Tokenization — the future of investment or just another fad?
From ICOs to STOs?
When we think about blockchain or cryptocurrency, we automatically think of the token sales and ICOs which made headlines in 2017. It was the year of utility tokens, with ICOs generating over $6 billion according to icodata.io.
In 2018, however, the cracks began to emerge. One of the problems of pure utility tokens is that they are sold on the basis that they will provide future access to a digital service when a project reaches maturity. This means that in effect, the value of a utility token is linked to a digital service on a platform that doesn’t yet exist. As you can’t see or use the service yet, this makes it extremely difficult to accurately estimate its value.
This was compounded by the fact that most ICOs were unregulated, which coupled with the whirlwind of hype and speculation surrounding cryptocurrency, led to countless scams and fraudulent activity. With the onset of crypto winter, the blockchain sector began to reassess its business model.
In 2018, many firms started launching security token offerings (STOs) rather than ICOs.
In contrast to ICOs, STOs are regulated in the same way as financial securities, which obligates the token issuer to register with the local financial regulator and publish a legally binding investor prospectus.
In addition, the underlying value of a security token is directly linked either to a physical asset — such as a piece of real estate, for example — or the revenue of the firm. This makes it far easier to assess the true value of the token. As a result, security tokens are perceived to be less of a risk, which may encourage institutional investors to reappraise the sector and get involved.
Tokenization: the big picture
A tokenized asset is fundamentally different to a virtual currency. Tokenization provides a way to store and manage assets digitally. By purchasing tokens, an investor gains the right to benefit from the future profitability of an asset.
So let’s say you purchase security tokens in a building in London. If the value increases by 15% by the time the building is resold, the tokens would allow you to share in the profit. Alternatively, you may be able to trade the tokens peer-to-peer on a secondary market in order to cash out earlier.
The main advantage of tokenization is that it enables fractional ownership of assets, thus lowering the minimum stake required to invest. This means that you can invest in a building or artwork, for example, without needing to purchase it outright. While this was possible before, it involved far more bureaucracy and intermediaries and all of these middlemen made the market less efficient and cut into investment yields. That’s why several blockchain start-ups are now working on ways to tokenize digital and physical assets such as precious metals, real estate, fine art, commodities, and more.
2019 — The year of asset tokenization?
Writing in Forbes, Rohit Kulkarni contends that the tokenization of non-liquid assets “is likely to be one of the biggest stories of 2019 and beyond.” Although the opportunities presented by tokenization are indeed promising, however, the reality is a little more complicated. Government legislation will be crucial in some territories: in the case of real estate, for example, asset tokenization has no legal recognition in several countries.
So is tokenization really the future of investment? It certainly has some noteworthy advantages over ICOs: while the ICO bubble was primarily driven by the speculative investments of laypeople, large corporations and institutional investors have already shown an interest in asset tokenization. In combination with a sound regulatory foundation, this should provide STO token markets with a greater degree of stability. Although the regulatory part of the equation could take a few years to come to fruition, asset tokenization is likely to play a significant role in the management and trade of non-liquid assets in the long term.
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