Asset management and investment is an ever-changing and evolving space with fund managers, companies and individuals always looking for the next best way to get an edge in the competitive markets. Blockchain has been looked at, in combination with AI and Big Data, but this space is constantly moving.
While these new technologies find their feet, they begin to offer even more ways in which this space can move with the times. Asset management and investment have traditionally been quite institutionalized and exclusive, with set rules and methods of how to do things.
But with the introduction of Blockchain, AI, Big Data and a bevvy of other technological tools, that is all changing. Even more so, the exploration of blockchain tokenization also looks to be introducing a new face for asset management and investment.
Assets, from Real Estate to Gold; to other precious metals previously out of the realm of general investment, such as Palladium; valuable works of art, and more, are now being sliced up and offered to investors to buy.
However, this is not a new concept. The tokenization of an asset bears similarities to the process of securitisation, where financiers slice, dice and sell fractional ownership of an asset. In fact, the 2008 financial crisis sprung from this ideal when bankers securitised and sold trillions of dollars of collateralized mortgage loans that were completely divorced from the loans’ underlying risk profile.
This is why the blockchain is an essential factor in this form of securitisation as these security tokens, which are becoming more and more popular in the form of STOs (Security Token Offerings) benefit from the lack of intermediaries involved. But, there are still other concerns and risks that spring up with this new world of asset investment.
What is tokenization?
It is essential first to understand what tokenization is, not only as a new form of asset investment but also how it differs from securitization.
Tokenization started to gather momentum through 2018 and involves taking physical assets and placing their value on the blockchain by divvying up the overall value into tokens of value that add up to the total.
As an example: if a person wants to invest in real estate, the usual way of going about this is to buy a piece of property, apartment, house etc. However, for most people, forking out hundreds of thousands of dollars for a full part of real estate is not feasible.
And, looking at it from the other side of things, if you own some property and need money from the asset; the apartment is valued at $150,000 but you need $10,000, it is near impossible to achieve this without much hassle.
This is where tokenization can come in. A person can convert an asset, in this case, say a house worth $500,000, into digital tokens of any value, and thus, each token represents an ownership percentage of that property.
Doing this on a blockchain platform which enables smart contracts has added benefits as these tokens can be freely bought and sold on different exchanges. More so, if you buy all the tokens, you then own the entire asset, but, this is also where legal issues come into effect as the ownership will not be on any government-run registry, but it will be on an immutable blockchain and thus provable beyond any doubt.
Concerns and securitization
The example given above is quite basic, but it immediately highlights some of the problems facing tokenization – which is only in its embryonic phase.
Cryptocurrencies and blockchain have no set global regulation with different countries taking different approaches to how this tech should be governed thus, if the token-issuing body sells the property then the token holders have their tokens, and no legal right to the property and no legal protection.
The issues of securitization can, to a point, be alleviated with the blockchain though. There is an apparent similarity between tokenization and securitization, but the key differences are that the token is issued on a blockchain, and with that comes the guaranteeing of trust, transparency, immutability, non-corruption of data and non-duplication. And, the tradability/liquidity of the token is on a digital secondary market.
Thus, the blockchain offers peer-to-peer trusted transfer of digital values while providing certainty and immutability of that transfer, which mitigates a lot of the risk but also limits the type of tokenization that can be done to purely on-chain.
There is a lot more that can be discussed and debated about the difference between tokenization and securitization, but for this article it is only worth mentioning that the blockchain offers a way to remove intermediaries from the equation and make the tokenization and transfer of assets peer-to-peer and far more liquid and tradable and also help reach different assets not accustomed to securitization.
A new world, with new assets
So, while there are a lot of teething problems that need to be dealt with before the housing market can move onto tokenization and the blockchain, there are still smaller, more accessible opportunities where blockchain tokenization can come to the aid of the traditional asset investment space.
Gold has long been a traditional asset that many feel safe in investing, helping them diversify their portfolio. However, even with its ability to be cut down into small, investible, pieces, it is still a problematic asset to get one’s hands on and to store.
This has led companies of the scale of JP Morgan to look to tokenize the asset on the blockchain through its Quorum blockchain. The use here is not so much for the everyday investor, but rather a way to allow sustainable miners to earn a premium on global markets. This is instead an indication of new trading opportunities that the disruptive technology can create over the coming decade.
But, for the everyday investor, there are new ways to get in on precious metals, and not just gold.
Russian metals giant Norilsk Nickel, known for its Palladium production, is working on launching its metal-pegged blockchain-based stablecoin which is another way to invest in the valuable Palladium.
“Electric car producers are worried about the future lack of palladium. The volume of the metal that we produce and sell is absolutely clear. There really will be a deficit of the material in the next few years,” Nornickel CEO Vladimir Potanin said.
What is interesting to note is that while gold has always been popular with investors – because of its stable growth – something like Palladium reaching the market, there could be excellent opportunities for investment.
Palladium, used in cars and sometimes jewellery, has topped gold in commodities trading in the recent past. The price of palladium, 30 times as rare as gold, has risen by more than 50 percent since August, surpassing the price of gold for the first time since 2001.
Nornickel is in a position to raise the output of palladium, but it remains a matter of investment. The company would not want to spark price volatility, but it would want to ensure the market that the necessary amount of the metals will be produced and offered to the buyers, Potanin also explained.
Driven by both investor and trade interest, palladium appears to be responding to strong demand from the auto industry. More than 80 percent of the world’s palladium is used in the catalytic converters that help vehicles manage their pollutant output.
Increased emission regulations across major markets including China would also increase the demand for electric vehicles, and thus palladium. This has already seen the metal reach a record price as it continues to rise without a sign of slowing down.
The new face
The investment world sits on the precipice of change once again. No longer is this ecosystem just about the big corporations, Wall Street, types who are putting their money into traditional stocks and assets; we are in a digital and inclusive world.
Cryptocurrencies opened the eyes of many millennials as to how ‘smartphone’ investing is both comfortable and rewarding. While the cryptocurrency bubble may have burst at the end of 2017, it has kick-started a new way of doing things.
People now want to be offered chances to invest in the future, with the ease and availability that technology allows. Thus, blockchain tokenization, metal-pegged stable coins, cryptocurrencies and the blockchain as the driver, are allowing this new wave to create a new face of asset investment.