Tokenisation – Innovation in Capital Markets

Here’s what I think is going on with digital assets and security tokens and why it’s the most exciting thing going on in finance right now.

There are two parallel streams of innovation: A new technology, and increased automation.

New Technology

Blockchains enable anyone to issue and transfer unique digital assets (tokens) with guarantees that the assets are authentic and can’t be sent to more than one person.

Tokens, representing financial assets or otherwise, can be defined and constrained by smart contracts. The smart contracts automate processes involving the tokens, providing guarantees that what should happen, will happen.

Automation drives down the cost of creating and managing the full lifecycle of these assets. For example, we can now have shares that can pay dividends to all shareholders in one transaction on one ledger. Or debt that automatically convert into shares based on a trigger event.

Lower costs encourages more experimentation. It’s cheaper to try new things that might otherwise be too risky to try due to the costs involved. Examples include the fractionalisation of assets, and the creation of a token that pays holders hourly interest, perhaps based on the price of something else.

New products lead to new asset classes and markets.

Automation and Tools

Platforms and portals are being built that automate the expensive and boring parts of finance. These boring parts are usually related to regulatory compliance, such as the collection of photographs of passports and utility bills etc. (Note: A utility bill doesn’t prove your address, it just proves that you pay the bill!)

Investor tools such as software and hardware wallets, real-time pricing feeds and so on are also being built.

These platforms, portals, and tools are making the whole experience of buying and holding tokenised assets more convenient and delightful for investors. So people who might not usually have invested in obscure hard-to-manage assets will be more likely to invest.

Increased participation by existing and new investors drives more activity and liquidity, supporting the new asset classes and new markets. This brings the two streams together.

Fuel

Both streams are fuelled by hype, zeitgeist (what’s topical), and capital investment.

And that’s ok! Sometimes you need the hype to get the investment, to make the thing happen.

What I also find fascinating is that Security Token Offerings (STOs) are bringing together the traditional finance and crypto communities. We are starting to appreciate each others’ viewpoints and skillsets, finding common ground, and meaningfully innovating.

How far away are we from an inflexion point? Probably less than a couple of years. If we can deliver on the promises of tokenisation, it’s inevitable that we’ll see new asset classes emerge, recorded as tokens on blockchains.

PS If you enjoyed this post, you may also enjoy my book The Basics of Bitcoins and Blockchains. Just saying.