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Tokenization of assets – transfer of rights to a traditional asset to a token on the blockchain



Tokenization of assets is a hotly debated topic in the crypto industry for the last two years. Tokenize offer everything: from stocks , to real estate and even art objects. Let us try to figure out what this is – a new way of making money or a step towards revolutionary changes in the market.

What is tokenization?

Tokenization – transfer of rights to a traditional asset to a token on the blockchain . Such a token is provided with a real asset and is tied to its value. It is assumed that this digital twin has the advantages of the blockchain (low cost, security, transparency, speed, no intermediaries), while maintaining the characteristics of a classic asset. This should attract investors who are scared away by the lack of control of the ICO.

Theoretically, any asset can be tokenized (although it is liquid, although not): stocks, debt instruments, derivatives, real estate, precious metals, art, or tenure rights. Most talk about the tokenization of securities, when blockchain technology is used instead of electronic records.

In fact, tokenization is securitization (financing assets through issuing securities), but on the blockchain. It should be cheaper and simpler than classical, but achieve the same effect.

The appearance of the first tools for tokenization

Tokens and steyblecoins linked to fiat currency (Tether), precious metals (MyGold, Digix, Orebits), gold (Goldmint, Vaultoro), shares of large companies based on marketplace (Blackmoon, Templum), real estate (Atlant), oil ( Petro), music and art (SingularDTV).

Special platforms also allow you to token your assets. For example, Polymath, BankEx, Harbor, Smartlands, Trusttoken, Securitize, Swarm.Fund, OpenFinance Network, Atomic Capital and LAToken crypto-exchange, Openfinance. But the main problem of such projects is more of them than the cases themselves.

In May 2018, the blockchain division of investment company Morgan Creek Capital announced the conversion of the company's paper shares into digital token assets. The Overstock Stock Exchange is also about to issue tZERO portfolio company tokens that will meet SEC requirements. Holders of these tokens will be able to receive quarterly dividends from tZERO profits.

In January 2019 , the licensed DX.Exchange cryptographic service was launched , allowing traders to buy tokenized shares of companies with NASDAQ and tokens for classic ETFs.

The advantages of tokenized assets for the financial market

The use of cryptocurrency in the real economy. To buy assets, you do not need to convert cryptocurrencies into fiat money .

  • Transition of trading capital into cryptoactives . Suppose an investor works with oil – perhaps it will be easier for him to do this by trading in oil tokens, which means introducing working capital into a stable cryptocurrency .
  • Increase liquidity . Tokenization of illiquid assets turns them into liquid ones (for example, real estate and art objects, where a transaction cycle may take several years).
  • Transparency . Thanks to the blockchain, the regulator will see any transaction, and smart contracts will be able to determine the pattern of revenue distribution or dividend payments, identify the identity of the buyer or the time of sale.
  • Trade without intermediaries . Blockchain can remove brokers, depositories, banks from the trading structure. Having bought such a token, the investor no longer depends on the stock exchange, depository or regulator: at any moment he can sell it himself. However, free sale can be limited by creating a platform for accredited investors – the main thing is that a broker-dealer is no longer needed.
  • Reduced commissions . The fewer intermediaries, the lower the commission.
  • Quick execution of the transaction . If there are no intermediaries, then all transactions take place through smart contracts, and traders receive the most timely information.
  • Free market, expanding the base of investors . Without strict regulation and standards, an investor can enter the market with any (even small) capital that can enter into transactions with any person from any country in any market.
  • The possibility of partial purchase of an asset . Expensive asset (for example, real estate) can be tokenized and divided into any number of inexpensive tokens available to any investor.

Is the market ready for tokenized assets?

The status of tokenized assets is not legally established, they are not reflected in the legislation at all. All that the organizers of tokenizing companies propose to rely on – entries in the blockchain and, at most, smart contracts. As long as it is not enshrined in law, all tokenized assets will remain ordinary tokens, and the law does not protect the rights of investors.

Tokenization requires new legal regulation, which would allocate such tokens to a special class of assets and fix investors' rights. In the meantime, the organizers (and regulators) either try to apply existing norms to them with respect to traditional financial instruments (then it’s not at all clear why they are needed, if everything works fine), or simply release them at their own peril and risk.

Tokenization of shares is not always justified. Low-liquid assets (for example, real estate and works of art) seem to be more suitable for tokenization than securities — the asset becomes more liquid due to the fragmentation of rights to it.

But the release of a token to a public share seems only a way to disperse the value of the asset and make money on it. It seems that buying tokens tied to stocks (or other assets) makes sense only if the investor does not want to exit cryptocurrency, but wants to reduce risks and invest in classic low-volatile assets.

The issuers do not guarantee anything: profit, return on investment, liquidity of tokenized assets. Moreover, most tokenized assets do not have any documentary evidence of collateral, and the platforms tokenize the shares of companies without the consent of shareholders.

Eliminating intermediaries and financial organizations from transactions can be considered beneficial for a crypto-community, but for an investor looking for guarantees, this is rather a minus than a plus. After all, part of the responsibility goes to buyers and sellers who can not guarantee anything.

Tokenized assets have no established market. Tokenized assets can be brought to the market cheaply and transparently, but who knows how he will behave? The issuer can not give any guarantees that the secondary market will develop or provide holders with liquidity of investments. It is not necessary that such assets will grow speculatively – for example, this did not happen with the same Bitcoin futures .

No infrastructure. Large-scale tokenization would require no less large-scale changes in the market infrastructure. For the system to work, you need to re-create the entire infrastructure: role management (users and administrators), asset lifecycle management (emission, taking out of circulation, etc.), security, integrate remote identification and access systems, integrate payment systems, commission management , limits, develop exchange modules, integration with other exchanges, applications, etc.

Smart contracts would be added, transparent real-time auditing would be possible with access to the results for all parties, as well as guaranteed data synchronization between bidders, fast transactions in a few seconds, the ability of any software to work with any trading platform. It is necessary to consider the procedure for registering such assets, their certification and licensing of blockchain platforms.

Many cryptobirds are not very interested in creating such an infrastructure and making additional commitments on KYC / AML: commissions from the sale of coins bring in more money.

It is not clear how tokenization will occur in real life. Most projects do not have a calculated (or non-transparent) business model: the amount of commissions, liability, the number of assets purchased.

Open questions :

  • who owns the rights to such assets (do you need permission of issuers of original assets),
  • how to pay taxes on them
  • who will manage a tokenized asset with a large number of owners (for example, real estate).

Existing tokenization projects deviate from direct answers to these questions.

The likelihood of a "bubble"

Separately, it should be borne in mind that the uncontrolled unlimited access of any person (unqualified investor) to the market brings not only the democratization of the market, but also threatens with another “bubble”.

With a free unregulated market, the "quality of investors" is sharply reduced: there is an influx of small, unhedged, insolvent retail investors. This usually leads not to an increase in liquidity, but to a decrease in the value of the asset. Such a bubble of low-quality liquidity, if inflated, will soon burst – after all, investors have no investment discipline.

A business is interested in tokenization not because it is profitable and convenient for small retail investors. And not because the existing trading system can not cope with their tasks. Against the backdrop of a protracted crypto market crisis and lower margins, tokenization for businesses is an opportunity to disperse the liquidity of a new asset and manage to make money on it until it falls.

Current situation

Tokens have undoubted advantages over traditional securities. Thanks to the blockchain token, no intermediaries are needed: depositories and stock exchanges. Due to its decentralized nature, as a derivative financial instrument, the token is even more secure. All this prompts major market players to look closely at the blockchain and test the technology.

But the development of tokenization is hampered by difficulties with regulation, infrastructure limitations, distrust of market participants, problems with the creation and registration of such assets, their management, and licensing of issuer platforms.

However, despite all the difficulties, it seems that the market is almost ready for tokenized assets. There are no principal obstacles to tokenization – it is only necessary to adapt the financial sphere and legislation. In the meantime, tokens are waiting for their assets, which will make them a full-fledged and legal financial instrument.

Publication date 03/22/2019
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