Daily Fintech

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.

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

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:

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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