Before jumping into the subject of tokenization and why investors should consider tokenized assets, it’s important to understand what tokenization is and isn’t.
The definition of tokenization, according to BNY Mellon:
“Tokenization is the process of converting rights – or a unit of asset ownership – into a digital token on a blockchain. Tokenization can be applied to regulated financial instruments such as equities and bonds, tangible assets such as real estate, precious metals, and even to Tokenization of Copyright to works of authorship (e.g., music) intellectual property.”
An example of tokenization would be how Apple Pay stores your credit card information. Square’s blog on tokenization explains:
“After you take a picture of your credit card and load it into your iPhone, Apple sends the details to the card’s issuing bank or network, which replaces your card details with a series of randomly generated numbers (the token). That random number is sent back to Apple, which programs it into the phone. This means that the number stored on the phone can’t be extracted into anything valuable to fraudsters.”
In the case of Apple Pay, the asset is your credit card details, while the token is proof that you are the owner of those assets. While it might sound like encryption, it’s not.
Encryption takes plain text and translates it into non-understandable cipher text through the use of complex mathematical algorithms that create a key for encrypting and decrypting the information. In the case of a symmetric key, there is only one key to both encrypt and decrypt the message. In the case of an asymmetric key, there is one key for encrypting and another for decrypting the message.
The big difference between the two is that tokenization doesn’t use math to secure the data but rather creates random numbers or alphanumeric characters that have no relation to the original data. This prevents hackers from being able to reverse the data to its original form.
Now that we’re all confused, here are three reasons to consider tokenized assets:
The Democratization of Investing
In April 2012, then-President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act. At the time, the creation of equity crowdfunding was hailed as the “democratization of investing.”
“For the first time, a new category of investors has been created. What was called the ‘unaccredited investor’ will now be called the ‘microinvestor,’ defined as anyone taking an interest in putting discretionary funds into private companies instead of other risky investments such as penny stocks, gambling or the lottery,” stated Wharton Magazine contributor Bruce Blechman in 2012.
Unfortunately, while equity crowdfunding has come a long way since the JOBS Act was passed, the democratization of investing still has a long way to go. Tokenization of assets could help us get there far sooner.
“You could argue that [capital markets] are very efficient. You have the New York Stock Exchange, Nasdaq. But who participates in those is really limited. It’s basically thousands of companies out of millions of companies. The ability to access capital as a start-up, small business, an entrepreneur, all the way as you grow, is limited…” Jeremy Allaire, CEO of crypto fintech Circle, stated while at the World Economic Forum in January.
“So I think the promise of this is, can we actually create capital markets that are as open and global as what we have in e-commerce?”
I, for one, would love to be able to buy stocks on any exchange, in any country, at any time, around the world. Tokenization, along with the appropriate investor protections, could accomplish this.
In 2017, Sotheby’s sold the intellectual property rights for a painting by Jean-Michel Basquiat for $110 million. Imagine if art lovers around the world could buy 1/11 millionth of those rights for $10. By tokenizing this asset, someone in the most remote part of Africa could turn on their computer, and assuming they had internet access, buy that fractionalized asset.
By making the way assets are purchased more efficient, the world is provided with an opportunity to invest in venture capital initiatives at a much higher rate.
Think about how you can make peer-to-peer payments today. It’s so easy to send your friend $20 for lunch via email payment. Well, now imagine if you could send $100 to the Toronto Maple Leafs via email to buy a small piece of the hockey club. With the tokenization of assets, that can be a reality.
The one thing I love about authentic equity crowdfunding opportunities in the U.S. is that it’s a little [investment] from a lot of people rather than a significant investment [venture capital] from a few.
With the coronavirus in full attack, it’s never been more critical than it is today, to make investing something that doesn’t have to happen face to face,
Common Sense Investing
One of the things that I do in my investing journey is to write down the names of businesses and brand names I come across in my daily travels from one task to the next. The other day I came across a Genie scissor lift at a construction site. I wrote down the brand.
So, I can find out if it’s a public company or owned by a public company. Genie, if you’re not aware, is owned by Terex (NYSE:TEX). Its stock is down by more than 50% year to date. It could be my next 10-bagger.
But what if a private company owns it? I’m mostly out of luck.
With tokenized assets, not only could I buy $100 of the company with a quick tap of my phone, but I could also purchase 1/1000th of the cash flow of the scissor lift I just saw.
After recently having to book an appointment with my mom’s bank to get added to her account as a joint owner — how crazy is that during the coronavirus? — the tokenization of assets would enable me to do that from the comfort of my own home.
I won’t say who the bank is, but suffice to say, it doesn’t say much about North America’s banks and the customer experience.
I, for one, look forward to the tokenization of assets.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.