Some thoughts on US tax law and so-called RWAs. In short, there are significant US tax impediments to putting RWAs onchain in bearer form. By contrast, cryptonative analogs typically don’t present the same impediments.

DEBT. There can be tax penalties for issuing or holding bearer debt (ie, debt that entitles non-KYC’d holders to principal or interest):

- Issuers (US or not) are subject to a penalty tax if they don’t have arrangements to avoid US ownership.

- US issuers can’t deduct interest and must withhold 30% on interest to foreigners.

- US lenders can’t take cap losses.

TLDR: Tokenized debt generally requires offchain records of beneficial owners (ie, KYC) to make it non-bearer so the above penalties don’t apply. By contrast, cTokens and aTokens aren’t subject to the above rules bc they are not debt for US tax purposes.

US REAL ESTATE. Foreigners are subject to US income tax on gain from a sale of US RE (and US RE holdcos), and have to file US tax returns. The tax is enforced thru a requirement that any buyer (US or not) withhold on the purchase price unless the seller proves US status.

TLDR. Buyers of US RE (or US RE holdcos) generally must KYC sellers to determine if they’re US or foreign to avoid liability for failing to withhold. Many foreign jurisdictions have similar rules. By contrast, onchain property isn’t subject to those rules.

STOCK. US corporates need to withhold on dividends to foreigners and report dividends paid to US persons. Market makers in stock need to do 1099 reporting for US persons.

TLDR. US stock issuers and any dealers (US or not) generally must KYC holders. By contrast, it is possible to devise tokenized governance structures that provide an income stream to holders without requiring KYC. And typical LP token holders do not need to KYC traders.

CONCLUSION. Financial institutions are already starting to tokenize RWAs and will continue to do so. See, eg, USDC and BUIDL. But the path to doing so typically requires KYC checks and limits on transferability, eliminating a lot of the benefits of blockchain.

Meanwhile, the world of onchain value creation is not subject to the same limitations, and we’ve barely scratched the surface of what is possible. While blockchain tech will host both natively onchain and offchain assets, it would be unfortunate to focus only on “RWAs.”