William Perlmutter 

COMMUNICATIONS AND MARKETING OPERATIONS / ANALYST
June 22, 2018

Benefits

Here are some benefits to transacting tokenized assets on a cryptocurrency platform. For starters, tokenized assets rapidly unlock liquidity more affordably, accurately, and collaboratively compared to financial institutions.

Transactions of tokenized assets:

  • take place immediately (by exchanging information faster than existing payment structures);
  • cut out institutional “middlemen” and their fees from the process (direct transaction);
  • are documented in a ledger to ensure transparency of transaction;
  • and diversify risk for both the buyer and seller.

As Dr. Stephen McKeon said on American television station CNBC, “you can represent an ownership stake on any asset with a token, and by doing so, you relax certain frictions to trade.” The minimization of inherent trade frictions, as listed above, is so desirable that potential investors would even pay “liquidity premiums” (also see Pearson example from part 1) to avoid exchanging property ownership in a traditional way.

What does this all mean for financial advisory? This emerging tokenized asset class (with its subclasses therein) will become, at the very least, a third option to traditional debt. Further and mentioned in the article, financial advisory will have an entirely new set of “decentralized customers” eager to participate in innovative investments offered by quickly-adopting traditional finance institutions.
 

Challenges

There are still external and internal factors which would determine the ultimate usefulness of tokenized assets. First and foremost, many external regulatory frameworks consider tokens as a financial security instrument; the legal landscape surrounding tokenized assets continues to evolve. As Anthony Pompliano emphasized on Medium, “If you take away one thing from this guide, remember this: When Security Tokens are done correctly, they don’t skirt laws & regulations, they remove financial institutions and middlemen.” If the value-added of tokenizing assets can still be achieved by lowering the costs of transactions – even through stringent regulatory frameworks – then the future of tokenized assets looks very hopeful.

Second and related to legal frameworks, if ownership of a real estate property assumes maintenance, how are organized responses taken among tokenized ownership to ensure the property is maintained or improved? The organized response, a conferral of duties and obligations onto collective ownership, must also be inclusive. Owners must clearly understand what challenge the token attempts to overcome within the cryptosphere, as well as the rights and obligations of a tokenized asset owner. Additionally, mainstream adopters of cryptocurrencies will not have as much knowledge as those who used the blockchain early on. In such a case, the focus on community learning to make the best decision is crucial to be empowered by a true “decentralized community”.

Third, do asset-back tokens have trusted issuers who can guarantee securely mapping digital governance while also being able to ensure real-world assets in a physical marketplace? If not, a liquidity squeeze to the market in combination with the increased interconnectedness could wreak havoc on the cryptocommunity (see the recent rumblings involving USDT as an example). Further and a pursuant step taken when tokens are not backed up with real assets, does collective ownership have some form of internal redress for damages? These represent only some of the questions needed to be answered for the tokenized asset to match expectations with reality.

Summary

Tokenized assets represent a business opportunity for investors and owners of real assets by increasing liquidity, diversifying risk, and ensuring transparency on the blockchain ledger. Although only in its infancy, tokenized asset projects have already started and are ongoing. Challenges will arise as the number of interested investors, owners, and crypto-enthusiasts increases in this emerging field.

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