The world of traditional finance offers security, insurance and a proven system for investors and traders to participate and grow their funds. But this system has many limitations.
Meanwhile, the blockchain and cryptocurrency space can offer nearly boundless potential, freedom and profits, but it lacks stability and regulation, resulting in little buyer protection. So can tokenized securities serve as the best of both worlds?
Security tokens, crypto tokens that are backed by assets like equity or commodities, seek to combine the traditional benefits of these types of backed assets with the efficiency of blockchain-powered cryptocurrencies.
"The best analogy [for tokenized securities] is the transition from email to snail mail," said Josh Stein, the CEO of private securities blockchain startup Harbor , in an interview with Fortune . "You can type out a written communication, print it out, put it in an envelope, address it, send it, and wait two to three days. Or you could hit send on an email. The content is the same, but by putting an electronic wrapper around it, you can send it faster, cheaper, and easier."
The Problems With Unregulated Tokenization
When people invest in a traditional asset like a stock, for example, they are essentially buying part of the underlying company that offers it. With that can come certain voting rights, dividends and an assurance that the asset's value is tied to the success of that company.
In cryptocurrency, however, the current market is almost entirely speculative, with very little framework for the ability to properly evaluate a project or company's market cap or price valuation. Many initial coin offerings (ICOs) and cryptocurrency projects have reached significantly high overall market caps, with little more than a white paper. Many of these ICOs and projects have also been found to be fraudulent. But even if a company is legitimate, there are often cases in which coins/tokens are the talk of the town for a small period of time and then quickly disappear from the spotlight, with their prices following.
The Problems With Traditional Markets
Stocks, bonds, real estate and other traditional assets are still more effective and "safe" when it comes to the above-mentioned problems in cryptocurrency. But there are also many limitations.
Investors are not currently able to trade or send their assets from person to person. Those assets are tied in funds, brokerages, traditional exchanges, etc. It can be difficult to move them if desired.
There can also be a liquidity problem. For instance, very large assets may not attract as many investors as those that can be quickly and efficiently divided with something like blockchain technology. Also, the traditional model encourages companies to raise money through venture capital at their earliest stages, as opposed to offering that early investment opportunity directly to institutional investors who may have been able to promote growth through an electronic, decentralized sale.
The Best of Both Worlds: Tokenized Securities
Blockchain technology can be used to create security tokens, providing the ability to sell "fractional interest" in large assets. With tokenized securities, investors are able to send cryptocurrency and receive a token that is backed by real-world value. Tokenized securities also provide an easy avenue for fractional investment in real estate, which would bring significantly more liquidity into that market with a larger pool of buyers.
Tokenized securities seem like the logical solution to pair the best of blockchain technology with the proven and effective traditional financial system.
There are many companies that are currently looking to make tokenized securities a mainstream reality. These include companies like Polymath , Securitize , Swarm and Desico .
Tokenized securities may very likely be the next big trend in finance, providing a whole new level of liquidity and purchase potential for all types of investors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
