Speaking at MoneyConf in Dublin earlier this month, Circle co-founder and CEO Jeremy Allaire spoke of a world in which everything is tokenized. “We’re at the beginning of the tokenization of everything,” he proclaimed but the concept in itself can be a bit confusing. After all, how can you tokenize physical assets and place them on something virtual like the blockchain?
We’re used to blockchain companies launching tokens by now. Sometimes they have an actual utility. In other cases, they’re merely a mechanism for securing funds. Allaire argues that it’s more useful, then, to speak of “crypto assets,” rather than “cryptocurrencies,” and make differentiations accordingly.
The Tokenization of Assets
2018 has seen a rising trend towards the tokenization of assets. Consider works of art, stocks (in some jurisdictions), real estate, and even diamonds. They have all been tokenized on the blockchain. But how does it work and what’s the point? Why tokenize assets?
The main advantage of tokenizing assets is that it gives them liquidity. Imagine for a moment that you have a three-year-old startup valued in the hundreds of millions. Yet, in many cases, the owner is unable to access this value and still has to live on a monthly salary. By tokenizing some shares of his company, he can gain access to funds immediately that can help grow his company or allow him to go on a really good vacation.
Now let’s take the same concept to a consumer level. The possibilities go way beyond investing in capital markets. For example, let’s look at real estate. The current system with mortgages and down payments makes purchasing property inaccessible to a lot of people.
Either potential buyers don’t have enough money saved, can’t guarantee to make regular monthly payments or have had a credit history and thus can’t access a loan.
With tokenization, you could invest a small amount, say $2,000, and increase your investment whenever you have the money. You would then own the corresponding percentage of the property and corresponding rights in decision-making or rental income.
On the side of the coin, you have the property owner who has an apartment worth $300,000 but no access to cash. Property is the most illiquid asset possible, but with tokenization, the owner could tokenize part of their apartment and receive the amount of money they need right now.
How Does It Work?
It’s relatively simple. If the value of the asset (let’s say, the property) were $300,000, that would turn into 300,000 tokens (for example) with each token representing the percentage of the underlying asset. Through smart contracts, you could buy one or two tokens, but you’d actually be buying a percentage of the ownership of the asset.
Buy all the tokens and you become the asset owner. Everything is recorded on the public blockchain, which makes it immutable and impossible to tamper with or erase. But, how legal is it? You own all the tokens, but does that make you the legal owner of the asset?
The short answer is, no.
The Tokenization of Everything is Not Here Yet
To legally own a property, you must buy the legal deed and have it recognized by the law. One of the main barriers to blockchain and tokenization is clearly that it’s still an unregulated area.
Token holders in the property have no legal rights and are not protected by any laws. If the owner sold the building through regular channels, the token holder could end up with a bunch of tokens, rather than a carefully constructed pile of bricks.
Allaire points out four major barriers to the tokenization of everything. One of the main ones is not having a regulatory framework. The second is a scalable, more mature public blockchain, since limitations with scalability, particularly of Ethereum, are well-documented.
We also need more mature marketplaces and according to Allaire, stable coins that allow for prices to be consistent. While we still have such volatility it’s impossible to tokenize a fixed asset and encourage mainstream buy-in.
Therefore, key changes are clearly needed but since blockchain tech is still in its infancy, regulators are trying to catch up. As the industry grows up and matures, leaving its teething trouble behind, the tokenization of everything looks to be unstoppable.
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