Yesterday I saw this advertisement on the Tube offering me the chance to buy fractionalized ownership in an artist and it got me thinking…
There are $256 trillion of real-world assets. Most of these assets are still signified by paper and are highly illiquid. However, with the advent of blockchain, ownership will continue to move from analog to digital and (I predict) we will witness the release of trillions of illiquid assets into liquid marketplaces.
On-chain tokens that denote real-world assets are often labelled security tokens. In many ways, these tokens resemble traditional securities (like stocks) that are digitally represented and traded in the markets today. The tokenization of an asset also bears similarities to the process of securitisation, where financiers slice, dice and sell fractional ownership of an asset. (Securitisation has existed for 100s of years and was the fuel for the 2008 financial crisis when bankers securitised and sold trillions of dollars of collaterized mortgage loans that were completed divorced from the loans’ underlying risk profiles.)
This begs the question whether security tokens are really that different to securities or are merely securities skirting regulation? My belief is that because of the structural design of the blockchain, which reduces transaction costs through an immutable record of ownership, security tokens will prove a significant innovation that transforms global trade.
By removing middlemen and embedding both execution and legality within smart contract code, tokens will augment the ease of divisibility and lower the cost global transfers of ownership. As a result, our ability to trade real-world assets that are currently illiquid should increase by an order of magnitude. The ICO wave, which was a truly global affair, may be a taste of what’s to come. In the not too distant future, we may live in a world where people from all corners of the globe trade everything from fractional ownership in Cristiano Ronaldo’s future earnings to a Manhattan office building. Any asset will be able to be placed on the spectrum of liquidity and made tradable.
The second order effects that will arise from this increased liquidity could be legion. I predict the liquidity discount for historically illiquid assets will deepen and fund managers of illiquid assets will be forced to innovate. New markets will emerge for under-utilised and illiquid assets that were previously inaccessible, such as diamond mines and carbon offsets. Cross-border trade will increase. Technology funding will become further decentralised and the IPO gatekeepers may be removed as the ICO model proves itself as an alternative. And the traders may inherit the earth, something I am very ambivalent about.
Creating a legal bridge between blockchains and real-world assets will prove the biggest hurdle because it requires novel legal entities designed around cross-jurisdictional property and tax law. It’s also not entirely clear how governments will react to all of this given that many regulations are in place to protect non-accredited investors. However, if these hurdles are surmounted the world’s assets may quickly liquidate. If you’re building anything to facilitate this disruption, please get in touch.