How the Pressures of the Coronavirus May Accelerate Adoption of Tokenization

Apr 16, 2020

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The Coronavirus pandemic has brought the global economy to a standstill. As investors are seeking opportunities to diversify their investment portfolios, adoption for tokenization continues to grow.

As many countries across the world go into lockdown, businesses have come to a virtual stop, with only essential services operating in many countries.

The International Monetary Fund (IMF) is already expecting a global recession “at least” as bad as the Great Depression [1]. The managing director of the IMF has stated that 80 countries so far have asked them for emergency funding. As lockdowns and quarantine measures continue, governments are feeling the strain of increased costs from social programs. According to the UN food agency, food prices across the world have fallen sharply as the demand has plunged due to Covid. [2]

Further, the Chinese Productions Managers Index is painting a concerning picture of the future of production. The manufacturing PMI fell down to almost 35% in February, recovering to almost 50% in March as production resumed in parts of China. [3] At the same time, global export orders to China continue to decline. [4] As supply chains shut down, they will not be able to just resume again when demand starts to rise, and this will lead to bottlenecks in production, slowing down recovery for everyone even after the pandemic ends.

Conditions for businesses are worsening with each passing day, especially for small brick and mortar businesses that do not have vast reserves or financial support from stimulus packages that many countries are announcing.

Market Performance of Tokenized Assets

Asset tokenization refers to the process of issuing a token based on the distributed ledger technology (DLT) that digitally represents a real tradable asset, such as gold, precious metals, and real estate or intangible assets such as shares and securities. The benefits of tokenization were discussed in a previous article as well as how it will disrupt the financial industry.

A study done by BlockState shows that the tokenized assets industry has exhibited strong growth lately, and the future appears to hold even more potential for this industry. The study concluded that while in 2017 there were only 5 Security Token Offerings (STOs), 2019 was projected to have 83 STOs. [5]

“Tokenization has often been hailed as the solution to all the problems related to ICOs and utility tokens. However, one has to keep in mind that the market is still maturing. It is really exciting to see that major financial players like SolarisBank or the Swiss stock exchange are building solutions to integrate this technology into the existing market infrastructure. At the same time, an increased demand for token-based fundraising can be observed among issuers and investors.”
– Paul Claudius, CEO of BlockState

The STO process allows for fractional ownership and the removal of middlemen, as well as the regular benefits of cryptocurrencies, including access to global markets that remain open 24/7 – which is not the case for most securities. [6]

How Can Tokenization Be Used in the Current Situation to Benefit Businesses?

The bailout packages being rolled out in many countries are aimed at big businesses and industries. Extensive lobbying means that industries that manage to lobby effectively get the bailout packages. [7] In this process it appears that very little will trickle down to small businesses. The only cushion that small business owners have at this time is that their debts are being deferred, but this alone will not get them through the lockdown. [8]

Tokenization offers a glimmer of hope for small and medium business owners in this crisis. Consider a small corner restaurant. Lockdowns have caused the owner to temporarily lay off staff and the restaurant is closed. The owner may even be considering closing the shop for good. Tokenization can help such business owners by allowing them to offer up fractional ownership of their business to their customers. The customers who are sympathetic to the business can simply purchase the tokens. Token holders can then be offered discounted prices or other privileges.

This concept would not only provide funding to the small businesses to stay afloat during the crisis but also set the foundation for a more stable financial future for small and medium enterprises where they will no longer be dependent on government support during future crises.

Furthermore, this opens up opportunities for investors to play a much more meaningful role to sustain local businesses and diversify their portfolio. Thus tokenization can open up opportunities for investors to invest in venture capital initiatives in a more efficient manner. [9]

Ilia Obraztsov, CEO of Smartlands, a global blockchain-based investment and alternative banking ecosystem was asked if the CoronaVirus crisis has made it difficult to raise investments. He replied:

“It’s too early to say. On the one hand, investors are becoming more cautious; on the other hand, the financial crisis once again shows the importance of portfolio diversification. In this sense, investing in shares of tokenized assets is a great option. Therefore visionary startups involved in that field will always remain a subject of interest for both investors and VCs.”
– Ilia Obraztsov, CEO of Smartlands [10]

According to a market analysis reports tokenized assets are expected to grow by almost 22.54% a year [11]. The current crisis could allow faster development of regulatory frameworks to enable tokenization to assist small and medium businesses. Before the crisis began, European regulators had carried out consultations to create regulatory frameworks in Luxembourg, Switzerland and Italy. Investors in these places have already started working to establish tokens as a new asset class [12]. This is an ideal time for investors to look towards investing in tokenized assets, to support struggling small businesses and a new class of assets.

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