Cadenza Chronicle

The process of tokenization, that is, digitizing and storing the rights to a physical asset on the blockchain, is transforming capital markets.

But it isn’t just the hundreds of trillions in financial assets that tokenization is shaking up. It will also fundamentally change the way we invest.

A New Financial System

So you want to buy a Van Gogh painting or a Mickey Mantle baseball card but don’t have seven or eight figures in liquid cash laying around?

No problem, because tokenization makes the once impossible, possible.

Last year, two digital versions of Dutch artist Vincent van Gogh’s paintings were sold for more than $2.5 million combined. No surprise here.

However, the big difference is that the digitized, on-chain paintings could have been sold to hundreds or even thousands of individual buyers via secured, fractional tokens.

That’s right, for little more than the price of a Starbucks Macchiato Latte, you could own a share of a prized Van Gogh painting or a rare baseball card or any number of other valuable assets that were previously out of reach.

Besides creating a new financial system, which hasn’t been done in more than half a century since the USD went off the gold standard, the potential benefits of this innovation are vast.

Democratization of Finance

The term “Democratizing Finance” has been bandied around a lot in the past.

Sometimes for things as inconsequential as life insurance policies and new credit products.

But technology and more specifically tokenization, is in the early stages of finally delivering on this long-held, often misapplied promise.

As of Q4 2023, some $3 billion in assets have already been tokenized.

A drop in the bucket compared to the quadrillion plus in global financial assets. But, you have to start somewhere and by 2030, $16 trillion in real world assets are forecast to be tokenized.

This isn’t just opening up access to previously illiquid, private assets such as art and collectibles, it is also creating new and more efficient markets.

Faster And Cheaper Transactions

The percentage of Americans who own stock directly, meaning not through a company pension plan or a 401(k), currently sits at around 21%.

Although this figure is a high watermark compared to previous years thanks to the proliferation of popular stock-trading apps such as Robinhood, it could and should be greater.

Tokenizing assets will make this a reality by enabling faster and cheaper transactions.

Presently, one has to go through the process of selecting a broker, placing an order, waiting for that order to be settled, and then taking delivery of your shares.

This involves numerous intermediaries and as a result, fees.

No more with tokenized assets.

Not only do you not have to provide any information to a third-party, but the entire exchange process is automated via software algorithms called smart contracts, which execute the order for a fraction of the cost.

As you can probably imagine, such a simplified trading process begets even more benefits, like a token that keeps on giving.

Liquid And Transparent Trades

We have already shown how tokenizing private and even already public assets would improve liquidity by simplifying and lowering the cost of trading.

But how will the tokenization of real world assets help make securities markets more transparent?

Two words: Security Tokens.

True to its name, a security token is imprinted with its holder’s wallet information and ownership rights to the digitized asset they purchased, whether fractional or whole.

Since security tokens are safely stored on the blockchain, they cannot be stolen or have their information altered.

This adds a level of transparency that doesn’t currently exist in securities markets and it also adds a layer of security that inspires confidence in this new form of transacting.

A Flourishing Secondary Market

All of these factors, fast and cheap transactions, as well as increased liquidity and unmatched transparency have worked together to create a burgeoning secondary market for tokenized assets.

As of last year, this global market stood at $15 billion across across real estate, pre-IPO shares, investment funds, and other tokenized asset classes.

If we keep in mind the quadrillion plus in financial assets that exist in the world today, the tokenization market is just getting started, meaning opportunities abound for both investors and innovative entrepreneurs alike in these early days.

However, with great opportunity also comes great responsibility and risk, which tokenization carries plenty of.

It’s Not All Ape NFTs And Rainbows

One of the first questions many have upon learning about tokenization is “all of this legal?“

The short answer is…yes and no.

A more in-depth answer is, different jurisdictions have introduced different legislation, while others have no framework at all for digital asset rights.

For example, in the offshore haven of Liechtenstein, there is something called the Liechtenstein Token Act. This law took effect in January 2020 and recognizes digital tokens as a legal claim, representing ownership in physical assets.

Meanwhile in the world’s largest capital market, the United States, the debate is still raging over whether digital assets are securities subject to Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) jurisdiction.

Some believe almost all digital assets are securities, while others, such as former SEC Director of Corporation Finance Bill Hinman said in June 2018 that “Bitcoin and Ether are not securities due to their decentralized nature and the absence of a central third party.”

A bill, H.R.5496 – Clarity for Digital Tokens Act of 2021, was introduced in the House of Representatives in October 2021 and referred to the House Financial Services Committee, but nothing came of it and it is presently languishing in limbo.

Even if it had been passed, the bill explicitly excludes digital representation of value or rights recorded on a publicly available ledger (digitized tokens) from securities registrations, so it wouldn’t have done much good anyway.

That being said, this legal grey area hasn’t stopped big investment banks and other institutions from fully embracing the tokenization of assets.

An Idea Whose Time Has Come

Every once in a while, something comes along that changes things.

In our great grandparents time, it was the automobile. Faster and more efficient than the horse and buggy.

The next generation had the airplane and television and the current generation grew up on the Internet and with smartphones.

We’re not saying the tokenization of real world assets will have the same broad impact as these life-changing innovations, but the change in how, and what we invest in, will be felt.

Simply put, in the digital era with a proliferation of cybersecurity threats, tokenization is an idea whose time has come, despite some legal and compliance challenges that remain to be addressed.

Proof of this lies in tokenization’s adoption to date, with even the most establishment of institutions coming to terms with the new financial reality.

JP Morgan debuted a tokenization platform last year called The Tokenized Collateral Network (TCN), which as its name implies, allows investors to use tokenized assets as collateral in trades.

We took part in a discussion on blockchain technologies with JP Morgan and VanEck, which you can see a quick recap of here:

UBS has also set up a group to originate, distribute, and provide custodial services for tokenized bonds and other structured products, while Goldman Sachs led the underwriting of the European Investment Bank’s first-ever digital bond issuance.

There are also more than 9 million people who already own some form of tokenized asset, such as an NFT.

At Cadenza, we know this is just the beginning for the tokenization of real world assets.

If you found this article insightful, you may also like The Cloud And AI Combo – Groundbreaking or Trouble? Or Emerging Market Digital Assets – A Look At The Future

If you would like more information on our thesis surrounding Tokenization of Real World Assets or other transformative technologies, please email info@cadenza.vc