Now that asset-backed tokens and “stable coins” are starting to become more and more mainstream, the normalization of the technology still presents some confusion and challenges for the average person.
Part of the problem rests with the “blockchain industry”, and mostly the “crypto bro” faction that did nothing but shoot itself in the foot with its previous fraudulent behaviors and subsequent effort to turn nothing into something.
In short, they attempted to make “math” the “thing”.
The easiest way to illustrate this is to compare it with the current, real world of finance and securities. A share of stock isn’t the cell or row of the spreadsheet of the cap table where the ownership and amount of the shares are recorded. That is the record of the ownership and proof of the transfer of the stock, but it isn’t the stock itself.
A more rational approach is to simply put the technology where it rightfully belongs, in the bowels of the enterprise information systems that manage the actual, real world asset.
Yet, there’s significant, phenomenally disruptive new value in transforming those layers of business and business systems.
Also called “stable coins” and “securities tokens”, asset-backed tokens are emerging: tokenizing existing asset classes under the current regulatory framework. The idea is to leverage blockchain technology and infrastructure to deliver “productive” innovation, to improve the functioning of market infrastructure in illiquid assets such as real estate, private markets, intellectual property, etc.
This evolution could deliver a number of benefits to market participants:
- Issuers: the first use case for asset-backed tokens are traditional assets that are illiquid or difficult to cash out. Two examples would be:
- VC funds: Through tokenization, fund operators can ensure that they retain a stable capital base, while allowing investors to cash out by selling their tokens to other investors without paying prohibitive fees.
- Real estate: Tokenization of real estate and other tangible assets (such as fine art) would allow fractionalization of a specific asset which is almost impossible in real life, and automation of the means of trading and custody. This would allow the development of a new financing model.
- Investors: Through the tokenization of assets, investors will have full ownership of their assets and thanks to fractionalization, investors can now have access to incremental ownership of assets that were previously out of their reach.
- Secondary market: Structurally, investors in asset-backed tokens will have access to secondary markets at issuance with potential limitations due to lack of liquidity and/or from investor agreements.
- Regulators: Most asset-backed tokens are securities, and must meet the same regulatory requirements. The model avoids operating in the early regulatory uncertainty void that has been exploited by ICOs.
The industry is just beginning its journey with blockchain technology and tokenization of assets in capital markets, but some important lessons have been learned in the past several years, which have helped to reset the course of the market.
Tokenization should be focused on efficiency and productivity gains for the industry which are numerous.
Meanwhile, we’re just over here biding our time, continuing to preach the XDEX message wherever we can find a pulpit.
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- Is Automated Financial Regulation the Future? - August 8, 2020
- Solving the Trillion Dollar Problem Plaguing Capital Markets and Financial Services - August 8, 2020
- Real World Assets Give Blockchain Tokens Real World Value - August 5, 2020
- Governance, Cryptocurrency’s Big Problem - July 28, 2020
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- What is Blockchain Consensus? - May 16, 2020