With the emergence and proliferation of the crypto technology/economy, the age of asset tokenisation has begun.
We are on the precipice of a financial revolution, a new internet of money that will fundamentally change the way society distributes value and capital in the digital age. Reshaping the global financial sector in the process; it won’t happen overnight, but it has already begun.
A decade after the launch of Bitcoin, the financial industry at large has failed to establish a clear and integrated response to how it will leverage distributed ledger technology. A conservative corporate culture, new regulatory requirements, a lack of innovation and conflicting incentives structures have led large players within the financial sector to utilise and apply new innovative technologies within the financial industry.
However, this is starting to change…
With the emergence and proliferation of the crypto technology and economy, the age of asset tokenisation has begun.
In an increasingly digital and global world, traditional ways of transferring and trading assets take too long and are too expensive and cumbersome for most people. Some assets are difficult to physically transfer, divide and track, especially between different jurisdictions and economic zones.
A new wave of new smaller, nimble crypto start-ups are already starting to digitise traditional assets like stocks, bonds, real estate, commodities, antiques and currencies, changing the way in which assets are traded, managed and secured- revolutionising the way businesses operate.
Through the emergence of new superior decentralised financial products and services, I like to think of it as a digital infrastructure inversion, a decentralised internet of money that is starting to absorb more and more users, capital and assets of traditional financial markets.
Tokenisation would allow innovators a host of benefits that leverage us to unlock greater liquidity from assets that are illiquid and hard to divide. The starting capital needed in acquiring a large physical asset, like a house or an office, would make them inaccessible to retail investors as lockup periods are long, and the costs are high. Tokenisation would allow billions of smaller investors from around the world to buy or sell a fraction of an asset, creating a whole new market of liquidity.
The same concept is being applied to other asset classes, like private equity in new start-ups, releasing significant amounts of value through tokenization that would have previously been locked up.
Other benefits of tokenisation include the instant and frictionless settlement of transactions of any asset or item of value that is transferred on the blockchain, without the lengthy delays caused by third parties, such as banks and clearing houses. Additionally, through the advancement in blockchain and smart contract technology, businesses will be able to simulate regulatory and tax implications on the blockchain.
Decentralised ownership: where assets are stored and traded on the blockchain through the use of smart contract technology. Without the need for a central party taking a fee or acting as a trusted custodian.
Fractional ownership: through tokenisation, where each token represents a small fraction of an asset, making it possible for anyone to own a small piece of an asset i.e., a boat, a house.
Global 24/7 market: just like any digital asset, it can be bought and sold at any time and from anywhere in the world, without having to wait for a third party, like a bank to process the transaction.
A good example of this trend is the emergence in popularity of initial coin offerings “ICOs” in 2013. Establishing a new way of raising money on a decentralised basis, quickly becoming the preferred option for many start-ups to raise funds, creating an alternative option to venture capital and IPO’s.
By tokenising assets, investors are able to start to trade and manage their investment on a decentralised basis through a contract written on the blockchain (like Ethereum, EOS or NEO).
The billions of dollars that have been raised and invested in the space has enticed many hackers, criminals, money launderers and fraudsters to create several scams and traps for unsophisticated investors to fall foul to. Given the rate of innovation, growth and size of the token market today ($150billion), regulators are trying to find the right balance of regulatory protection, trying to encourage innovation, whilst at the same time integrating the correct controls to safeguard their citizens from toxic tokens.
No one knows how the internet of money is going to develop over the next decade, making it almost impossible for regulators to create sensible regulations and guidelines today, for an industry that will look completely different tomorrow. A divergence of policy between regulators, increased competition for investment and different taxation classifications have created big regulatory arbitrage opportunities. This has incentivized pioneers to move out of unfavourable regulatory environments, to more favourable established jurisdictions, in order to avoid excessive legal fees and restrictions.
Several countries have marked blockchain as a key strategic interest and an important component for the next digital industrial revolution. Japan, Malta, Switzerland, Bermuda, UAE/Abu Dhabi and Singapore are all vying to build the first truly digital financial centre.
Therefore, it is not a question of whether the financial industry will become more decentralised in the future, but how this transformation will take place.
Which products and services will become decentralised?
Which financial institutions will continue to innovate?
Which country will create the first digital financial centre?
With trillions of dollars at stake, the race is on.