7 Ways Tokenizing Traditional Assets Will Launch Security Tokens To Main Street In 2019
The Tokenization Of Everything
It may be hard to believe now, but the securitization of non-liquid assets — venture capital funds, real estate, precious metals, currency, art, sports teams — is likely to be one of the biggest stories of 2019 and beyond.
In fact, it’s likely to reshape how investors value their assets and how they think about them going forward.
The driving force behind this market upheaval is the rise of cryptocurrency and Blockchain. To date, both technologies have been the provence of early adopters and speculators, but they are about to move from the perimeter of our financial lives to permanent fixtures on Main Street.
Because cryptocurrency and blockchain make it cost-effective to securitize common assets — to turn anything of real value into a marketable security by creating a digital unit of ownership known as a security token.
Instead of owning a Rembrandt outright, for example, tokenization means the owner could offer digital shares of ownership in a masterwork painting. The fractional owners would benefit from buying or selling their digital shares to take advantage of rising or falling prices. As a digital security, it can be quickly and easily traded online. Think price transparency every day, instead of a Christie’s auction every blue moon.
We believe the tokenization of everything will bring to common assets the benefits Wall Street long ago engineered for other asset types, such as Commercial Mortgage Backed Securities (CMBS), syndicated loans, student loans, auto loans, and countless other assets.
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Tokenization of traditional assets can provide a wide range of benefits, including greater liquidity to asset owners, 24/7 markets, lower transactions costs, fractional ownership, automated and quicker settlement, improved compliance checks, and a broader slate of possibilities with smart security contracts. And, in turn, realization of such benefits would pave the way for security tokens to have a banner year in 2019.
As we gaze into our crystal ball for 2019, we look at seven types of assets that are likely to be tokenized. This process won’t happen overnight, but it will begin in earnest in 2019. As this trend gathers momentum, we believe it’s likely to change Main Street investing as we know it today.
1. Venture capital funds: This asset class has beennotoriously illiquid. Investors typically have long investment horizons and must typically wait 5 to 10 years before earning a return. Projects like Blockchain Capital (BCAP), EQUI, and Spice VC, want to lower the barrier to entry for investors and provide them opportunities to purchase pieces of investment portfolios and sell them faster.
Our Take: The increased liquidity would allow more people to participate in the asset class. Venture capitalists would enjoy access to larger pools of investors.
2. Precious metals: Blockchain startups such as CEDEX want to see if individual investors can securely and easily trade gold, silver, and diamonds. Sellers could list their diamonds on the CEDEX platform and subsequently deliver them to a custodian, who would release them to the buyer once the transaction is complete.
For investors, the CEDEX platform provides something that has long eluded the diamond industry — transparency. Such a consolidated repository would help investors to properly determine their value and set prices.
Our Take: The tokenizing of precious metals creates the possibility of fractional ownership along with greater transparency in an asset class that has been opaque, illiquid, and prohibitively expensive to own.
3. Real estate: Several Blockchain startups, most notably Alt.Estate, Atlant, Blocksquare, and Deedcoin, have been working on ways to tokenize commercial and residential real estate. In October, a luxury Manhattan condo development offered tokenized shares on the Ethereum Blockchain worth $30 million. Users can buy fractions of properties, earn income on those properties, then, as with traditional real estate investments, sell their fractions at higher prices depending on the appreciated values of the underlying property. The platform reduces entry and transactions costs, easier access to investment opportunities around the world, and a means to diversify investment portfolios. Real estate owners will find increased liquidity from fiat and cryptocurrency investors.
Our Take: Tokenization of real estate assets provides liquidity to owners of traditional illiquid assets with fairly long capital lock-ins.
4. Rare art and luxury cars: Wealthy individuals have exclusively owned these assets. But Blockchain projects hope to change that. The Maecenas project, for example, wants to “democratize access to fine art by creating a decentralized art gallery.” Such a platform would provide investors exposure to art without the cost of physically preserving the piece. More importantly, the technology could allow buyers and sellers to directly transact without the need for traditional auction houses like Christie’s and Sotheby’s, which control a combined 80 percent of secondary market value.
BitCar aims to enable fractional ownership for both car enthusiasts and investors looking to diversify their portfolios. Users can buy and trade pieces of ownership in exotic cars without an intermediary like dealers. Verified agents source, acquire, store, and display these vehicles. After holding periods of 5 to 15 years, the vehicles are sold and proceeds distributed to token holders.
Our Take: These and related applications increase access to an asset category which was traditionally limited to a smaller group of investors.
5. Commodities: Binkabi wants to reduce geopolitical inefficiencies which adds costs to the supply chain and lowers prices paid to commodity producers. The current system to trade commodities suffers from a number of problems, which adds cost: a lack of trust that requires middlemen who often charge high fees; requirement of USD/EUR settlement in emerging markets; paper-based record-keeping in emerging markets, which increases the chances of errors and fraud; and the lack of affordable access to supply chain financing for commodity producers. Binkabi’s proposed solution consists of Barter Block, which will facilitate the development and use of Binkabi’s end-to-end cross-border commodity trading platform. Second, tokenization of commodities will enable commodity hedging and financing.
Our Take: While most other applications want to provide benefits to investors and owners, Blockchain-based tokenization of commodities would benefit participants at almost every level of the supply chain.
6. Sports teams, athletes, and celebrities: Globatalent wants to create a decentralized marketplace where investors and fans can invest in clubs and players and trade benefits guaranteed by image rights, player transfers, price money, salaries, ticketing, TV contracts, or any other income. For example, fans and investors alike could invest in young players, provide financial support to continue their careers in exchange for some future return. Clubs could similarly sell rights to future profits so they can raise the capital needed to sign players and thus boost the team’s value.
Our Take: Fractional ownership and purchase of future benefits aligns incentives of asset operators with owners.
7. Flat currencies: Stablecoins, whose prices are tied to traditional currencies, are designed to offset the volatility of traditional crypto assets like Bitcoin. The first such coin was the BitShares-created BitUSD, a cryptocurrency pegged to the value of a U.S. dollar. The market has since witnessed the launch of Tether, TrueUSD, and Dai, worth a combined $3 billion. Other companies have developed their own stablecoins including “USD Coin,” backed by Circle and Coinbase and governed by the CENTRE network.
Beyond stablecoins, other projects have taken novel approaches to curbing volatility. Basis (formerly Basecoin) is attempting to build a cryptocurrency with an algorithmic central bank. By controlling the number of coins in circulation (as any government does with a money supply), Basis hopes to stabilize currency value.
Our Take: We expect the adoption of Stablecoins to rise over the next 12 months. Such assets can provide a roadmap for other tokens to reduce transaction costs and processing time and check volatility.