When Facebook part-ideators Tyler and Cameron Winklevoss told Fortune at the start of the year that stable coins and tokenised securities had a bright future, it signalled stage 0.2. After a period in which leading players have been quietly developing the tech, the PR push was on.
“The next wave will see the real innovation,” said Cameron, “and the really interesting assets that become tokenised — like real estate, like buildings that are currently not traded in a really liquid fashion.”
There’s no doubt that both stable coins and tokenised securities are the latest thing, something needed by a crashing crypto market — and possibly the next stage for a jittery real estate market. But will the reality of the next 18 months match Cameron’s hype?
Trading on uncertainty
Security tokens imply something about our financial markets — a lack of security and limited public participation in trading. Investment isn’t what it was, with interest rates low and political uncertainty high. Trading on financial markets, done judiciously, can still work. But the growth of passive funds that simply track the performance of an index, outlines how costs are increasingly a factor — and how much things could change.
Brokers recommend varying industry and economies — ‘diversifying your portfolio’ — but national borders mean barriers. And for barriers’ read ‘broker’s management fees’. Transaction costs vary, but brokerage commissions are nearly always higher for investors looking to place their money outside domestic markets. Charges such as stamp duty, exchange fees and clearing fees, scale quickly.
As Sean Hagerty, managing director for Europe at Vanguard, the asset management group, says: “Every pound paid in fees is a pound less of return for investors — and that makes an enormous difference over time to their returns”.
It’s why something new has emerged. Built on Distributed Ledger Technology (DLT) via the blockchain, tokenised securities allow the investor to follow his or her trades more easily. Plus, they open up opportunities for investors and fundraisers alike.
The Boston Consulting Group concluded in a report last year: “The use of blockchain solutions would significantly improve transparency … It would also create a more efficient and liquid market, moving commodity trading away from bilateral deals struck directly between two parties to transactions based on electronic platforms to match buyers and sellers.”
Dividing into Fractions
Security tokens benefit classic security instruments such as equity. But the securities market itself could also be expanded, taking us back to Cameron Winklevoss and his prediction. Currently, fractional ownership in property is almost non-existent, with larger ventures owned by multinationals involving multiple agents.
Tokenisation could bring part-ownership of a property. Or the shares of a company owning a property could have tokens attached to them. Or, a hotel could give usage rights, or rights to a percentage of profits. These could be distributed among the token holders, and if the hotel is profitable then the value of the token goes up.
Mike Kessler, CEO of Tokenise, a company offering tokenised securities and a secondary market, adds: “Tokenisation is a way to raise capital and create liquidity in what was and still is, currently a very illiquid market.”
And there are more uses. Instead of Leonardo da Vinci’s Mona Lisa painting selling once every 20 years at Christie’s, it could be traded in fractional parts per second online.
Right now, one particular demographic group is wary of investment. A recent survey by Barclays Bank found that 47% of 18–24 year olds only put their money into current accounts, and 31% were not comfortable with the level of risk involved with alternative methods of investment.
Meanwhile, the older group of Millennials — those in their early 30s — came onto the job market with the financial crisis in full swing. Their job prospects took a dive just as their career was about to take off — thanks to failures largely spurred on by the derivatives market. The default on loans caused by an asset bubble created a downward spiral.
Some of the fog around derivatives would be cleared by tokenised securities. Plus, tokenised securities could repair the damage done to the current investment market by Initial Coin Offerings.
It’s why Tokenise is building a crowdfunding platform with investment delivered through tokenisation, and then allowing people to trade that investment with others. According to Kessler: “we saw a natural pathway from equities crowdfunding to tokenising securities. This is to help create liquidity, price discovery and transparency into an otherwise opaque and untraceable marketplace”.
Tokenised securities are shares in real companies with real value, rather than fantasies dreamt up by barely legal crypto operators. For an upcoming generation wary of investment — and for many of the rest of us too — they look like the answer.