As the enthusiasm for blockchain-centric projects has cooled off significantly in 2018, there is a lot of discussion around tokenizing existing and more traditional assets. This makes sense: the tokenization of securities represents a modernization and democratization of finance that has very real appeal.
Tokenization allows for a dramatic improvement of financial assets features
- Raise capital at a much lower cost, and with customizable features
- Provide liquidity to very illiquid assets (being able to sell part or all of a stake in seconds)
- Engage investors in novel ways (product evangelizing, contribution to specific work, discounts or priority on the company services etc.)
- Participative decision-making models: many projects replace a traditional management structure with a community-driven approach (decentralization)
So far, security tokenization has only been applied to very early stage and highly experimental ventures. Today, most tokenized securities were originated through ICOs, and are providing funding to projects that have no customers outside of the crypto ecosystem. Most of these projects have no revenues. It is similar to having revolutionary accounting software but no business to account for. But what if we could extend these compelling properties to real-world, established assets?
There are many compelling examples of the potential of tokenized assets
- Tokenized shares of private businesses could open their capital to more private investors, and provide liquidity to existing investors. Today, stakes in private businesses are hard to sell (creating a liquidity discount), and the process to do so is paper-based. Tokenized shares would allow for increased liquidity at a cost much lower than listing on an exchange (which is out of the question for many small to medium size businesses).
- Tokenization of select assets on businesses balance sheets. For example, instead of raising debt or equity a business could get access to liquidity by tokenizing royalties on some of their IP. For example Mattel could tokenize its Barbie asset, and sell a share of future royalties in the form of a token, raising capital to develop new IP or fund other projects, without outright selling a key asset.
- Tokenization of real estate property: what if instead of contracting a HELOC on a house to pay for restoration homeowners could sell 5% of the equity as a token, in exchange for a monthly rent? This would provide immense flexibility to homeowners. For example, anyone with 20k of savings could buy little pieces of equity in the housing markets they want to be exposed to. Today, most households have a disproportionate share of their wealth invested in their primary residence. Tokenized real estate would allow them to easily diversify this risk, by selling some of their home equity to take a long position in real estate in other markets, outside of real estate entirely.
Security and asset tokenization could create an entirely new realm of financial products
Investors small and large could invest in a much broader variety of assets and could develop sophisticated investment approaches that are simply not accessible today. It would also allow for the creation of new models of engagement between investors and companies. For example involving shareholders much more in the life of the business as they become much more easily identifiable and reachable (what if Disney offered first dibs to its shareholders for new broadway shows or cruiseships? Apple could provide previews of new products, etc.). The value of tokenized assets can be summarized this way:
- Massive increase in liquidity for private market assets. Private companies represent xB of valuation in 2018. Assuming a typical liquidity discount of 20-25%,
- Massive reduction in paper based records and transactions (private companies still deal in paper shares)
- Increased transparency for companies: they can know at any point in time who owns how many shares. Because there are many intermediaries public companies today do not have a full and real-time picture
- New engagement models for shareholders, and new and improved shareholder experience… Perks, real time communication channel and maybe even better involvement of shareholders into decisions
What stands in the way of tokenization of traditional assets?
- Auditing and other ways to protect and inform investors: the entire infrastructure will need improvement… There is no sign of regulation evolving to adopt to this just yet
- Fraud and scams: where there’s new ways to reach and engage investors, there will be new scams and attempts to defraud them
- The point of connection between real world and token is a big headache
Which companies stand to benefit from tokenization of traditional assets?
– Digital asset exchanges?
– Innovative companies that are willing to leverage these models. We’re especially excited by non crypto-centric ones.