In this Make Blockchain Work series, I discuss how blockchain technology could be best applied to financing and investment in nine chapters. It is from these reflections that we devised the world’s first marketplace for tokenized real-world assets, IdeaFeX. I prefer not to touch on ideological or debatable subjects, because a strong business model must be built on resources, including technologies, available now while thriving on agility to adapt to future developments. In this series, I will insert some of the posters that we have published on our social media platforms.
Flexibility is almost always desirable for businesses. In financing, the level of flexibility has been relatively low, with shares and bonds being the most common options. The flip side of the same coin, investment, is also limited as a result. While blockchain certainly is not panacea, it does provide a cost-effective option to boost the flexibility in financing and investment by offering functions similar, and sometimes superior, to existing alternatives.
The community involved in blockchain mostly agree that this technology is valuable in recording transactions with high degree of resistance to tampering. This quality has led many to develop payment systems that could work independently of existing banking infrastructure. While these efforts are promising, we also see that simply keeping the transaction records tamper-proof and easily-verifiable can be valuable for many assets beyond money. In a previous article on ICO, I also discussed Security Token Offering (STO). ICO and STO are existing forms that take advantage of this quality.
Compared to a traditional, centralized database, this allows assets “tokenized” on our exchange (and indeed elsewhere) to “live on” independently of our marketplace. For short-term trading, this quality is unimportant, and indeed trading on our marketplace will be off-chain and we will leverage state-of-the-art digital asset custody services for maximal security. Nevertheless, investors can freely withdraw their asset tokens for their own safe-keeping or on-chain transaction. The legal rights that these tokens grant are guaranteed by the token issuer or the custodian of the asset, thus allowing for intermediary-independent fulfillment.
A further quality provided by blockchain is the support of both fungible and nonfungible tokens. To us, the fungible type is more interesting. With this, we can fractionize an asset or re-fractionize a number of identical assets easily. Suppose the asset is a toll road, one can invest in a small part of it; alternatively, if the asset is crude oil, one can invest in any number, whole or otherwise, of barrels. Assets that are previously unsuitable for financing and investment may thereby become suitable.
Arguably, it is this fungibility that lead some to contend that all crypto assets are securities, that all crypto assets that are not widely-accepted means of payment are securities, or that all crypto assets that are not widely-accepted means of payment or fully-functional utility tokens are securities. The majority of jurisdictions around the world recognize that the nature of the underlying asset plays the key role in determining whether an asset is a security. This is a topic for another day.
Armed with these two qualities, we designed IdeaFeX to work with valuable assets that are frequently overlooked in financing and investment, but that would make attractive alternatives to existing options, thus expanding the degree of flexibility.
Primarily, we will support Exotic Assets and Product Futures. Exotic Assets are assets that are rent-generating. Usually, a custodian is needed to manage an exotic asset. Product Futures are assets that are physically delivered at a future date.
This constitutes a break with other tokenization projects that we are aware of, who tend to focus on a few assets that have non-blockchain alternative markets. Commercial real estate (a type of exotic asset) is perhaps a notable exception, even though the stages of financing that we plan to support seem to differ from other projects. It is a conscious decision on our part to make our marketplace about financing and investment, not purely asset trading. In a future chapter in this series (Chapter 3), I will explain why I keep mentioning “marketplace”, not “exchange”.
For an avid observer of recent developments in blockchain and/or crowdfunding, a question must arise: How do we ensure that the projects allowed on the IdeaFeX marketplace are legitimate? I will cover this in depth in a future chapter in this series (Chapter 8). It suffices to say for the moment that this is the point where centralization and third-party audit are essential. In other words, we are not so ambitious as to develop everything on blockchain; instead, as I mentioned in the opening, we look at the advantages of blockchain technology and leverage just that. If and when new technologies, including new blockchain technologies, arise, we will adopt them to improve our service continually.