When one says “tokenization”, many people tend to think about cryptocurrency and token sales, which made headlines in 2017. But this is only the hype version of the story.
Some time ago, there was only one question faced by crypto investors: whether to invest or not to invest in Bitcoin. And now, that question has become more complex. On the hype of thousands of ICOs, investors stormed blindly into cryptocurrency. When the cryptocurrency and ICO bubble burst, it was a time of reflection for investors and issuers alike. However, there were many positive developments to come out of this initial round of crypto investment. For one, the interest in the crypto space shifted from the fringe of techno-geeks and libertarians to the mainstream. For another, ICOs paved the way for STOs – a trend that has gained popularity in many countries.
Every decade, the IT marketplace experiences a major innovation that changes the entire data management infrastructure. In recent years, cryptocurrencies have appeared as an example of how a financial system can be made robust in a completely hostile environment—fully anonymous, permissionless, distributed, and without any security administrators, firewalls or physical security. Many ideas can be borrowed from that scenario and applied to the much more friendly environment of enterprise asset management.
Today, financial assets are too much like a loose pill on the counter. You don’t know enough about where it’s been, what’s in it, or what it will do to you. But the process we call tokenization is going to make many assets a lot more attractive to a lot more investors, in part by providing an unprecedented level of information.
Tokenization is the process of the digital transformation of asset accounting and management systems. It has nothing to do with the creation of virtual currencies. Tokenized assets are always issued to perform registration of users, processing of transactions and custodial services. These activities are performed according to local regulations.
Tokenization has plenty of promising possibilities:
- Primary benefits of tokenization are that operations with tokens are cheaper and more secure than with the traditional database records.
- Reliable real-time audit of an accounting system from the owner or customer prospective increases confidence in business and strengthens relationships.
- Increased user convenience by using uniform software allows bringing on board more customers.
- Liquidity of assets is increased as a result of reduced trading frictions.
However, many important questions have yet to be answered. Regulators are still figuring out whether a utility token is a security.
TOKENIZATION TRENDS AND REGULATION
Tokenization is simply a traditional contract linking token rights to an asset. A trusted third party plays a vital role to ensure asset security through the token link. The issuer has fiduciary duty to protect the asset, distribute dividends, and return capital upon liquidation.
The complicated part is regulation. For an STO to comply with US security law, the process is rather straightforward. The issuer must either file a public offering registration or rely on exemptions to sell securities. The complicated part is secondary trading that limits shareholder ability to transfer or trade-restricted tokens between accredited investors.
DECENTRALIZATION VS. REGULATION
China and the US boast the strongest regulations when it comes to governing the crypto world. China completely banned ICOs and crypto exchanges. The US is still waiting for the SEC to approve a Bitcoin ETF for investors that do not own a crypto wallet. For these and other reasons, we are entering an age where business models and technology lead regulation.
DECENTRALIZING EXCHANGES
Because of the existing security issues with crypto exchanges, the blockchain industry decided to experiment with decentralized exchanges, in which no company or website holds the customers’ cryptocurrency. Instead, investors can trade directly from their wallets and exchange their cryptocurrencies into other currencies or into other wallets quickly and safely.
CONCLUSION
At the end of the day, decentralized or not, regulated or not, one point remains clear in the new world of tokenization: The basic rules to evaluate and select an investment do not change. Prudence, due diligence, risk evaluation and research analysis still rule the day.