Tokenization, not crypto, is the future
This is a summary of - and commentary on - an opinion piece titled“Tokenization, not crypto, is the future for Canada’s digital economy,” written by Mark Wiseman and published recently in The Globe and Mail. The full article can be found here.
An investor for more than two decades, including many years spent managing the pension investments of millions of Canadians, Wiseman writes about the principle of intrinsic value: pricing assets based on their underlying attributes and, in turn, generating a reasonable risk-adjusted return from those assets.
Multiple disruptive global events have made for a bearish economic outlook and this is being felt even more strongly throughout crypto. The dual threats of inflation and further financial downturns are looming. And as we all know, cryptocurrencies have been extremely volatile, with their value tied to speculative activity as opposed to what Wiseman calls ‘intrinsic value’. But there is a large silver lining amidst this doom and gloom.
Wiseman points to tokenization as the real benefit of the distributed ledger technologies behind cryptocurrencies (i.e. blockchains). The potential for tokenization is what is commonly known in DeFi as Real World Assets (RWAs), and it is far more world changing than many speculatory cryptocurrencies and at the same time can allow for better yields than many indexes and funds.
Wiseman writes:
“Tokenization allows owners of assets with intrinsic value – ranging from real estate, to securities, to commodities, to fine art (or the digital equivalent) – to tokenize their assets into a form that is usable on a blockchain application. In practical terms, it enables asset owners to sell fractional ownership of their asset akin to a publicly traded company issuing equity, but in a much more accessible way.”
Real World Assets (RWAs) are incredibly attractive because they provide investors with easier ways to purchase, hold and trade assets that have real underlying value, including digital assets like accounts receivable (invoices owed by clients).
“Tokenizing and selling part ownership of one’s assets can improve liquidity and increase the transparency of the value of their assets, allowing them to borrow against them more easily. Valuing an artwork is notoriously difficult, but if a sculpture is tokenized and a liquid market in those tokens develops, price discovery for the object as a whole becomes far easier. After the tokenization of a skyscraper, a token holder would be able to secure financing against their tokenized portion of the building, as opposed to having to mortgage the entire structure to gain funding.”
A regulatory opportunity in bearish times
Wiseman believes that tokenization is what regulators should be focused on as a way to provide value in their economies. He says ‘Whichever country becomes a leader in tokenization, retail investors would be able to access assets beyond the public equities and bonds to which they are now mostly limited.’
The Nasdaq Composite tumbled 13.3% in April, the index’s worst monthly performance since 2008, while the S&P 500 fell 8.8% and ended the month at levels last seen in May 2021. All over the world index fund managers are looking at losses of between 9-13%. Investors are crying out for better places to park their capital.
Wiseman says, “Institutional investors – many of whom have already begun to significantly increase their investments in private companies, real estate, infrastructure and other alternative investments – are desperate to find havens for their capital, particularly given the recent fluctuations in equity markets.”
However, there is a problem with this seemingly attractive opportunity for capital that wants a home.
“Publicly traded companies have a significant amount of disclosure regulations they must adhere to, which may cause many asset owners to shy away from listing their assets on public exchanges. Regulation will have to ensure adequate information is available about the underlying asset, so that investors purchasing tokens can understand what they’re buying, without being overly burdensome to the point that it dissuades asset owners from participating.”
Centrifuge solves this with its private data layer - documents can be created and stored off-chain, and then brought back on-chain when proof is needed. Access can be given to those who might want to underwrite the deals. Centrifuge uses NFTs as on-chain representations of assets that link to off-chain, private information.
RWA via Centrifuge allows investors to invest in assets that would otherwise be unavailable, creating potential value for both buyers and sellers. Additionally it removes barriers to selling fractional ownership, and enables new asset classes.
With these measures, institutional investors can drastically expand their project portfolio and sophisticated retail can get to look behind a previously closed door.
Centrifuge also removes geographical distance between investors and investments by permitting an investor from one continent to invest in assets on another with a few clicks, without any loss of security or assurance. As many Centrifuge users will attest, removing inter-country barriers for investors fundamentally changes the way investments are done.
Centrifuge covers the four major points required in the tokenization of assets: a regulatory framework, scalability, security, and adoption. Read more here.
top-notch article!
