Tokenized Assets: The New Technology Will Change the Way We Trade
Most of us own things. Assets – things that individuals and entities own – can range from personal items and currency, to real estate, gold, oil, carbon credits, stocks and bonds. Many of these assets are hard to physically transfer or to divide into parts, simply because they are not liquid. This is why buyers and sellers trade paper that represents an asset or a part of it instead. However, the current system is less than perfect, since transferring, trading, and dividing paper can be cumbersome.
The Current System Offers Room for Improvement
Seeing an opportunity to improve the existing system, commodity exchanges, prominent financial companies and start-ups around the world are racing to develop ways to substitute physical paper with easy electronic transactions and standardized agreements. It may be hard to believe, but the tokenization of assets, and specifically the securitization of non-liquid assets, from currency and real estate to art and precious metals, is likely to be one of the biggest fintech trends in the next decade. Although it will not happen overnight, tokenized assets are expected to become a multi trillion-dollar market in about 10 years, as the technology promises to evolve along a trajectory similar to that of the HTML standard and the World Wide Web in the 1990s. Today’s cryptocurrencies, including Bitcoin, are just a fraction of the overall migration of asset value to a tokenized form on the blockchain that we will be seeing going forward.
What is Tokenization?
Tokenization is a process of turninganything of real value into a marketable security by creating a digital unit of ownership – a security token,” which can be stored and safely managed on the blockchain. Those working on the new technology explain that tokenizing assets involves evaluating them and conducting an audit of one’s property, but once the asset is evaluated, tokens can be available for the investors to purchase.” While there is so much more to the actual process, which will depend on technological advances and regulatory developments, what is important to understand is that tokenization of assets will transform the way we own things, and the way we trade and invest. The benefits tokenization will offer are enormous and include greater accessibility, transparency, and liquidity.
If you have not already noticed, access to assets is not uniform. Selected investment opportunities have been traditionally reserved for smaller, exclusive groups of investors. For instance, wealthy individuals exclusively own expensive art. Large investors are offered more investment opportunities, while small and foreign investors are often limited in what they can do. Intermediaries limit investment accessibility by restricting investments to accredited investors only, demanding high fees, and requiring an access to stock-trading accounts. Tokenization can expand the investor pool and make investing more accessible to many, while also eliminating middlemen and reducing transaction fees. Blockchain platforms would allow their users to create and trade new asset-backed tokens, as well as offering access to securities that are already being traded within the financial industry, making it easier and cheaper to invest. For instance, tokenization could democratize access to art, allowing for partial ownership and direct transactions between buyers and sellers, removing the need for auction houses, which currently control most of secondary art market. At the same time, tokenization could facilitate international investing, attracting new investors from all around the globe. One good example would be leveraging blockchain tech to pull currently stranded assets in places like Africa into the market. Finally, tokens would enable 24/7 trading, because they can be accessed anytime from anywhere in the world, using a smartphone app.
Many asset classes are notoriously illiquid. Investors often have long investment horizons and have to wait for several years before earning a return, while their capital remains locked in. A good example of a long-term investment is private equity or real estate. Tokenization would lower the barrier to entry for investors, and increase the speed of transactions, making the markets more dynamic. Investors would be able to purchase pieces of investments or portfolios and sell them faster without impact asset prices, which would result in increased liquidity, again allowing for greater pools of investors.
Tokenization would make transactions more transparent, since tokens eliminate asymmetry of information associated with the traditional transfer of ownership. Take precious stones, for example- blockchain will allow investors to securely and easily trade gold, silver or diamonds. Sellers would list their stones on the blockchain platform and then deliver them to a custodian who would release them to the buyer once the transaction is complete. The new system would help investors determine the value of precious stones and set prices in a transparent fashion. Improved transparency across the gem supply chain would broaden gems’ investment appeal. No wonder leading diamond industry players have decided to work with a blockchain start-up to tokenize diamonds.
Tokenization clearly promises to change the way we trade. While what it will look like we are yet to see, the trend is towards the elimination of multiple barriers.
Text by Maria Birger