The financial world has seen some rapid developments over the last decade, especially since the financial crisis of 2008. One of the most notable advancements has been the introduction of blockchain technology, ever since its introduction, the momentum for Decentralized Finance (DeFi) applications especially for the tokenization of financial assets has been increasing. The emergence of tokenization of assets has exposed some serious inherent weaknesses in the traditional financial ecosystem.
Some of the main drawbacks of traditional financial assets include their limitation posed by the platform of issue. For example, securities which are issued by exchanges and financial institutions are often limited by their geographic and legal jurisdictions. An IPO as a result is limited by the rules and regulations of the country and the exchange where it is being issued, which can impose restrictions for attracting global investors.
Several types of financial assets today have liquidity problems when it comes to the current system in place. Although listing on multiple exchanges and markets can help with the problem but they still face the issue of dealing with the respective rules and regulations of each exchange or market. Exchanges and markets have their own set of rules, processes and bureaucracy which must be complied.
Tokenization of Financial Assets
The concept of tokenization of assets and securities refers to the process of issuing financial securities digitally on the blockchain. The process itself is not much different from traditional securitization. For example, the digital token issued to shareholders is backed by a real share of a company. Depending on the type of security different types of tokens can be issued for shares, bonds and debt securities etc. The digital tokens that are issued are at times called “Security Token offerings” (STO).
Some of the major benefits of asset tokenization:
- Removing barriers: Tokenization will allow digital assets to be traded in a secure and transparent manner of the internet, thus enabling an exchange of such assets not to be bound by jurisdiction or time zones. It will remove the barriers from global investment and allow investors from any part of the world to release their investments into stocks of listed and private companies and other digital financial and illiquid assets, anywhere in the world.
- Increased liquidity: A logical consequence of removing barriers from global investing opportunity will be a drastic rise in liquidity of every class of digital security and assets.
- Non-stop trading: Since the platform is blockchain based and over the internet, this allows for seamless, non-stop 24 hour trading globally not bound by geographical time zones.
- Direct ownership: One biggest benefit of tokenization is that it reduces the friction by ending the need for brokerage and clearing houses and thus owners of digital assets and securities will have direct ownership of their assets.
- Fractional ownership: Tokenization of assets will in particular allow big assets to be securitized fractionally allowing investors from all of the world to purchase tokens that will represent a share in an asset instead of a single buyer having to buy that asset.
- Lower fees and commission: Eliminating the brokers, clearing houses and middlemen will also eliminate commission and other charges, thus reducing the cost. In case of exchanges, the commission will be significantly lower due to the instant settlement advantage that blockchain technology offers.
Disruptive Factors of Tokenization
Tokenization of financial assets is going to disrupt and revolutionize the financial industry by removing the barriers from global investment and facilitating investors from across the globe to invest in digital assets anywhere in the world. Securities tokenization will allow billions of dollars to be invested into private and public companies.
Perhaps the biggest disruption will come for the stock markets where tokenization is all set to challenge the traditional roles of brokerage houses, central securities depository and clearing houses. As mentioned above, digital securities render the need for such institutes useless because the investors will be directly able to purchase and receive a token that represent an underlying asset for their investments directly.
According to the digital asset management outlook, the digital asset management market was valued around $1.9 billion in 2016 and is projected to reach estimated $5.2 billion by 2023, growing at a rate of almost 17% between 2017-2023*.
Considering the rate of growth, it is apparent that the financial world will be shaken up and new roles will have to be defined for the change to take place. We have seen this in the past with the introduction of e-commerce, the market resisted the change the longest but it had to give away because e-commerce brought one of the biggest digital revolutions. Thus financial institutions will have to redefine their roles in future, therefore here at elivise we are on a mission to operate in the capacity to advise investors by giving them insights into the world of blockchain, digital assets and tokenized financial markets, which will help transform the global economy and enable us to lead the 4th industrial revolution.