The Benefits of Digitizing Financial Assets
The global market for financial assets is around $294 trillion. Although exchanges have largely done away with physical paper by substituting electronic transactions, most of these assets are still signified on paper. In the 21st century, that’s like taking a buggy ride on a six-lane highway.
The overhead associated with paper systems is enormous, and they generally rely on centralized, trusted parties stuck up in tall buildings receiving generous salaries and benefits. The primary benefit of blockchain technology is that it eliminates the need for these middlemen. Aside from its other features, the bypassing of intermediaries already makes blockchain processes much faster and cheaper.
Blockchain start-ups and major financial companies around the world are now racing to develop systems for the next phase of this evolution: digital assets. Last year, this didn’t even exist; this year it’s emerging as the next crypto super trend. The best minds in blockchain are trying to figure out how to move real-world assets onto blockchains to gain the advantages of cryptocurrencies, while keeping the characteristics of the asset.
There are a bunch of reason why people are so excited about digital assets, but I can sum them up in terms of three fundamental benefits.
1. Unlimited potential
The number one reason there’s such a great interest from financial intermediaries and technologists around the world is that digital assets unlimited potential for digital assets. Real world assets are roughly 1,000 times the size of cryptocurrency markets. Most of these assets are still illiquid with high overhead. The digitalization of assets enhances trading of assets that otherwise would not be actively traded due to low liquidity.
2. Fractional ownership
Another reason for asset digitalization is that it enables new economic models of asset ownership, such as fractional ownership. Investors can own a certain percentage of an asset, which means users can purchase a more affordable piece rather than an expensive whole. Fractional ownership allows for better diversification of risk, due to the ability to invest smaller amounts in each asset. This will allow new markets to develop as people who have little disposable income are able to make micro investments and benefit from greater inclusion in our modern economy through the magic of divisibility. As a result, our ability to trade real-world assets that are currently illiquid should increase by an order of magnitude. New markets will emerge for under-utilised and illiquid assets that were previously inaccessible, such as diamond mines and carbon offsets.
3. Increase in cross-border trade
The third benefit behind digitalization is the substantial increase in cross-border trade. Blockchain is a borderless, decentralized ledger which spans across the entire globe, and anyone has access to it. Rather than using intermediaries, trust is ensured on the network by mathematics and cryptographic protocol. Because the blockchain is a peer-to-peer network, transactions flow directly between parties, which means these transactions normally take place within seconds and at negligible cost. And the traders may inherit the earth, something I am very ambivalent about.
Ever changing world
Heraclitus once said that the only thing that is constant is change. The world is always changing, and changing at an ever-increasing rate. Recognizing this, there are two ways to function: either you can change incrementally, little-by-little, or you can change radically. Digitalization has the power to radically change and improve existing financial assets. Blockchain will democratize asset ownership and replace costly and unproductive intermediaries. While the technology is still in the nascent stage and it is very likely that it will take years to develop and reinforce trust, our economic system is inevitably changing. It’s up to you whether you take advantage of these changes now or in the future.