Tokenization & Securitization: Fundamentally Different or Practically the Same? (Part II)
In the previous article, we have highlighted that the concept of asset tokenization bears similarities to the process of securitization. As we recall, the financial crisis of 2008 sprung from the ideal of democratizing the market, but what really happened was the backfire of selling trillions of dollars of collateralized mortgage loans that were completely divorced from the loans’ underlying risk profile. Let us examine the process of asset-backed securitization and identify inefficiencies that impede the realization of a “liberal” market.
The Securitization Life-cycle
The securitization life cycle begins with originating and underwriting loans, similar to traditional bank lending. An issuer or originator pools together many loans and adds a securitization structure by placing them in a bankruptcy-remote trust or special purpose vehicle (SPV). The structure is legally insulated from the management and reviewed by an auditing firm who in turn provides a pool audit letter and an agreed-upon procedures letter covering the pool statistics. Rating agency may review the securities’ credit-worthiness, whereas the underwriter prepares an offering document and brings the securities to market. SPV issues debt and divide up the benefits and risks among investors on a pro-rata basis. The simplified process is illustrated in the diagram below.
While loan origination and securitization have rebounded since the financial crisis of 2008, many inefficiencies persist throughout the securitization life cycle, including time lags, high processing costs, and opacity. In all asset classes, basic loan contractual data, such as contractual terms, credit profile and collateral information, is rarely standardized. Moreover, most of the work is still done on paper, even among the most tech-savvy, leaving a long paper trail. In addition, different record format increases the difficulty of access or reconciliation, and raises the likelihood of inconsistencies among various parties involved in the securitization process. These inefficiencies naturally limit the extent of automation possible in securitization.
That said, however, some securitization transactions, in which investor reporting and the generation of wire transfer instructions are coded based on the interpretation of the underlying documents, exhibit signs of having already taken an important step in the direction of smart contracts, though these transactions are not yet processed on a blockchain platform.
Will tokenization fare differently considering it champions similar ideals? How is tokenization different from securitization?
This is where blockchain comes into the picture. Blockchain technology is the key difference between tokenization and securitization. Although presently in the embryonic stage, the nascent technology has immense potential to alleviate these encumbrances and inefficiencies in the industry. Blockchain technology champions peer-to-peer trusted transfer that could not only reinvent the securitization life-cycle, but offer a more viable alternative, i.e. tokenization.
The Evolution of Tokenization
In the field of data security, tokenization initially refers to the process of substituting a sensitive data element with a non-sensitive equivalent, known as a token. However, a token by itself does not carry any extrinsic or tradable value. It is merely an identifier that points back to the sensitive data through a tokenization system.
However with the advent of blockchain and cryptocurrencies, tokenization takes on an extra layer of meaning. It is remodeled into a financial instrument with the intention to increase tradability of an otherwise illiquid asset. Asset tokenization, as we presented in Part I, is a process that converts assets, including fiat currencies, commodities, real estate, and art and collectibles, into digital tokens on a blockchain platform. It has the potential to become a gateway to a completely liquid world, where anything and everything imaginable can be traded in the most efficient ways.
But What’s the Catch?
The implementation of blockchain technology is not without its problems. The potential risks broadly fall under three categories:
- Data security and privacy: with so much information on the same platform, a cyber attack may render everything at risk, and become systematically devastating. Privacy issues may also arise since the distributed structure of blockchain shares and stores data on multiple nodes.
- Lack of technical reliability: being a nascent technology, it is inevitable that many smart contracts and other blockchain applications have not yet reached a level of bullet-proof sophistication.
- Legal and regulatory uncertainty: regulators, starting with SEC, are still in the process of reconsidering the presence of regulatory bodies on blockchain, and how to integrate blockchain into regulatory reporting.
A Possible Solution?
The Konrad platform, a multi-asset tokenization platform, is built on the Ethereum public chain and its infrastructure at present is based on three pillars of asset tokenization, namely raw material asset providers, the medium of exchange (Konrad platform) and the financial and regulatory institutions.In the future, Konrad will initiate further smart upgrades involving the building of a smart contract library through the consolidation of smart contract templates across all three sections. This is an attempt to provide a comprehensive library of reliable smart contracts to support various on-chain services.
When it comes to regulatory policies present in the world, Konrad has built an information sharing incentive mechanism — Konrad’s legal compliance DAO. Konrad’s legal compliance DAO is designed to cater to the legal minds from all over the world, and to solve the issue of legislation disparities among different countries.
To find out more about Konrad, check out its socials at:
Bitcointalk: https://bitcointalk.org/index.php?topic=5148889.0
Facebook: https://www.facebook.com/KonradPlatform/
Medium: https://medium.com/@konradholdings/
Reddit: https://www.reddit.com/r/Konrad_Official/
Telegram: https://t.me/konrad_En
Twitter: https://twitter.com/KonradHolding
Website: https://www.konrad.holdings/
Weibo: https://www.weibo.com/7041318945/profile?topnav=1&wvr=6&is_all=1
