Tokenization empowers investors and disrupts Wall Street | Opinion

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This text discusses the growing trend of asset tokenization and its potential impact on various industries. Asset tokenization is the process of converting real-world assets into digital tokens that can be bought, sold, and traded on blockchain networks. One notable example of this trend is in the art world, where artists like Damien Hirst and Beeple have tokenized their works.

“Bob Dylan’s iconic line, ‘The Times They Are A-Changin,’ encapsulates the current trend in asset management.”

Last year, a comprehensive market analysis carried out by Ernst & Young (E&Y), one of the Big Four accounting firms, indicated a notable rise in investments towards digital assets and a growing enthusiasm for tokenization amongst institutional investors. The findings from this E&Y survey demonstrated that an impressive 57% of these investors were considering investing in tokenized assets. Furthermore, a staggering 93% of the respondents held a strong belief in the long-term value of blockchain or digital technology and digital assets.

As a crypto investor, I’ve noticed an intriguing trend among institutional asset managers: not only are they eager to tokenize their assets, but each one seems to have a well-thought-out plan for doing so. For instance, around three out of every four surveyed intend to tokenize their assets through collaborations with digital native or tokenization firms. On the other hand, about one in five prefer to establish their own infrastructure for this purpose, while a small percentage are looking forward to acquiring a tokenization startup.

How do experienced fund managers perceive advantages that motivate them to carefully prepare for the tokenization process?

The empowering potential of tokenization

In one of their explainers, McKinsey & Company defines tokenization as the “process of issuing a digital, unique, and anonymous representation of a real thing.” On a practical level, tokenization requires a blockchain on which the process has to be carried out. Institutional investors show a marked preference for public-permissioned blockchains for the tokenization of their assets, followed by private chains (40%) and public chains (22%). 

One appealing feature of tokenization is its broad scope, enabling various types of assets to be represented as tokens. Examples encompass real estate, artwork, bonds and stocks, intellectual properties, identities, and data.

As a researcher studying the digital transformation of traditional assets, I’ve come across numerous instances where real-world assets have been tokenized and made accessible to a broader audience of customers and investors. A prime example is gold, an asset with a rich history and unquestionable trustworthiness. Last year alone, the market capitalization of tokenized gold surpassed the $1 billion mark, signifying a significant shift in how this valuable commodity is being traded and owned.

As a crypto investor, I can explain that tokenized gold is a digital representation of physical gold, with the ownership rights being recorded on a secure blockchain. The actual gold bullion or coins are kept in safekeeping by trusted financial institutions outside of the blockchain network. The issuing company generates corresponding tokens on the blockchain to signify ownership of each gram or unit of physical gold. The value of one token equals the value of one gram of gold held off-line.

Several businesses currently provide gold tokens as an alternative. For instance, Paxos Trust Company based in New York introduces Pax gold (PAXG), whereas Tether, a renowned blockchain corporation, offers Tether gold (XAUT).

Just as gold is a valued asset that has adopted tokenization, art follows suit in this innovative trend. For example, Freeport, a forthcoming blockchain platform, successfully completed its SEC review and announced the launch of its art tokenization platform in April 2023. This groundbreaking project will introduce four iconic Warhol pieces from esteemed collectors, such as Baby Jane Holzer. Although the platform didn’t endure, it made a significant observation: it emphasized that these artworks would be represented by tokens on the blockchain.

“The revolutionary technology of blockchain has broadened investment horizons for individual investors, including the younger demographic, who previously had limited access to elite investment opportunities. Regrettably, entering the fine art market remains a significant challenge for most retail investors, thus denying them the chance to invest in a sector that not only surpassed the S&P 500’s performance over the past quarter-century but also generally maintains resilience during economic downturns.”

Freeport hit the mark exactly. The public has already been introduced to Sygnum Bank’s groundbreaking tokenization project, where Pablo Picasso’s 1964 masterpiece, Fillette au Beret, was transformed into 4,000 tokens, enabling 50 investors to co-own the artwork. This trend is further highlighted by renowned artists such as Damien Hirst and Beeple, who have recently joined the ranks of successful painters embracing this innovative approach.

I’ve noticed an increasing trend towards the tokenization of real-world assets, which is revolutionizing various other asset classes. The Boston Consulting Group predicts that by 2030, the total value of tokenized assets, including less liquid ones like real estate and natural resources, could surpass $16 trillion.

“What’s fueling this substantial increase in worth for something as novel as blockchain, allowing it to access trillions of dollars previously untouched? A number of elements are contributing to the expansion of this sector.”

The factors that make asset tokenization a winner

Asset tokenization holds great promise by making it easier for a larger population to access and own assets. This is achieved through the fundamental characteristics of blockchain technology, which envision a world where transactions can be carried out without intermediaries and their associated costs. These principles are particularly relevant when applied to real-world asset tokenization.

As a researcher studying investment opportunities, I’ve noticed that high-value assets like art, precious metals, and real estate have traditionally been out of reach for most retail investors due to their high price points. However, with the advent of fractionalized ownership through digital tokens, investing in these assets has become more accessible.

As a blockchain analyst, I’m excited to describe this revolutionary method that empowers individuals through automated smart contracts within the intricate architecture of blockchain technology. This system is fortified by cryptographically secure tokens, effectively challenging the dominance of brokers – be it local real estate agents or high-profile investors commanding the market from their luxurious Wall Street offices. With a digital wallet and an internet connection as your only requirements, retail investors can now invest directly, eliminating the need for intermediaries.

As a researcher exploring the realm of tokenized assets, I’ve discovered that these digital representations of real-world assets offer significant advantages. One of the most intriguing benefits is the potential for democratic ownership and enhanced price discovery. This means that costs are reduced while the market gains access to a broader range of investors who may have previously shied away from investing in niche asset classes like art or luxury real estate. Consequently, liquidity experiences exponential growth.

Real estate asset ownership has historically been vulnerable to deceit and fraud. Approximately 10% of Americans have fallen prey to real estate fraud, and among those unfortunate individuals, nearly half have experienced monetary harm. The extent of this issue is troubling, as it leads to an estimated $446 million in annual financial losses. Moreover, the typical consumer who falls victim to realestate fraud can potentially suffer significant damages, with a median loss of approximately $70,000 per incident.

The process of asset tokenization introduces greater transparency and stronger security to the involved system. By combining blockchains, smart contracts, and decentralized oracle networks, there is a significant decrease in the need for intermediaries. This leads to easier verification of tokenized assets’ authenticity due to their immutable ownership records, which are kept on a distributed ledger. These ledgers enable provenance tracking and provide data trails that can be audited.

As an analyst, I can’t help but highlight the advantages of investing in tokenized assets from my perspective. The use of programmable smart contracts brings about significant improvements to the backend, eliminating potential administrative errors. It’s no surprise that tokenization has gained popularity given its democratic, efficient, inclusive, and cost-effective nature. Why settle for a less streamlined investment process when you can enjoy all these benefits?

The future of tokenization: Innovation and ingenuity

As a crypto investor, I firmly believe that the market’s anticipated growth to trillions of dollars in the near future will draw in an incredible amount of innovation and groundbreaking solutions. Interoperability is a key element in this transformation, as it bridges the gap between disparate systems and unifies them under a single operational framework. This union leads to significant improvements in scale, transparency, and efficiency through enterprise-grade infrastructure and programmable logic.

As a crypto investor, I’m excited to see tokenization gaining traction in various sectors, particularly in financial services where cash tokenization is on the rise. According to McKinsey & Company, around $120 billion worth of tokenized cash is already circulating as fully reserved stablecoins. This trend is a game-changer, offering numerous benefits.

Carbon credits can now be directly issued on the blockchain, making their details openly accessible. This transparency boosts acceptance and usage, as these credits can be transferred onto the blockchain via carbon links. Over time, these links may connect to established registries such as Verra and Gold Standard.

As a analyst, I would express it this way: I’m deeply impressed by the vast potential of tokenization. With just a digital wallet, anyone can join in, regardless of their financial standing. Tokenization has revolutionized access to high-value assets that were previously out of reach for most people – think of that lucrative piece of real estate or an art masterpiece. It’s a game-changer, bringing the opportunity to own a piece of the extraordinary to the masses.

Prior to tokenization, those assets were primarily off-limits for the average investor to simply observe from a distance. Now, however, investors have the opportunity to acquire ownership in these valuable assets, albeit partial, and experience their impressive growth firsthand.

An individual investor with direct control over their investments can now maximize returns and expand their investment horizons across various asset classes without the need for intermediaries.

Cloris Chen

Cloris Chen serves as the CEO of Cogito Finance, a fintech company specializing in decentralized finance (DeFi) solutions that tokenize traditional investment assets such as fixed-income and equities for institutional investors. With a solid background in banking, having spent six years at HSBC, and hands-on experience in the DeFi sector from her tenure as treasury director at a unicorn startup, Cloris brings a unique perspective to addressing challenges within this emerging field. These challenges include unsustainable yield farming practices, credit risk management, and regulatory uncertainty. As a valued partner with SingularityNET, Cogito leverages Ben Goertzel’s artificial intelligence (AI) expertise for portfolio management applications.

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2024-06-02 15:19