Investing in Asset Backed Tokens

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The idea of fractional ownership of some “hard value” asset is not new. Think of stock certificates, timeshares, mutual funds to name just a few examples. What Blockchain Tokenisation brings to the table is simplicity, transparency and tradeability. While that may sound incremental it is actually game-changing because it opens up new markets.

This is Part Three (Chapter 4) of The Blockchain Economy book. This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated. For the index/table of contents of The Blockchain Economy book please click here.

This chapter covers:

  • examples of assets that can be tokenised.

 

  • an Asset Backed Token is an IOU that must be collateralised.

 

  • the three big benefits to investors from tokenising assets via Blockchain.

 

  • Tokenised gold could be a game-changer.

 

  • one asset example with some complexity = diamonds.

 

  • combining asset + use (hybrid of asset and utility token)

Examples of assets that can be tokenised.

  • Commodities, such as gold, diamonds and oil. Our use case example below is diamonds.
  • Equity, through Security Tokens. This is a special case of an asset backed token to which we devote a separate chapter. It is critical because this relates to how the the Blockchain Economy gets funded.
  • IP assets with cash flows. Today this is an exotic asset class where musicians were the early adopter – think Bowie Bonds. Once these assets become tokenised there will be a lot more liquidity and that will bring a lot more IP Assets onto the market.
  • Currencies. Collateralised stablecoins is another special case of an asset backed token to which we devote a separate chapter (see next week in the serialised book rollout).
  • Real Estate with rental income. Today you can invest in REITs, if you want exposure to real estate cash flows. When ownership of whole buildings become tokenised it will open up new vehicles and new ways of doing portfolio construction; for example you could create a portfolio based on a  theme such as migration from Silicon Valley to Rocky Mountain states.
  • Debt collateralised by Payables and Receivables. Today this is done through Supply Chain Finance and Factoring. With data flowing direct from AP and AR modules in ERP, this market is growing fast. Bundles can be Tokenised and sold to investors looking for a specific credit risk and duration.

All of these assets can be bought and sold today. What Blockchain does is make that process dramatically more efficient thanks to the three big changes that Blockchain brings to investing. That may sound incremental but it is as revolutionary as moving from hand built cars to Henry Ford’s production line or moving from messages sent on paper to email. In both of those cases, a dramatic rise in efficiency grows the market. In simple terms, a 90% drop in price (destruction) is accompanied by a 10x increase on volume (creation); that is great for entrepreneurs and incumbents that can navigate creative destruction.

An Asset Backed Token is an IOU that must be Collateralised

An Asset Backed Token is simply an IOU. Think of one of the first Asset Backed Tokens to get traction – Tether. When you buy $1 worth of Tether, you are really buying an IOU that says you own $1 worth of the United States currency held at a bank somewhere. That also applies to the multi currency basket Stablecoins that we look at in the next chapter. The general point is that an Asset Backed Token is an IOU – like paper currencies when they were backed by gold.

The three big benefits to investors from tokenising assets via Blockchain

  • Real time settlement. Liquidity matters when introducing a new type of asset; investors will be nervous and so will want to avoid long term lock-in. Real time settlement offers instant tradeability via crypto exchanges, which is the first step towards liquidity.
  • Liquidity through easy fractionalising. If a single bar of gold or a single diamond or single musician’s back catalogue is not the right unit, fractionalising allows you to buy in whatever units suits your profile. This is particularly relevant for examples such as Commercial Real Estate where many more would enter the market if one could easily buy units of a building.
  • Trust through verifiability, transparency and immutability. This is where regulation is critical as we are in the scammy era of Blockchain today. A modern regulator should like the data transparency that comes with Blockchain. The High Net Worth (HNW) investor can afford lawyers and others to manage due diligence, but if that process can be automated it will open up the market and bring in more investors (which is the key to liquidity).

Tokenised gold could be a game-changer

Many ventures are tokenising Gold, because it is relatively easy to do because there are few variables. Gold is already traded as a paper asset through vehicles such as ETFs. Tokenised Gold is different because each token must be properly stored and audited. You must have total confidence that when you buy an asset token – which is really an IOU – it is really backed by actual gold of the quality stated on the token. That means it can be exchanged for physical gold at will. Although gold is fairly standardised and therefore relatively easy to tokenise, there are some nuances. For example, some supposed gold is really gold covering tungsten.

If gold tokenisers can solve these problems, the widespread adoption of gold tokens could take away one of the advantages that Bitcoin has today as digital gold. One advantage that Bitcoin has over gold today, is that it is easily divisible and transmittable. If I have one Bitcoin, worth around $8k as I write, I can “chip off” 1% and send the equivalent of $80 to somebody. Lets say I own a one kilogram gold brick, worth about $37k as I write. It is much harder to “chip off” 1% and send the equivalent of $370 to somebody. If that one kilogram gold brick, I can easily sell/transmit whatever part of that asset that I want.

In simple terms, tokenised gold would be like paper currencies before thy became Fiat, when they were still backed by gold.

If gold is relatively simple, consider a tougher case which is diamonds.

One asset example with some complexity = diamonds.

Gold as an asset class is well understood. Diamonds as an asset class is less well understood and relates to the declining power of De Beers over supply and pricing. There are many more variables and so the back end part of tokenising has to be a lot more sophisticated and mature. One company going after this market is D1Coin. D1Coin, which was created by an established asset management firm in Singapore with a 30+ year track record, has to do a lot of work at the back end around certification, auditing, tamper proof packaging, insurance, safe storage, mechanisms to convert a token to physical delivery.

Disclosure. Daily Fintech Advisers is an adviser to D1Coin.

Combining asset + use (hybrid of asset and utility token)

This is currently in the realm of science fiction, meaning it is possible within existing technology but (AFAIK) nobody is doing this yet.

Think of classic cars. I happen to love classic cars, as many do, so this example resonates. Today the classic car market breaks down into two types of collector:

  • DIY enthusiast. They buy a wreck, painstakingly restore it, have fun with it, then sell it and rinse/wash/repeat.
  • Wealthy collector. They employ people to do the hard work. They may buy wrecks or perfect examples at auctions. Rather than one car at a time that the, DIY enthusiast has, the wealthy collector typically has a whole stable of cars.

There are millions who would like something in between. They love classic cars but a) don’t have the skill/motivation to do a DIY renovation and b) don’t have the money to build a collection from auctions and pay others to maintain them.

This is where a mix of asset + use, using a hybrid of an asset and a utility token could deliver what millions want.

The first task is to build the asset and certify that the asset is what you claim it it is. If you claim that your collection has an Aston Martin DB5 from 1955 (aka a “Bond car”), you will need a reputable firm to vouch that it really is an Aston Martin DB5 from 1955 and not a replica. Auction houses do this today.

Once you have those assets properly certified, stored and maintained, you can sell usage. Somebody can rent that Aston Martin DB5 from 1955 for a James Bond fantasy weekend.

Today there are some classic car clubs offering something like this. A mix of Asset + Utility Token would enable many more to be created as they can be crowdfunded. The beauty of classic cars as an asset class is that they have scarcity value. The benefit of tokenising is enabling many more people to enjoy driving these beautiful machines (which are meant to be driven and not just admired in showrooms).

Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).

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