With the word “tokenised” being present in the title, most likely some readers thought that this is another think piece on blockchain and how it’s going to inevitably disrupt every industry as it was widely mentioned in 2017 during the “bull” market. I won’t lie – the blockchain will be mentioned. But not in the way you heard before.
To begin with, let’s take a look at the traditional and professional investment world. This is a private club that has its own language, plays by its own rules and is generally quite an old school. Although the world of big money really does not welcome change, we know that nothing is eternal.
A Preamble
Due to the fourth industrial revolution, today, retailers are armed with big data, while technology manufacturers are getting crafty with the Internet of things. At the same time, the investment sector is searching for the most convenient form of communication between those who are looking to raise capital and those who are willing to invest, whether these are specialised applications, crowdfunding or venture capital. This list also contains the distributed ledger technologies (DLT), particularly blockchain.
According to Deloitte, we shouldn’t view DLT as just a new type of “database ” but rather as a new way to organise the security value chain from issuance to custody. But what exactly can be transmitted through this chain?
My answer for 2020 is security tokens or, in simple terms, a digital representation of an irrefutable right to a physical share in an asset. That right is built-in to a smart contract along with the appropriate legal framework. Essentially, a security token is a digital signature that issuance platforms use to automate compliance, let both investors and asset managers/owners know that a certain amount of value is changing hands, and settle transactions for both parties. Just like with traditional securities, investors have voting rights; they can receive dividends or profits, or trade on a secondary market.
So here are five reasons investors should turn their attention to this new emerging type of alternative investing.
Fractional ownership - take as much as you want
Digitising shares makes them highly divisible, meaning that investors can buy very small percentages of tokenised assets. For example, one square meter in a multi-million building. The dramatically reduced buy-in threshold breaks the barriers for billions of retail investors’ cash to flow into the market.
A good example is real estate investments. While in the analogue world an individual would need a substantial amount of money to buy a share in a property, in the digital and tokenised realm, one can become a landlord with 500 pounds in the pocket.
So long, intermediaries!
Security tokens have a simpler investment structure and lower fees. Traditionally, investment is associated with a large number of intermediaries - banks, currency exchangers, attorneys, brokers, etc. In this chain, each of them performs its function and cannot be simply removed. But this is only the tip of the iceberg.
The great number of middlemen, who ensure ownership rights transfer occurs smoothly and legally, means the vast amount of fees, which grows in proportion to the investment. In the case of asset tokenisation, the technology removes most of these guys from the playing field. The project has documentation, transparency and a clear mechanism of interaction between the investor and the project. That is, only two participants left.
On the way to maximum liquidity
Putting investment process on the blockchain creates a low-friction environment: automated transfer of ownership while staying compliant, reduced costs and complexity, possibility to invest with fiat money or cryptocurrency, P2P trading on regulated exchanges - all of these contribute to greater liquidity. Even traditionally illiquid asset classes, like real estate, will be at our fingertips, ready to be traded 24/7 on a moment’s notice thanks to blockchain.
This is similar to how e-commerce once completely disrupted brick-and-mortar businesses. Just like customers can shop 24/7/365, it will be possible to trade digital securities anytime, from anywhere in the world.
Legal protection
In addition to everything mentioned before, there is a regulated legal framework for security tokens. Europe is one of the friendliest places when it comes to running compliant STOs (Security Token Offering). For example, the Financial Conduct Authority in the UK issued crypto classification guidance where security tokens were defined as shares or debt instruments and included ownership rights.
Indeed, the industry is very young, but the infrastructure is developing seven leagues at a stride, with the appearance of regulated security token issuance platforms, compliant exchanges and custodians. With this pace and potential STOs might soon become serious competition for IPOs - they are cheaper and faster to do, have a broader fundraising base still providing a high level of legal protection for investors.
Cherry on top
A security token is basically a digital signature connected with a smart contract responsible for facilitation and verification of ownership rights transactions. Just like any software, it can be encoded with some additional features besides what was originally laid down in the structure of the project - a loyalty program, an opportunity to influence the development of the project through plain-old governance mechanisms such as shareholders voting or additional bonus dividends for the accumulation of assets. Projects can attract additional investors and incentivise them. At the same time, everything is automated, and the operating team and customers don’t have to worry about legislation compliance, verification, AML, infrastructure support, etc. This is an additional perk that security tokens have compared to traditional securities.
In conclusion, asset tokenisation is not a different type of investing; we’re talking about adding value to any investment project. Digital securities can shape the future of investing and finance, democratise access to wealth and break the barriers to higher-yield investments. While the infrastructure of security tokens is gaining momentum, the pioneers can get first-mover advantage. After all, the early bird does get the worm.
About the author
Ilia Obraztsov is an experienced startup CTO specialising in cloud solutions, storage design, fault-tolerant and high-load systems, security, event-driven architectures, distributed and scalable apps, blockchain/smart-contract/DL. Ilia has rapidly moved through the ranks of the IT sector growing from a backend engineer in a Russia-based machine learning company to being a CTO of multiple California-based fintech startups. He is now VP of Technology at Smartlands, a blockchain-based platform for crowdfunding investment.