News & Insights

5/10/2018

Asset backed tokenization—a huge value unlock in the makingby Alex Cowan


(CC BY-SA 2.0)

The emergence of Bitcoin and cryptocurrency has captured the investing world’s attention. The wild price volatility combined with the long-term potential to disrupt and innovate has led people to invest huge sums of money into the space.
 
Stories of people mortgaging their house, or spending entire pay cheques to gain portfolio exposure, have been juxtaposed with the more sinister underbelly of criminals using the inherent privacy features for illegal purposes.
 
What is far less reported however is the huge potential which cryptocurrency has to unlock value in various asset classes. Illiquid assets like fine art, real estate, antiques, gems and horses all possess high barriers to entry, locking out many would-be investors.
 
Much like the way mortgage-backed securities enable investors to buy and sell portions of a pool of mortgages and receive entitlements based on that portion, so could blockchain enable investors to own and trade portions of a Picasso masterpiece, thoroughbred stallion or suburban terrace, through the process of tokenization.
 
If such assets were to be tokenized, a huge value unlock could occur, whereby small investors globally could overcome the financial and geographical obstacles that currently restrict them.
 
Taking gold as an example, the introduction of the world’s first gold ETF in March 2003 (which listed on the ASX) and subsequent ETFs opened the flood gates for investors, providing them with instant and easy access to the gold spot market – the price of gold has since skyrocketed.


Gold ETFs democratised investor access, and in the case of the local real estate markets in Sydney and Melbourne, tokenisation of residential real estate could help remedy the current social imbalance and like gold, democratise access for priced out investors.

Of course, blockchain also provides the added benefit of immutability and transparency. This greatly reduces transaction costs and removes counter-party risk and complications over proof of ownership and identify. As such, the costs of conveyancing fees and stamp duty could also be significantly reduced, further reducing the barriers to entry.
 
Any asset or business in the future has the potential to become tradeable through tokenization. The process will introduce a sea of new liquidity to these markets and through blockchain, administrative expenses will be reduced, speed of settlement greatly increased and issues regarding ownership entirely removed.

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