The Unseen Potential of Asset Tokenization and Security Tokens
We are confident that blockchain and cryptocurrency are here to stay. That being said, the glory days of ICO has passed, and the cryptocurrency market is going through a sanitation period whereby many utility tokens will phase out. However, we remain bullish on asset-backed tokens, and security tokens, tokens with real fundamental value have high potentials to be the next big wave of internet finance.
Improving Traditional Finance
Many financial intermediaries or so-called “middleman” that exists today is to create trusts between counterparts in business transactions. Trust in financial services is essential to facilitate transactions and for marketplaces to operate. However, these financial intermediaries are human labor intensive, and it often leads to significant inefficiency in the financial market.
By tokenizing real-world assets and securities on the blockchain, many features that previously require human labor to execute can now be programmed and automated through smart contracts. Smart contracts can fully automate much of the service provider function through the blockchain and remove the intermediaries from investment transactions, resulting in lower fees and enhanced efficiency by shortening deal execution time. From a traditional financial service perspective, turning traditional securites into a programmable asset can be a powerful toolkit to attract different types of capital as certain features can be programmed into a smart contract only to accept a specific group of buyers.
Blockchain technology enables the tokenization of illiquid assets, such as real estate and fine art. Hong Kong has the world’s most expensive office space. With this said, the number of organizations that can afford the trading and investments of real estates in Hong Kong is minimal. Security tokens allow for fractional ownership of any assets, meaning that assets can be broken into fractional pieces, opening up for a much bigger pool of buyers. Once an asset is tokenized, it can be divided into portions that anyone can afford and it can be traded freely on exchanges. The same goes for fine art and other asset classes previously reserved for the wealthy.
Fractional ownership, cheaper fees, global access to multiple asset classes are all potential benefits of asset-backed tokens and security tokens. Ultimately, these benefits all translate to more participation in the market, improving the liquidity of the asset classes. Liquidity is not only appreciated by traders but also the asset owners or the issuers as it will bring adoption to the asset class. Offering a liquidity channel to investors in alternative illiquid assets will also create markets where markets did not previously exist.
The current securities regulatory framework may be rigid, but most of these regulatory frameworks are robust, well-tested precedents and have existed for many years through continuous developments. For the mass adoption of tokenized assets to happen, the use of smart contracts and the blockchain technology have to abide by some of the existing frameworks, so there will be a catch up for asset-backed tokens and security tokens from the regulation and legal perspective.
Disclaimer: The contents of this article are for reference only and do not constitute any investment advice or solicitation. Please do not rely on this document for investment decisions. Investment involves risks. The authors have tried to ensure the accuracy and reliability of the information provided, including the data, but it does not mean that such information can be used as a guide for investors. Any inaccuracies or omissions in the information will cause any loss to investors. Or damage, no liability is assumed.
