Asset Tokenization is Here to Stay
Today it’s an Andy Warhol piece. Tomorrow it could be pretty much anything.
In a recent auction, 49% of the ownership of an Andy Warhol piece was sold through crypto tokens through the platform for art fractional ownership.
The deal will be done through Maecenas, a platform in its beta stage that wants to tokenize art pieces into tradable securities that are accessible by anyone globally using their ART token, BTC or ETH. Using tokens to trade these “shares” effectively lowers the barrier to entry of investors globally as there are minimum investment requirements (unlike in a Fine Art Fund) and lower transaction costs (compared to management fees of up to 20–30%), as reported by Maecenas.
This is just one early example of how the tokenization of physical assets is here to stay. The basic idea behind it is that by dividing the ownership of an asset (like a painting, a house or virtually anything you can imagine) and selling it to a global market through tokens leads to greater liquidity and improved access from investors all around the world.
There are three key pieces to these new crypto securities that I want to analyze through the Andy Warhol example: the fractional ownership, the value of the art piece and the volatility of the asset.
From this Bloomberg article, we can see one of the most common critiques to asset tokenization:
“If history’s a guide, the risk and cost of owning a tiny part of an illiquid, hard-to-value asset still outweighs the rewards. And all that without ever getting to hang the picture on your wall.”
The way I see it, art is one of the few fields where it can be incredibly useful to own fractions of an art piece, instead of owning the whole thing, and the reason is that the value of the art piece is almost purely speculative. Let me explain.
An art piece, unlike a house, a boat, a company or other assets that need to be operated, does not require any maintenance or management (besides eventual restoration work) and no end users of the asset (like in real estate) that might affect the value of the piece while it’s held by the investor. Thus, increases in price of an art piece are then purely based on the expectation that someone else will pay more for the piece in the future, not on the way the asset is managed, operated or inhabited.
On the contrary, the operations and management of other assets such a house or a boat can greatly influence their market value. One of my intuitions about these fractionally owned assets is that the governance dynamics will be incredibly complex: if you have a house that is owned by 20,000 fractional owners living all over the world, the maintenance and operational running of the house becomes much trickier. If these assets are not managed well, their price will decrease over time, so this could actually have an adverse effect on market value.
If that’s the case, the much-advertised “liquidity premium” (a premium of the asset market value based on the ability to trade fractions of the asset instantly), worshipped by tokenization gurus all over could in fact turn into a “governance discount”. The solutions to this problem will likely involve different responsibilities for different token classes, but art pieces won’t be in that conversation, given their value is purely speculative to begin with.
VALUE OF THE ART PIECE
Again, let’s look at a quote from the same article:
“Do punters know the difference between this “Electric chairs” canvas, which the gallery says has been valued at 4.2 million pounds ($5.6 million), and others by the same artist?”
Easy answer, nope! But this is by no means new to the space of traditional art investments. Can Mohammed bin Salman tell the difference between the original Salvatore Mundi and the copies by Leonardo’s students? I’d happily bet that he can’t, yet he paid 4,500x the price paid for the piece a few years before, previous to the discovery that Leonardo was the real author of the piece.
Beyond the ethics of all of this, does it matter at all? Clearly the purchase of assets like art responds to a speculative expectation that its price will rise in the future (and it has, historically), and the “trophy asset” status that these have. So based on these dynamics, investors will continue to invest in art, even if they cannot tell the difference between one piece or another. It would be rather naive to believe that investors at some point did, even if it was a traditional auction.
Volatility has been a worry for the players in the tokenization space for a while, and thus the increased use of stablecoins as a unit of account for these transactions. The reason is this: when you buy a token in the Andy Warhol piece, you usually don’t buy it right away with your ETH or BTC. Most of these platforms want to become thriving platforms for these investment opportunities, so they use a platform-specific stable coin to invest across the different opportunities in their platform, each of which has their own individual token. So you buy their platform token (which doesn’t fluctuate in value), and then you buy the asset token. An example of this is TrustToken, who recently launched the TrueUSD token at a 1:1 parity to the USD.
Overall, we are seeing a boom in the number of organizations that are exploring this space. This new application of blockchain technology has caught the attention of many traditional investors and large financial players, who were not interested in previous crypto opportunities. But many new challenges to maintain these securities stable will arise, as I have mentioned with the “management discount” or the volatility issue.
While there is a clear designation as for which agencies and institutions will regulate these securities (such as the SEC in the US), which was not the case with previous utility tokens that were much more difficult to categorize, we will soon find ourselves tokenizing nearly anything you can think of. Tokenization will work better with some of these assets than with others, and I suspect a big part of it will have to do with the operation of the underlying assets themselves.
This will bring about a number of new regulatory challenges. If nearly anything is tradable in public markets, the ability of the daily consumer to affect the price of the underlying tokenized assets could be very important, which should bring about new regulation to ensure that the prices are not distorted by parties with intrinsic interests in the asset prices. Imagine a “CoffeeCoin” token where Starbucks can dictate the asset price artificially at their will given their influence over the coffee value chains.
While I don’t think in the long term the liquidity premium will be of the magnitude that is thought of today (given the asset governance issues I referred to earlier), I realize the nature of many of these assets makes them a very good fit for tokenization, especially when in the short term there will be a lot of liquidity for the first assets to be sold in these platforms. Tokenization might very well affect the way we think about liquidity markets, so it’s something to keep an eye on. Let’s wait and see what the rest of 2018 brings.