Making A Case For Accessibility: Why Now Is A Pivotal Time For Mainstream Finance To Explore Tokenization
Throughout the years, digital infrastructures have served to boost accessibility, automation, and convenience across all kinds of commercial industries. Nowhere is this more apparent than the financial services sector. After all, consider the rise of online payments with the advent of PayPal to the vast array of mobile payment solutions — be it Venmo or AliPay — as well as online banking services offered by traditional players.
If we take a closer look, innovations across wealth creation avenues from the very first online stock trading platforms and brokerages have since evolved to the crypto market as we know it today. Rather than being limited to investing in equities which are set at a fixed price, digital assets allow for fractional purchases. For high-value cryptocurrencies such as bitcoin, this has ensured that newcomers to the crypto ecosystem can still experiment and participate in this new frontier of finance without having to put in tens of thousands of dollars.
With these financial principles in mind, a combination of these two processes has given rise to asset tokenisation — the process of representing physical or non-physical assets as blockchain-based digital tokens — leading to convergence of the worlds of traditional and emerging finance.
Streamlining investments
Irrespective of the application in question, blockchain offers core value propositions that are applicable across multiple scenarios and sectors: a smarter model of automation, transparency, as well as long-term cost-savings.
The traditional financial services sector is served by lengthy pipelines of middlemen and intermediaries handling a vast range of processes spanning know-your-customer, anti-money laundering, and compliance practices, administrative tasks, and validation activities. Within tokenised asset platforms, many of these processes can be further automated as smart contracts allow for the self-execution of transactions in accordance with pre-agreed metrics. This can easily be applied to KYC and AML verification, limiting access to vetted traders and investors. In turn, tokenisation offers a more scalable and efficient investment infrastructure.
Transparency, on the other hand, all boils down to the democratisation of access to information. Users have access to financial statements, relevant partnerships, transactions, as well as token issuance terms, entitling and enabling them to make informed decisions at their convenience. Backed by the underlying ledger’s immutability, investors also benefit from the assurance that each transaction is not only recorded but cannot be altered or erased — this significantly mitigates risks of fraud.
Most of all, tokenisation offers liquidity — both in terms of the breadth of market participants but also diversity in assets. Reflective of the inherently borderless nature of today’s digital economy, tokenisation eliminates geographical barriers — allowing anyone in the world, provided that they meet platform-specific requirements — to engage with these digitised representations for assets. More valuable, however, is tokenisation’s ability to mobilise a previously illiquid asset, allowing investors to engage in novel and emerging asset classes as we’re beginning to see today.
Fragmenting fixed assets
In spite of their high value, fixed assets often suffer from low liquidity due to slow trading volumes as well as the inability to ascribe to them a fair market value. From pre-IPO shares, real estate to even rare whisky casks, tokenisation has served as a much-needed form of extensible experimentation as market participants seek out new investment opportunities.
Historically-speaking, 2018 saw the first stirrings of tokenisation’s potential when crowdfunding platform Indiegogo played host to Aspen Coin, one of the earliest tokenised real estate offerings heavily regulated under the United States Securities and Exchange Commission’s Reg D 506(D). Limited to accredited investors who could undertake the economic risk of investing in unregistered securities, Aspen Coin sought to offer “fragmented equity ownership stake” in the St. Regis Aspen Resort. Months later, it would go on to become one of the industry’s more successful STOs as it raised US$18 million by October 2018.
Since then, institutional players have also explored the potential of tokenised assets, particularly in the realm of pre-IPO shares. In crypto-friendly jurisdictions such as Singapore, a vibrant group of players has emerged across the digitised securities space, all with the blessing of the country’s central bank — the Monetary Authority of Singapore (MAS). The MAS is renowned across the region for its Fintech Regulatory Sandbox which allows pioneering fintech players to freely experiment with new innovations in a live environment. One such notable graduate from the Sandbox includes Zilliqa-backed Hg Exchange which has established itself as a bonafide player in the country’s investment landscape.
Most recently, Singapore multinational banking giant DBS Bank made waves when it announced the launch of a full-service digital exchange, offering a holistic tokenisation, trading and custody ecosystem for institutional and accredited investors. The move was unprecedented, offering an even greater stamp of approval as one of Southeast Asia’s largest banking players embraces blockchain for the better.
Meanwhile, the ever-thriving luxury market has made initial forays into tokenisation. Catalysed by the 2018 auction of 49 percent of Andy Warhol’s ‘14 Small Electric Chairs’, democratising access to the art world was truly possible. Since then, other luxury collectibles such as vintage cars — which returned over 330 percent throughout the course of a decade — have joined a class of assets ripe for tokenisation. Driven by market demand, a luxury segment on the rise is rare whisky with a market value skyrocketing by 564 percent in the last decade. True enough, Hg Exchange recently announced that it would be listing Southeast Asia’s very first digital whisky-based asset-backed security (“ABS”) investment. Such high-value items have seen consistent growth in spite of market volatility and economic uncertainty with wealth creation having risen among the ultra-high net worth population segment over the past year.
Anticipating demand
Tokenisation has certainly come a long way since 2018 and in the last three years, meaningful developments on an institutional, commercial, as well as technological level only serve to signal its growing promise. With the opportunity to radically level the investment playing field, blockchain’s ever-increasing maturity serves to further bolster the technology’s legitimacy. Ultimately, players from all corners of the finance and technology sectors will need to work hand in hand, fostering cross-industry collaboration to solve the challenges ahead as they look to the next frontier in financial innovation.
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