Tokenization is Securitization

Modern tools in banking and insurance

Julien Brissonneau
Ledger Investing
7 min readJun 12, 2021


Tokens are here

The foreign exchange market has existed since nations began minting currencies. It is the largest and most liquid market in the world with $6+ Trillion of fiat currencies being traded daily. In comparison, cryptocurrency markets have much smaller daily volumes. To date, the total market cap for crypto is only ~$2 Trillion. However, the late crypto growth is significant, and tokenization of assets has started disrupting entire financial industry segments.

The tokenization of assets refers to the process of issuing a token that represents(sometimes digitally) a real tradable asset. Almost anything can be tokenized, from startup ideas to buildings. It is similar to the traditional process of securitization (sometimes with a modern twist from blockchains). Currencies are examples of tokens, sometimes pegged to a commodity such as gold, often backed by government rules. Technological innovations fuel the growth and widespread adoption of both fungible and non-fungible token systems. Let’s discuss a specific transformation of global financial services: commoditization of capital and the decoupling of reserve risk-management from services in banking and insurance.

Doge moving fast

Decentralization: finance vs operations

Decentralized finance is old and might be the least appealing side of blockchains. The long history of banking started at least 4000 years ago with multiple merchants offering loans. Multiple offers from independent banks naturally compete with the growth of highly inefficient financial monopolies. In 2020, there were 5,000+ commercial banks and savings institutions in the U.S. with insured deposits (source FDIC report). Throughout most of history, financial services have been decentralized with every merchant, family, government, supplier, etc… in a position to offer loans and IOUs in one form or another. Most of the US current centralized scoring, reporting, and regulations of credit are actually “modern” things from the 20th century.
Fully decentralized operations, however, are new and are what makes crypto eco-systems so robust. Headless networks prevent the easy enforcement of laws against private currencies. Instead of painfully fighting them, regulators accept crypto tokens as property/assets. To an extent, blockchain’s massive adoption has kicked off a new Free Banking Era, and once again, in practice, almost anyone can mint coins in the form of digital token issuance.

A private $1 note, issued by the “Delaware Bridge Company” of New Jersey 1836–1841. In the United States, the Free Banking Era lasted between 1837 and 1866, when almost anyone could issue paper money. Source
Non-Crypto attempts to create private currencies are limited and heavily regulated. Video games, streaming services, stores, and credit cards all offer access to their own (regulated) token ecosystems.

Reserving until now

Commercial banks worldwide practice fractional reserve banking. Banks accept deposits from customers and make loans to borrowers while holding in reserve an amount equal to a fraction of the bank’s deposit liabilities. It is often held that banks, therefore, have the privilege to create money. In a legal sense, this is not true. But banks do have legal privileges that enable them to issue debt instruments that are used as money.
The vast majority of fiat money is created by commercial lending. Financial Times economist, Martin Wolf, describes it this way: banking is not a normal market activity because it provides 2 linked public goods: money and financial services.

“On one side of banks’ balance sheets lie risky assets; on the other lie liabilities the public thinks safe. This is why central banks act as lenders of last resort and governments provide deposit insurance and equity injections. It is also why banking is heavily regulated.”

We could add similarly that insurance is not normal market activity.
Insurance companies provide 2 distinct public goods: coverage and insurance services.

Both bank’s “money” and insurance’s “coverage” are intangible promises acknowledged by the distribution of tangible tokens such as checking accounts’ unique address for “electronic cash” and insurance policies’ unique IDs pointing to specific terms of coverage.

Financial companies’ focus

Considering fractional reserving, the accepted fungibility of money and coverage is remarkable. For example, when Citibank and Wells Fargo issue loans in USD, their clients recognize credited checking accounts with liquid, fungible USD. They are not “Citibank dollars” and “Wells Fargo dollars”. Similarly, when shopping for insurance, retail buyers do not question the solvency of their insurance quotes, but instead, focus on comparing price, convenience, and coverage. This works because “reserving risk” is an investor thing, almost invisible to end consumers. In both banking and insurance, leverage on reserves is efficient/profitable for companies and their shareholders. Uncertainty in the estimation of the required reserve is a risk almost exclusively for investors. In large part because in the US, consumers can be protected from this risk by federal and state governments:

  • In banking, deposit insurance is provided by FDIC insurance.
  • In insurance, protection is provided by the state’s guarantee funds

The leverage on reserves generates income that complements other incomes from providing pure services for banks and insurance companies. Large balance sheets with reserve risk management are the reason why a significant amount of resources in banking and insurance is dedicated to managing capital and other non-customer-facing, risk-warehousing activities.

Technology empowers servicing without reserving

Banking pure service
The fintech champions today are staying away from large balance sheets and reserving games in favor of transparent services as pass-through intermediaries. A new generation of reserveless technology companies is indeed reinventing the retail finance space. Offers by established banks are complemented by newcomers doing pure payment services. The growth rate of apps such as Venmo or Zelle is staggering. For illustration, here are some of Venmo’s usage statistics as of May 2021. PayPal, the owner of Venmo, is not a bank and as such does not have the licenses to do fractional reserving. PayPal would most likely focus on becoming an Alipay -style “super app” instead of becoming a bank and abiding by banking standards and regulations.

Insurance pure service
Similarly, insurers today increasingly rely on agents and more specifically, Managing General Agents (MGAs) to provide pure insurance services including underwriting. Not only are established risk carriers turning to MGAs to handle a growing proportion of services but many insurance tech startups are choosing to launch themselves as MGAs. Likewise, SaaS and HaaS startups often sell to MGAs directly. The “rocketing skyward” growth of MGAs’ role in the industry is prompting AM Best to evaluate MGAs directly.

Crypto’s “pure” services
Within crypto ecosystems, the rise of pure financial service without reserve risk management is even more obvious. Currencies like Bitcoin offer a practical implementation of the full-reserve banking mechanics. Users of crypto-wallets fully own their tokens. Empowered users can use 3rd parties to help manage their funds, facilitate payments and compliance but often without fractional reserving on tokens. As an example, the Coinbase deposits policy is a great illustration. Sometimes, crypto-owners will accept better services and return from 3rd parties who may practice fractional reserve. In any case, the tradeoff for better services vs reserving risk is clear. Rephrased: with crypto, cash and imitation of cash are distinct and compete freely. For example, unlike Coinbase, Robinhood does not offer a digital wallet yet, but an imitation of crypto cash.
Many crypto wallet owners want banking services operating without risk warehousing. Reserveless banking apps simply offer glorified wallets: simple UI/UX for transfers, compliance work such as KYC/AML, help with tax documents, and a phone number for questions. Venmo for example now does crypto as well.

Modern financing and insurance

“Pure service” apps enable profitable, tech-powered, high-growth businesses. Liberated from the burden of capital, businesses and their apps can focus on creating user-centered solutions. Among other things, less capital management and more “pure service” implies:
- Capacity to grow: reduced time and resources to accept new business
- Lower costs of on-demand capital, more profitable operations
- Unconstrained new upgrades, scalability, and integration with other services
- Ease to experiment with new products, test release proofs-of-concept.

Efficient service providers help the end-consumers allocate resources: shop for coverage and move their money.

In other words, resources like money and coverage are treated more like commodities. This phenomenon is sometimes referred to as “commoditization of capital”:

  • Commoditization is the process of converting products or services into standardized, marketable objects.
  • This process tends to strip away unique or identifying qualities of the commodity in favor of identical, lower-cost items that can be interchanged with one another.
  • Some financial products have already been commoditized, for instance, pooled investment products.
Financial institutions are not doomed to be mysterious monoliths

Our startup

Ledger Investing is our startup, and we are building a marketplace for insurance securities/tokens. These securities are attractive to outside investors looking to gain access to pure insurance risk. They also result in a lower cost of coverage for insurers and MGAs.

We have the expertise in insurance, capital markets, data science, software, and legal matters to help investors understand the insurance risk they’re buying.

Freed from their capital burden, insurers have room to grow and become more efficient information processing companies. This enables more capacity to provide insurance-as-a-service and win-win-win situations for investors, insurers, and their clients.

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