Liquidizing the illiquid with blockchain
And why you should care about this.
It’s 5 pm, end of your working day. You’re walking out of your office building into the garage to step in your car. You’re driving your way home, while crossing a few windmills they built a few months ago. Nothing noticeable right? Well, within this small time that has passed you’ve came along a lot of illiquid assets. So, why am I pointing that out — you may ask. It’s because there’s a lot of money locked up in these assets. Money we cannot access, while it is actually (y)ours. That’s not new, I realize. But what if there would be a way in which we now can liquidize the illiquid. Sounds interesting? That’s what I thought. There might be a solution already out there.
Working in the pension industry, pension funds tend to invest a lot in illiquid assets while they often have a long lifespan and are rather stable. This matches the characteristics of pensions. However, they require a very high % interest because these assets are not so easily convertible into cash (=liquidity). It often takes years to accrue value. Furthermore, they cannot be bought and sold with ease. This is not really a problem in itself, for pension funds it very well applies. What it is a problem for, however, is assets that are illiquid and simultaneously do not have a high % return — You could say simply not to invest in them, but I’d argue these kind of illiquid assets are the ones that actually grow the wealth of the individual.
Let me give an example of this.
Take a house.
There’s a significant number of people that have fully paid their mortgage on their house, but stay living there till they decease. The house passes on to their children. This was no problem in previous days when pensions were still enough to live of, but in the future that might be a different case. We might very well see people living in a big house, while having to eat toast and eventually deceasing with a big value locked up in their house. To ‘solve’ this, we hear more and more about reverse mortgages. Why this doesn’t take off is, among other reasons, because the % return is too low in comparison to how illiquid the house is. The only parties that could take on this market are big insurers or funds, but for them it’s just not feasible. For individuals there (was) is simply no way to fund this.
Another example. Take a windmill.
Part of the reason (next to NIMBY), we don’t see green initiatives more than we want, is a lack of funding. This is not because there is no positive business case (cause there is), but because it’s very hard to acquire a windmill being an individual. It would give the individual more % return than their bank account does. However, investing in windmills is only in the hands of big funds and insurers. And here again, for which the % return is too low in comparison to the liquidity it offers.
So, summarizing, there are a lot of illiquid assets around us which are not available for the individual to benefit from, whereas there is great potential. Luckily I don’t have to end the article here with a ‘wish’, but there might actually be a solution to make these assets available to the consumer:
Tokenize illiquid assets.
Tokenizing doesn’t mean much more than breaking an illiquid asset up in pieces. Genious? Yes, but of course people thought of this before. However, the transaction costs for an individual to find and trust a group of enough people to together invest in an illiquid assets was too high. Therefore this wasn’t the solution. But hold on.
Using blockchain technlogy, the trust factor is overcome by registering fractional ownership in a transparent and auditable way. Then it just comes down to finding enough people to do so, to actually make tokenizing live up to the promise to make illiquid assets liquid. Because without a critical mass, achieving liquidity is impossible. Using a blockchain enabled dashboard, it however doesn’t matter anymore with whom you link up since you can trust that they’ll pay the same amount. Finding this critical mass therefore becomes a lot easier. While the dashboard will grow in size, so will grow the amount of assets that can be made liquid.
So what’s holding us back from building this? It’s not the technology. Myself, I’m working with a team on building the platform to achieve this: NestEgg. However, regulation is mostly holding back from doing this on a bigger scale. Fractional ownership needs to be acknowledged and promoted by larger institutions. Only then, we can liquidize the illiquid to get the most value out of the assets we own and use, for everyone!
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