Asset Tokenization, what, why and how.
Cryptocurrency or crypto token is a secure digital record. That record could contain anything, just an address or rights to any assets. We view such records as containers or wrappers. Traditionally investors always bought assets in different containers. A company’s share is a container that gives an investor a percentage of ownership in a business. If an investor wants to buy gold, chances are he or she would buy an ETF or a Futures contract or an Option, many investors outside of USA can also buy Gold CFD, these are standard containers that give the investors exposure to gold. How do the investors choose a container? Based on the attributes that these containers have, based on investors’ understanding of the instrument, his or her access to technology, access to credit, an appetite for risk, etc.
Crypto containers have unique attributes and represent a new choice for investors. It doesn’t mean 100% of the investors will choose these new containers going forward, but over time, some significant percentage of the investors will. The percentage of asset tokenized will vary from asset to asset, as the benefits of the crypto containers for different assets will also vary, and of course, the potential customer base will vary as well.
Buying stocks of Amazon or Google in crypto wrapper for investors in the developed countries doesn’t make a lot of sense, at least until the crypto securities trading develops to a point when it becomes cheaper to trade securities that way, but for investors in developing and emerging markets like Russia, mainland China, etc. it would present a good alternative. Local brokers could be charging higher commissions, counter-party risk could be high, investor protection laws in practice are questionable in many of these countries. Plus, crypto tokens have new attributes that could be very appealing to the investors. Crypto tokens are fractionable — if a small investor wants to buy 100 dollars’ worth of Amazon stock he can’t really do it easily right now, but with tokens it is possible. Tokens are mobile — an investor can have them on your phone, sell them from anywhere in the world at any time for dollars or another cryptocurrency and have access to the capital right away instead of having to wait for wires from the broker. Tokenization of assets could also make assets more liquid and transparent. If we look at tokenizing real-estate projects, a hotel, for instance, the investors in such a project would be able to sell their tokenized interest in the project whenever they want as these markets develop.
Asset tokenization is a natural progression of the evolution of investable funds. The market moved from closed-end funds to mutual funds to ETFs. Each new product category along the way reduced cost, friction, and uncertainty for the investors. Going from ETFs to CTFs (crypto traded funds) is a natural progression of that process. CTFs will be cheaper to create and operate. It takes on average about a year and two-three hundred thousand dollars to create an ETF and an additional one–two hundred thousand dollars to maintain one. CTFs can be created and maintained for a fraction of the ETF cost and in a fraction of the time. These savings will be passed on to the investors. CTFs will trade 24/7 with real-time creation and redemption capabilities, giving the investors more options and more flexibility. But the biggest utility of the CTFs is the new type of baskets that can be put into such structures. Until now ETFs were confined to the securities issued on a single market. Only securities that are listed in one jurisdiction can be combined in one ETF. CTFs will have no such restrictions, issuers will look to combine stocks and other assets from any jurisdictions. Analysts from different markets will collaborate to create groundbreaking tokens. Stock pickers from Brazil, Russia, India, and China could create new BRIC security tokens using their local expertise to find proverbial “diamond in the rough” companies and put these companies into a single basket. How many of such baskets will be tokenized? Thousands I hope. Because it is cheaper and faster to create these tokens and it is cheaper to maintain CTFs, many tokens will be created and offered to the investors around the world. As long as the handling of the underlying assets is transparent, secure, and dealt with ETF like discipline, as long as the information about all the tokens and baskets they represent is readily available and trusted. These products have a very good chance of gaining a significant market share in a short period of time. SPDR the first ETF was created about 25 years ago. It was a slow going in the beginning, but now ETF industry has over 4 trillion dollars under management and is still growing quickly.
For the CTFs to gain market acceptance and trust we need to borrow some features from the ETF industry: we need fungibility, flowing of assets into and out of CTFs has to be simple, transparent and frictionless. Real-time token creation and redemption are needed. The handling of the underlying assets has to satisfy the highest custodian standards, the asset holdings have to be audited periodically and NAV has to be calculated daily. Liquidity in the CTFs has to equal the liquidity in the underlying assets from day one. And on top of all of that, these products have to be transparent and function with full disclosure. All the information about these products has to be public. Investors have the right to know what each of the tokens is holding, what were the results of the last audit, etc. and blockchain is a perfect public platform to host all this information.
In conclusion, CTFs are a natural progression of traditional investment funds (ETFs). CTFs will borrow the best of the ETF structure and practice and add a healthy dose of the blockchain, creating a new category of crypto financial products. CTFs represent new worldwide financial supermarket where every asset and every basket of conceivable combinations of assets will be tokenized and offered to the investors in a fair and open marketplace.
Welcome to the tokenized world!
Dan Raykhman, CEO of Fungible Network
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