Is Asset Tokenisation Still The Hottest Trend In Fintech?

Is Asset Tokenisation Still The Hottest Trend In Fintech?

By Ilia Obraztsov, Smartlands VP of Technology

The global asset pool is immense. Serious economists would not bother measuring it, but current estimates shoved onto the www by geeky enthusiasts and research firms looking to excite their clients run from $700 trillion to Alpha Centauri. The exact size doesn’t really matter, the point is, the amount of gold, oil, wheat, constantly growing debt, various types of real estate, stocks, and private equity is enormous. It’s gigantic, and it’s utterly immeasurable simply because it’s constantly changing in real-time.

The mechanisms for trading commodities have existed for a while now: you call up your broker, he pings a runner at the exchange, the runner places an order, punches some numbers into a computer and, violas, your shipment of pork bellies is on its way (well, on paper, but that’s a story for another day). But what do we do with assets that aren’t so easily movable?

For example, investing in real estate has been a national sport for virtually all industrialised countries. But for decades papers and titles simmered inside all kinds of family-run funds being refinanced thrice a generation yielding enough for all nieces and nephews to go to college, start a business and join the ranks of the upper-middle class.

But today people want greater returns, faster processing, more flexibility and transparency, lower risks, and as few intermediaries as possible. Asset owners and investors want to operate across borders, in a regulated environment, and do it with one hand while holding a martini with the other. One wonders if something like this even possible…

Well, it is. The universal solution is called “asset tokenisation”, and lately it’s been attracting major interest on the part of legacy financing institutions. The reason being is that it’s simple to grasp; we’ve all played skee-ball, and some of us have later graduated to playing Vegas. We know what tokens are and what purpose they serve. They represent value. Value transfer at an arcade is as simple as can be: you play your heart out, and if you win, you win tokens that represent the monetary value of your winnings.

You then step up to a magic window, and a nice lady exchanges your tokens to cash. However, global value transfer inside financial markets is a gruelling multi-faceted process that before the advent of asset tokenisation was a real pain for all involved. Knowing how to capitalise on that pain meant the difference between success and failure.

Today, things are looking up: we know precisely how to fragment the value of real assets, ascribe those fragments irrefutable digital ownership turning them into easily transferable digital shares. Those shares called “security tokens” are the magic that will eventually transform financial markets.

So, what exactly is Asset Tokenisation, and what challenges does it face? In so many words, tokenisation is a process of transforming the ownership right into a digital token. The fact that your ownership of a share of an asset is now represented by a few lines of code presents investors with tangible benefits: instant settlements, automated compliance, an ability to seamlessly trade in any world currency, including crypto currencies, and many others.

The list is long, but the challenges here are also a few. Namely, the current hierarchy of the financial world is very slow to move towards such a brilliant and simple solution as tokenisation of assets. The big financial institutions’ incentives to keep the system’s homeostasis in many cases far outweigh the necessity to innovate, although, lately institutional adoption of security tokens is a solid uptrend.

The regulatory vacuum used to be another major impediment for wide security token adoption. Since securities laws date back to the early 30s, they are not exactly digital economy-friendly. That’s why regulated platforms for security token issuance are in the minority right now. Getting regulated is difficult; it’s long, expensive, and the temptation to cut corners is overwhelming. But by being registered with the UK Financial Conduct Authority (FCA) we are endeavouring to ensure that both issuers and investors benefit from operating in a regulated environment.

Another issue that until very recently was a pain in every investor’s neck is legal enforceability of property rights. How can an owner of a digital wallet, which is just a piece of software or a flash drive-sized cold storage device – claim ownership of a share of an apartment block in the UK or an orchard in Brazil? Can that right be enforced? Can a security token holder claim damages on an asset owner/manager if all they have is a “smart contract” embedded in the security token software?

The short answer is, they absolutely can. All these issues and many others, including safety and security standards, interoperability, cross-border transfers, logistical limitations are addressed through the use of cryptocurrencies alongside fiat currencies. Let me explain.

We need to look at security tokens not only as digitised title rights but as significantly upgraded asset-backed securities, which are looked at as securities by virtually any regulator. That means that security tokens are governed inside the same framework that has been created for the rest of the financial instruments.

In essence, we are talking about just another derivative of the securities market that, due to the might of blockchain technology, allows issuers to bundle a staggering amount of legal and otherwise information into a tradable digital security.

The KYC (Know Your Customer) procedure is one of the most notable examples of how blockchain-based security tokens handle the selection of qualified investors. For example, we use Onfido – a global provider of document verification services – to handle the process that used to take weeks in minutes.

And of course, the issue of liquidity. Ultimately, asset tokenisation is the run to unlock liquidity in otherwise illiquid assets such as real estate and Smartlands, for instance, is working on a solution specifically designed for a fast, secure, reliable, and cheap trading of security tokens on the regulated segment of the Stellar exchange. We’re talking about direct transactions on the Stellar blockchain that boasts the highest level of security currently available, which is paramount for institutional investors.

To sum up, let’s go back to the title question: is asset tokenisation a strong trend or a quirk produced by a hungry for sensation digital world? Hopefully, you have little doubt by now, but I will say that if certain conditions are met soon (broader interoperability standards, better enterprise-grade blockchain integration, recentralisation to accommodate institutions, improved relationship between greater security and cost efficiency), I believe compelling innovations will enter the financial architecture of security tokens.

About the author

Ilia Obraztsov is VP of Technology at Smartlands, a blockchain-based platform for crowdfunding investment. Grown as a backend engineer, Ilia possess advanced architectural thinking and has a strong 10+ years IT background covering both indepth low-level knowledge and high-level conceptions (cloud systems and storage design, fault-tolerant and high-load systems, event-driven architectures, distributed and scalable apps).

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