Today I'm going to talk about real world assets. Yesterday, Ondo Finance announced that they were going to launch a product that would allow them to tokenize shares in a fund that invested into ETFs managed by Blackrock and Pimco.
To many in the crypto space this feels like a "finally!" moment. Finally, RWAs are coming on-chain and stablecoin holders can get access to tradFi yields instead of having to settle for the paltry returns offered on-chain. But the devil's in the details. Let's dig in.
One of Ondo's legal entities is going to be the issuer of these tokenized interests. This means that they have a regulatory obligation to comply with relevant securities laws (these things are definitely securities). To comply, they require that only qualified purchasers (a high regulatory hurdle) can buy their tokens.
They also go one step further - it looks like they are going to impose transfer restrictions on their tokens, presumably to ensure that no non-qualified purchasers can hold them. This is the big thing - it looks like Ondo is taking the view that they are responsible for not letting the genie out of the bottle. They've probably been advised that if they let these tokens trickle out into permissionless DeFi they are exposed to significant legal liability.
And so, if only qualified purchasers and whitelisted protocols can hold these tokens, what's the point? We already have a product where you can invest your USD for bond ETFs - it's called Scottrade. You won't have permissionless protocol innovation because every protocol will need to be vetted specifically by Ondo to make sure they don't let the tokens leak out somehow.
The benefit that I could see is that people would prefer this UX because they like stablecoins and using crypto generally. This could be enough. But I also question whether they will be able to maintain the UX that crypto people like - you're going to have to do KYC, sign forms, and all the rest of the things that you don't have to do in DeFi. Will those hurdles negate any UX benefits here? Maybe, maybe not. We'll just have to see.
To close this out, I'll touch briefly on risk here. Putting securities on-chain is extremely sensitive. The financial system and financial stability is critical. Regulators have a tight grip over this system today. Putting securities on-chain in a meaningful way means, in my opinion, that regulators will have to cede some of their control to smart contract protocols. I think regulators see that as extraordinarily risky and see very little upside in return. I think it will happen eventually, but I would bet on regulators taking their time.
All this is to say that if Ondo builds something which really is different than the financial system we have today for RWAs, I would put a non-negligible risk on the government stepping in at some point and freezing the project while they go back and think about it more.
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