain network through tokens. The tokens do not create value like regular cryptocurrencies, instead they simply act as a representation of something that exists away from the chain and has a value of its own.
In other words, these are underlying assets that give RWAs their value, and without them, the token itself is worthless.
There are several common RWA categories, including real estate, commodities, bonds, funds, and royalties.
Why Fake or Misrepresented RWAs Exist?
As mentioned earlier, some RWAs are fake or misrepresented, and naturally, those looking into RWA investing might wonder why they exist at all. Simply put, it is the same reason as most other financial scams - money.
Of course, the longer explanation is a bit more nuanced, and it has to do with the fact that money moves faster than verification. Tokenization comes with a layer of complexity, and scammers can use this to their advantage to raise capital without actually owning the underlying asset. They are motivated by quick profits, and in many cases, they don’t own the asset, they don’t disclose liabilities, or meet regulatory standards.
The asset may even be real in some cases, but already pledged somewhere else, or overleveraged. This falls into the category of misrepresentation, which comes with its own common tactics, like fake custody, opaque SPV, and inflated valuation.
With that said, not every RWA is a scam, some projects are legitimate, but poorly structured. Despite them being real, they still pose a risk for investors.
How to invest in RWA tokens in a safe way
To ensure safety during real-world assets investing, start with issuer verification. That means confirming legal ownership of the underlying asset, as well as custody arrangements, audits, and redemption rights, before you even look at yield. Treat REAs as traditional assets in crypto form, and if you wouldn’t buy the real thing, don’t buy the token representing it either.
Main risks involved with RWA tokenization
The biggest risks involved with RWA tokenization are fake or unenforceable ownership, opaque custody, and redemption mechanisms that fail under stress. Beyond that, regulatory uncertainty is also a significant concern, as well as overreliance on off-chain promises.
Verification Framework: How to Spot Real Assets
Source: Pixabay
For investors, there are only two things that matter - finding real, successful assets, and avoiding scams. However, this is often easier said than done, as many scams tend to be sophisticated enough to trick the investor if they are not careful. There is no trick to success here - avoiding scams requires discipline and a short series of steps that can help you uncover whether you are dealing with the real deal or not. Here are the steps you need to take to properly verify frameworks:
Issuer verification
Before you start with the real-world assets investment, first verify the issuer, not their token. Reputable and reliable issuers don’t run scams, which is why you need to check who is behind the asset. This can be done through registrations with regulators, licenses, jurisdiction, and the like. If you can’t find the company with the right filings, walk away from its RWA immediately.
Beyond that, check the people behind the project, such as executives, directors, their previous ventures, whether they have past experience with managing assets, and so on. Lastly, you should also ask for proof of ownership, meaning title deeds, audits, and alike - anything that can prove that they own the underlying asset they claim they have.
Custody validation
The next step is custody validation, which is important, as ownership without custody does not hold much value. In this step, you must confirm who controls the asset, both physically and legally. In other words, you should check if the custodians are real, regulated entities, and whether they provide insurance, transparent contracts, whether they are reputable, and alike.
Shady custodians are relatively easy to spot as they rely on vague partners, internal wallets, shell companies, and alike. Also, ask to see custody agreements, and confirm that there is a clear separation between the issuer and the custodian.
NAV transparency
Net Asset Value, or NAV, also needs to be transparent with clear and auditable calculations. It represents the total value of a fund’s assets minus its liabilities, divided by the number of shares outstanding. Simply put, it tells investors how much one share of a fund is worth, based on what the fund owns.
This is why its transparency is crucial, and why audits by reliable independent parties must be conducted.
Redemption testing
Lastly, there is redemption testing. Simply put, this means that you should review redemption terms and focus on the details, such as withdrawal simulations and review conditions. Keep an eye out for hidden lock-ups or unfair fees that might be used to mask fake liquidity. Remember that many fake RWAs tend to look good and liquid on paper, but as soon as you try to redeem, they collapse.
Scammer Identification Techniques
Source: Pixabay
Most RWA scams look solid at first glance, but pay attention to the details, and you will soon see that there aren’t any. Their token models come with very vague and unclear rights, revenue flows, or rules regarding redemption, all of which are red flags for those who know how to spot them.
They lack audits, or their audits may be outdated or provided by unknown companies, and they rely on vague language in their promises, like “asset-backed exposure” while avoiding any specifications regarding the ownership, jurisdictions, and alike.
You can see similar patterns if you look at who promotes the project - is it trusted third parties and reputable independent researchers, or mid-tier influencers who were paid to praise the project, coupled with recycled press releases. If there is also no strong community support or strict moderation in the project’s channels, you should assume something is not right.
Finally, you can always use tools for fraud detection, like feedback platforms and blockchain explorers, which will quickly reveal unusual behavior if there is any to spot.
Legal and Compliance Checkpoints
One sure way to confirm whether an RWA is real or fake is the legal angle. In the US, tokenized RWAs are considered securities, meaning that they fall under the Securities and Exchange Commission’s (SEC) jurisdiction. That means they are tied by securities law, and must be registered with the regulator, and feature full investor disclosures, based on the securities law.
In the EU, the law focuses more on issuer licensing, custody rules, and, recently, MiCA compliance. Then, there are jurisdictions like Singapore, where the emphasis is on clear asset ownership, strict AML checks, and regulated custodians, while some jurisdictions may be unfriendly to the tokenization process.
AML and KYC procedures are obligatory regardless of the jurisdiction, so any platform that cannot identify participants represents a risk for investors. Also note that the SPV structure also must be clear and transparent across jurisdictions, meaning that you should be able to see who owns the asset, how claims are enforced, what would happen in case of bankruptcy, and alike.
Case Studies
All of the things discussed in previous segments become quite clear when comparing a real, vetted RWA project against a known low-quality offering. For example, Centrifuge/Tinlake, a tokenized invoice platform, has strong practices, including verifiable asset ownership, on-chain proof of invoices, reputable 3rd-party custodians, clear redemption mechanisms, and more.
On the other hand, there are numerous tokenized real estate or commodity platforms that did not survive because their SPV structures were too vague and non-transparent. Their custody was also suspicious and unverifiable, and they artificially boosted valuations, often by too much. Would-be investors saw no proof that the underlying assets existed, and redemptions typically suffered delays or blockades, which served as a red flag for others, who saw the danger and decided to stay away.
Due Diligence Checklist
Before you invest in tokenized RWAs, follow this checklist to spot any red flags that may warn you to stay away from the project:
Verify the issuer - confirm the issuer’s identity, check if they have the necessary licenses, and whether the entity is registered with the appropriate regulator
Research executive background - Check the executives and their reputability
Ask to see proof of ownership - Make sure to verify any deeds and titles related to the underlying asset
Make sure custodians are valid - Make sure that the project’s creator uses well-known and reputable custodians for safekeeping the underlying assets
Check NAV transparency - Read audits, and other project-related documents and data and look for any vague language or calculations that could indicate something suspicious is going on
Test redemptions - Try to withdraw funds while checking for too high fees or potential mechanisms to lock your funds that might emerge
Search for audit and compliance reviews - Try to find audits from legitimate third parties, and ensure that AML and KYC procedures are present, as laws of pretty much all countries require them to be there
Community and market signals - Look for independent reports, research, feedback, the presence of a real community, and who talks about the project
Conclusion
Investing in real-world assets can be risky if you rush into it blindly. To stay safe, you need more than trust, which is why verification is the only way to stay safe. Through the verification process, you will learn whether the issuer is a real, reputable entity, whether they use real custodians, how transparent the details of the project are, and whether the redemption mechanism works as it should, or if it was rigged in some way.
Follow the structured verification frameworks and due diligence checklists to easily spot red flags if there are any, or secure a peace of mind if the project is legitimate and safe to invest in, at least from the technical standpoint. As mentioned earlier, distinguishing real RWAs from fake ones is quite possible, and even simple once you get some practice. The key is to maintain discipline and not rush into investing just because the offer might look good at first glance.
