Reasons Why Tokenization is Heading Towards Mass Adoption

May 28, 2020

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Tokenization is now being seen as a way to democratize finance and this has opened new horizons for mass adoption where several studies projected that by 2027, 10 % of global GDP will be stored on blockchains.

Blockchain today is at the stage where the internet was in the early 90s. People were aware of the internet and its potential uses but had very little idea of what the internet was and how it worked. The accessibility of the internet was also an issue at that time but as time passed things changed. Almost three decades later the internet is an integral part of almost all of our lives. [1]

Blockchain is at a similar stage today; people and in particular investors understand the basic concept but cannot connect it with everyday applications and its potential to change our lives. The first decade of blockchain was marred with problems such as poor usability, volatility and lack of tangible benefits to encourage serious mass adoption. Most people think of cryptocurrency whenever the word blockchain comes up and the poor performance of crypto currencies and ICOs have prevented them from seeing the full potential of blockchain. [2]

Emergence of asset tokenization has changed this perception and blockchain is now being seen by the investors as disruptive and a “game changing” platform. George Gilder, the cofounder of Discovery Institute is of the opinion that blockchain is a new architecture for handling data and information is taking shape that will “shake the Google empire to its foundations.” [3]

Adaptability of Tokenization

The first decade of blockchain was not very productive in terms of its usability and broad adoption. Cryptocurrencies paved the way for ICOs in 2017 but ICOs resulted in many scam projects that did attract funding but were limited to raising money for new projects that failed to gain any traction.

Tokenized assets are becoming a centre of attention in blockchain these days because tokenization has allowed the industry to focus on product innovation rather than the blind raising of capital. Tokenization is now being seen as a way to democratize finance and this has opened new horizons for mass adoption. [4]

Blockchain and tokenization are gaining increased traction with opinion makers and investors, earlier this year tokenized assets were the focus of discussion at World Economic forum. [5] Research from WEF and McKinsey institute has projected that by 2027 up to 10% of the global GDP will possibly be stored and transacted on blockchain platforms. [6] According to Jeremy Allaire, the CEO of Circle, through tokenization the world is resolving the trust issues that have resulted due to crypto currency scams. [7]

Can Tokenization Survive Mass Adoption?

Scalability of digital assets is a serious concern among investors. [8] Tokenized investment funds will need to assure investors that if the required funds are provided they possess the ability to scale up offerings. In order to pave the path for the mass adoption of digital assets, a clearly defined path is required with achievable milestones. Scalability is not only dependent upon funds but it also requires the ability to set up the technological infrastructure and this leads us to the second question. [9]

Many governments are less than enthusiastic about adopting cryptocurrencies due to the inability to regulate them, will digital assets face the same issue? Mass adoption is not possible without active government involvement to create regulatory frameworks in order to facilitate the creation and harmonization of digital assets with the already existing financial framework. [9]

When asked about why acquiring digital assets is difficult, the Co-founder and CEO of Sequoir, Justin Seidl said:

“Digital assets are difficult, especially in the United States, because of all the different regulations involved in each state. And then outside of the US going from Europe to Australia to Korea, there’s just a wide range of different laws and regulations put in place and then trying to get those on-ramps to… push assets across borders further complicates that. But we’re doing our best to kind of reduce that friction on the back-end for our users and provide a safe and simple solution for them.” [10]
Justin Seidl, Co-founder and CEO at Sequoir

Countries like Switzerland, Lichtenstein, Malta, Bermuda and Singapore are at the forefront of developing regulatory frameworks to facilitate mass adoption but a greater push is needed. [11] Government involvement is also necessary to bring more investors on board as the tacit approval of government will boost investor confidence and unlock more funds for digital assets. 

Tokenization and Investment Interest

While investor interest in cryptocurrencies has waned investors are showing increased interest in tokenized assets. The biggest advantage that tokenized assets have right now is that tokenized products already exist in the market. So investors can have an idea of what the market will look like once mass adoption takes place. Creating awareness is going o be the key for tokenized fund managers. [9]

Fund managers need to position tokenized assets in a professional and viable manner to prove that tokenized assets are the most viable and better alternative to conventional funds and assets. Traditional investors are still unaware about the advantages and future potential of blockchain and tokenized assets and this is where awareness creation is required. Unless the traditional assets fully realize the potential and scope of digital assets mass adoption will not be possible.

Views from Industry Leaders

Speaking about the 2017 crypto crash and the current surge of interest in digital assets, Wayne Zhao, a partner at TokenInsight said:

‘What we need to see is that this phenomenon is alleviating. The number of digital asset addresses is increasing, and the number of people holding and recognizing digital assets is also increasing. This is a gradually mature process. We must acknowledge that it is not good enough, but we should also be aware that the industry is growing and maturing”
Wayne Zhao, Partner at TokenInsight [12]

The interest in digital assets is increasing but in order to speed the process the trust challenge needs to be tackled with increased seriousness. Neha Narula, Director of the Digital Currency Initiative at the MIT Media Lab said:

“We want to have consumer protection. We want to have market integrity. People who are issuing assets should disclose information about what exactly those assets represent. And we want to make sure that those assets are really tied to their representation in the real world”
Neha Narula, Director of the Digital Currency Initiative at the MIT Media Lab

Although the interest in digital assets is growing, regulation remains one of the top concerns of industry leaders. The CEO of Liquefy, Adrian Lai said:

“A significant challenge that must be overcome before mass adoption is regulatory compliance. As regulatory bodies around the globe unfold their perspectives on security tokens, issuers must comply with various jurisdictions to issue an STO.”
Adrian Lai, CEO at Liquefy

Adrian Lai further explained his view with an example where he mentioned that if a UAE-based company for instance would conduct an STO and attracts American investors, it must ensure compliance with both local and American regulations. Failure to do so will hurt the entire STO ecosystem as it is still in its infancy. [13]

Dusica Lukac, partner of DL Capital Partners and a leading innovator and disruptor in fintech wrote in an article on mass adoption that for mass adoption to happen, the critical mass of innovators must converge at the “zero cost zone”. For her after investor interest and regulation the cost if the most important factor that will play a major role in mass adoption. She further adds:

“In reality this means that transformation will be pushed from the inside and the outside. New technology will bring new players, and some of the existing players will adjust and adopt new technology and chasm will be bridged.”
Dusica Lukac, Partner, DL Capital Partners [14]

Concluding Comments

Tokenization is creating exciting opportunities for investors. The market for tokenized assets is not only heading towards mass adoption but also is expected revolutionize the way financial assets are currently seen. This happened with the internet revolution, and it is bound to happen for tokenization of assets.

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