1. Introduction

We live in an era where digital innovation and environmental sustainability are increasingly shape global industries. The intersection of tokenization and real-world assets is garnering significant attention. Tokenization — the process of converting physical assets into digital tokens on a blockchain — is transforming the way assets are bought, sold, and traded. Among the various real-world assets ripe for tokenization, rare earth minerals hold a unique and critical position. These minerals are essential components in clean energy technologies and modern electronics. But they also raise important environmental, social, and governance (ESG) concerns.

This paper explores how tokenization can revolutionise the handling of real world assets (RWAs), with a special focus on rare earth minerals. As industries strive to meet ESG benchmarks, the tokenization of these minerals presents an opportunity to enhance transparency, efficiency, and accountability within supply chains. However, adopting tokenization also introduces complex legal challenges that must be navigated to ensure compliance with evolving regulatory standards.

2. Real World Assets and Tokenization

Definition of RWAs

RWAs are tangible, physical assets that exist in the global economy and play a crucial role in various industries. RWAs can include commodities like gold, silver, and oil, property such as real estate, natural resources, and minerals like rare earth elements. These assets are foundational to industrial processes, technological advancement, and even national security. For instance, rare earth minerals like lithium and cobalt are vital for producing electronics, electric vehicles, and renewable energy technologies such as solar panels and wind turbines.

The significance of RWAs in the global economy cannot be overstated. They serve as a store of value, are used in production processes, and impact the supply chains of critical industries. These assets are also subject to supply and demand fluctuations, geopolitical risks, and environmental concerns, which further underscore their importance. As businesses and investors seek to optimise the use of RWAs, the concept of tokenization emerges as a solution for enhancing liquidity, transparency, and access to these otherwise illiquid and difficult-to-trade assets.

Tokenization of RWAs

Tokenization of RWAs refers to the process of creating digital representations of physical assets. This involves breaking down the ownership of a real-world asset into fractions, each represented by a token. These tokens can then be bought, sold, or transferred on a digital platform. The underlying technology powering RWA tokenization is primarily blockchain. Blockchain-based smart contracts enforce ownership, transfer rights, and compliance rules in an immutable and transparent manner.

Key technical aspects of RWA tokenization include:

1. Asset Representation: Real-world assets are converted into digital tokens, often following standards like ERC-20 (for fungible tokens) or ERC-721/ERC-1155 (for non-fungible tokens) on Ethereum or similar standards on other blockchains. These tokens act as certificates of ownership, allowing the asset’s value to be fractionalized and traded more easily than the physical asset.
2. Smart Contracts: Smart contracts are deployed to automate processes related to the token, such as compliance checks, dividend distribution, and ownership transfers. These contracts encode regulatory rules, including KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements, to ensure that token transactions align with local and international legal frameworks. Importantly, these contracts are self-executing, meaning once certain conditions are met (such as buyer verification or payment), the token is automatically transferred to the new owner.
3. Custody and Settlement: RWA tokenization introduces unique challenges in custody and settlement. Physical assets cannot be directly transferred like digital assets, so custodians — trusted third parties — are often required to hold the underlying asset. These custodians issue digital tokens that represent ownership, and the smart contract governs the relationship between token ownership and the actual physical asset. Settlements can occur instantaneously on-chain, but off-chain processes (such as physical asset transfers) often introduce delays and require legal coordination.
4. Liquidity and Market Infrastructure: Tokenization unlocks liquidity in traditionally illiquid assets by enabling fractional ownership. Investors can buy smaller portions of large assets, democratizing access to investment opportunities. Decentralized exchanges (DEXs) and centralized exchanges (CEXs) are integrated with blockchain networks to allow for seamless secondary trading of these tokens. However, market fragmentation, lack of standardized regulations, and technical interoperability issues between blockchain networks can impact liquidity.
5. Compliance and Regulation: A key technical challenge in tokenizing RWAs is ensuring regulatory compliance across jurisdictions. Tokenized assets can be classified as securities, depending on the asset type and jurisdiction (such as under the U.S. SEC’s Howey Test). To comply with global regulations, including those related to securities law, AML/KYC processes are integrated directly into the blockchain infrastructure. This is done via identity verification services, enabling compliant trades while preserving the decentralization benefits of blockchain.
6. Data Integrity and Security: Tokenization relies on accurate and tamper-proof data that links the physical asset to its digital representation. Oracles — third-party services that connect blockchain systems with off-chain data — are often used to ensure the asset’s state (such as property ownership or commodity price) is correctly reflected on-chain. Data security and integrity remain critical concerns, as any vulnerability could lead to incorrect or fraudulent token issuance.
7. Interoperability and Scalability: One of the technological challenges of tokenizing RWAs is ensuring that different blockchain platforms (public and private) can interact seamlessly. Cross-chain solutions, including atomic swaps and bridges, are often required to allow the tokens to be traded or used on multiple blockchain ecosystems. Additionally, the scalability of blockchain networks must be addressed to handle the high transaction volumes associated with fractionalized assets and high-frequency trading.

As blockchain infrastructure matures, tokenization of RWAs is expected to expand, especially in sectors like real estate, commodities, and fine art. Advances in Layer 2 solutions, zero-knowledge proofs (for enhanced privacy), and cross-chain interoperability will likely resolve many existing bottlenecks, promoting greater adoption of tokenized RWAs in global financial markets. Regulatory harmonization across jurisdictions will also be crucial in enabling secure and compliant RWA tokenization at scale.

3. Rare Earth Minerals

What are Rare Earth Minerals?

Commonly referred to as rare earth elements (REEs), rare-earth metals or lanthanides, they are a group of 17 metals that play an essential role in modern technology. The word “lanthanide” is derived from the Greek word “lanthanein” (?????????), which means “to lie hidden” or “to escape notice”. This name was chosen because the first element in the series, lanthanum (La), was initially difficult to isolate and identify due to its chemical similarity to other elements. The suffix “-ide” is commonly used in chemistry to refer to a group or family of elements, and in this case, it refers to the 15 elements in the lanthanide series, from lanthanum (La) to lutetium (Lu). These elements tend to share similar properties, particularly their reactivity and occurrence in nature, which contributed to their “hidden” nature in terms of early scientific discovery.

Despite the reference to the word “rare,” these elements are not particularly rare in the Earth’s crust, but they are often found dispersed and in low concentrations, making extraction challenging and expensive. REEs are integral to everything from smartphones and electric vehicles to wind turbines and medical devices, serving as key components in batteries, magnets, and various electronics.

The group of REEs includes 15 lanthanides, as well as scandium and yttrium, which are often grouped with the lanthanides due to their similar properties. These metals share common traits such as being lustrous, silvery-white, and reactive, particularly in high temperatures. Their ability to interact with other elements makes them valuable in producing strong magnets, lasers, and catalytic converters.

One of the reasons REEs are critical in technology is their unique magnetic, optical, and catalytic properties. For example, neodymium is widely used in powerful permanent magnets found in wind turbines and electric motors, while europium plays a crucial role in the red phosphors of LED screens and lighting. Although these elements are not scarce, mining them efficiently remains difficult due to their scattered distribution and the need to process vast amounts of ore. As technology advances, the demand for rare-earth elements continues to grow, especially in the context of green energy and electric vehicles. The scarcity of concentrated deposits and the environmental costs of extraction make the supply chain for REEs a critical issue for many industries worldwide.

Element	Atomic Number	Symbol	Main Uses
Scandium	21	Sc	Aerospace components, metal alloys
Yttrium	39	Y	LEDs, phosphors, superconductors, lasers
Lanthanum	57	La	Camera lenses, battery electrodes, catalysts
Cerium	58	Ce	Catalytic converters, glass polishing, self-cleaning ovens
Praseodymium	59	Pr	Aircraft engines, magnets, fiber optics
Neodymium	60	Nd	Powerful magnets, electric vehicles, wind turbines
Promethium	61	Pm	Nuclear batteries, research, luminescent paints
Samarium	62	Sm	Permanent magnets, nuclear reactors, lasers
Europium	63	Eu	Phosphors in screens and LEDs, anti-counterfeiting technology
Gadolinium	64	Gd	MRI contrast agents, nuclear reactors, magnets
Terbium	65	Tb	Phosphors, solid-state devices, green phosphors in lighting
Dysprosium	66	Dy	High-temperature magnets, nuclear reactors, data storage
Holmium	67	Ho	Magnetic flux concentrators, lasers, nuclear reactors
Erbium	68	Er	Fiber optics, lasers, vanadium steel
Thulium	69	Tm	Portable X-ray devices, lasers
Ytterbium	70	Yb	Fiber optic cables, stainless steel, lasers
Lutetium	71	Lu	PET scan detectors, catalysts, phosphors

Environmental and Social Impacts

The extraction of rare earth minerals is essential for many modern technologies, such as electric vehicles (EVs), wind turbines, and consumer electronics. However, it carries significant environmental and social concerns. One of the primary environmental issues is the release of toxic waste during the mining and refining processes. Extracting rare earth minerals involves the use of hazardous chemicals, such as sulfuric acid, which can lead to soil and water contamination. The improper disposal of tailings — a byproduct of mining — often results in radioactive waste and heavy metal pollution, damaging ecosystems and posing long-term health risks to nearby communities.

Social concerns are equally pressing. Many rare earth minerals are sourced from countries with poor labor practices, where human rights violations are common. Reports have highlighted the prevalence of child labor, unsafe working conditions, and inadequate compensation for workers. Additionally, rare earth mining can displace local communities, undermining indigenous land rights and contributing to social unrest. Resource depletion is another key concern, as the extraction of these minerals is often unsustainable, leading to long-term scarcity and driving geopolitical tensions over control of critical supplies.

ESG standards are becoming more relevant as investors demand accountability for the environmental and social impact of mining practices. Failure to address these concerns could result in reputational damage, regulatory penalties, and a reduced ability to attract investment.

Role of Tokenization in Addressing ESG Concerns

Tokenization — the process of representing real-world assets on a blockchain — offers a promising solution to some of the ESG concerns surrounding rare earth minerals. By tokenizing rare earth minerals, it is possible to create a transparent, immutable record of their extraction, production, and distribution. This can improve traceability and accountability, ensuring that the minerals are sourced from sustainable and ethically responsible suppliers. For example, blockchain technology can certify that the minerals used in EV batteries or wind turbines were extracted with minimal environmental harm and in compliance with labor laws.

Tokenization can also promote sustainable investment by providing investors with more detailed information about the ESG performance of mining operations. Blockchain-based tokens could be linked to sustainability certifications, allowing investors to support companies that prioritise environmental stewardship and social responsibility. Moreover, tokenization enhances governance by enabling real-time audits of supply chains. Companies, regulators, and investors could access up-to-date information on the origin and environmental impact of minerals, promoting better decision-making and regulatory compliance.

4. Case Studies and Practical Applications

Back in early 2022, Reuters reported on a blockchain rare earth scheme to certify sustainable output for electric vehicles (EVs)[1]. The Circular System for Assessing Rare Earth Sustainability (CSyARES), spearheaded by the Rare Earth Industry Association (REIA) and Circularise, is part of the EU’s broader strategy to secure critical minerals for its industries while improving transparency in supply chains. This system utilises blockchain technology to track rare earth minerals from extraction to end-of-life, ensuring that sustainability claims can be verified at every stage. By using blockchain tokens, or digital “passports,” the process allows for a permanent, tamper-proof record, helping manufacturers prove that the materials they use meet stringent environmental, social, and governance standards.

The significance of this development lies not only in its technical innovation but also in its potential to reshape the rare earth supply chain, particularly as Europe and the U.S. seek to reduce reliance on China, which dominates the global rare earth market. By applying blockchain in this context, tokenization offers an efficient way to certify and manage commodities in industries like EV production, where consumers and stakeholders increasingly demand sustainability. This approach to commodities like rare earth minerals exemplifies how technological advancements can support ESG goals, creating a ripple effect across the global supply chain and encouraging more responsible mining practices.

More recently, it was reported[2] in September 2024 that HashKey Group has a partnership with Asteroid X. The two entities will collaborate through HashKey Tokenisation to explore opportunities in the RWA sector. Asteroid X, developed by Web3in Tech-Lab based in Perth, Australia, aims to tokenize high-quality mining exploration assets in Australia. The project intends to facilitate decentralized investment and equity trading through decentralized applications. Currently (as at October 2024), Asteroid X has entered Phase 6 (Legal Opinion) of its project, after which it plans to begin product launch, Series A funding, and finally, initiating its Security Token Offering / Initial Public Offering.

In terms of what is being done globally from regulators to support tokenization of RWAs, my advisory company has been following closely the work of the Hong Kong Monetary Authority through its Project Ensemble Sandbox, a testing ground to explore four main themes of asset tokenization use cases: (1) fixed income and investment funds, (2) liquidity management, (3) green and sustainable finance, and (3) trade and supply chain finance. While Project Ensemble does not focus solely on RWAs, the underlying technology and use cases of the project are highly relevant to the tokenization of RWAs.

In the realm of fixed income and investment funds, Project Ensemble is exploring how tokenization can fractionalize traditionally illiquid assets such as bonds or real estate-backed securities. These assets, often limited to institutional or high-net-worth investors due to their high capital entry requirements and illiquidity, can be made more accessible through tokenization. By creating tokenized versions of these assets, the sandbox is testing how blockchain technology can enhance market participation by allowing fractional ownership, improve liquidity through secondary market trading, and potentially shorten settlement times. The objective is to leverage blockchain’s capabilities to reduce the current settlement periods (T+2 or T+3) and improve the efficiency and transparency of transactions.

In the area of liquidity management, Project Ensemble explores how tokenization and blockchain technology can streamline liquidity allocation and improve cross-border transactions. The sandbox is testing how tokenized financial instruments, such as tokenized fixed-income assets or investment funds, can be used to facilitate real-time settlement and enhance liquidity for financial institutions operating in multi-currency environments. These tests aim to improve the speed, flexibility, and efficiency of liquidity management processes, making them more adaptable to global financial markets. The regulatory oversight within the sandbox ensures that these experiments adhere to evolving standards in digital asset management.

In terms of green and sustainable finance, the sandbox explores the tokenization of assets such as green bonds, carbon credits, and other environmentally linked financial instruments. Tokenization in this context ensures that assets are both traceable and transparent, meeting strict ESG (Environmental, Social, Governance) criteria. The sandbox tests how blockchain can provide an immutable ledger for tracking the origin, performance, and environmental impact of tokenized assets, ensuring they meet the sustainability claims made by issuers. This framework is critical in preventing greenwashing by ensuring that tokenized assets comply with international environmental regulations, such as the EU’s SFDR (Sustainable Finance Disclosure Regulation).

Finally, Project Ensemble addresses trade and supply chain finance, where tokenizing RWAs such as inventory, invoices, or bills of lading can bring significant efficiencies to global trade. The sandbox is testing how tokenized assets can streamline the cross-border transaction process by reducing transaction costs, enabling real-time settlement, and improving transparency throughout the supply chain. By leveraging tokenization, participants in the sandbox can explore how to reduce counterparty risks, speed up document verification processes, and provide real-time tracking of both goods and payments. This integration of physical assets with digital finance is seen as a key innovation to bridge traditional trade finance with blockchain technology.

5. Benefits and Challenges of Tokenizing RWAs

Tokenization introduces several benefits for real-world assets, particularly in sectors like rare earth minerals, where supply chains are complex, and the assets are inherently scarce. For example:

1. Liquidity: RWAs, especially those like real estate or rare earth minerals cannot easily be sold or traded on secondary markets. Tokenization creates liquidity by enabling these assets to be traded digitally on blockchain platforms.
2. Fractional Ownership: Investors can buy fractions of high-value assets, thereby lowering the barrier to entry for retail investors.
3. Transparency: Blockchain technology ensures that the history and ownership of tokenized assets are transparent and verifiable, reducing the risk of fraud and increasing trust in the asset’s provenance.

While the benefits are clear, several challenges need to be addressed to realise the full potential of tokenization:

Valuation and Liquidity Concerns: While tokenization increases the liquidity of assets, there remains a question of how accurately tokenized assets will be valued on the market, especially for assets as rare and volatile as rare earth minerals.

Legal and Regulatory Issues: The regulatory framework for tokenization is still developing. In many jurisdictions, it remains unclear how tokenized assets are classified, whether as securities or commodities, and how they should be taxed or regulated. These ambiguities create barriers for widespread adoption.

Technical Challenges: Implementing tokenization on a blockchain requires robust security measures to protect against cyberattacks. Additionally, the technological infrastructure to support large-scale tokenization, such as smart contracts and digital wallets, is still evolving.

[1] https://www.reuters.com/business/sustainable-business/blockchain-rare-earth-scheme-certify-sustainable-output-evs-2022-02-07/

[2] https://www.techflowpost.com/newsletter/detail_60074.html