The Next Very Big Thing
Nine months ago, I inadvertently fell into the world of blockchain and cryptocurrencies. It wasn’t by design; there was no master plan. I just found myself at dinner one evening last November with some very early adapters of cryptos. The fact that one of the guys is a multi-billionaire was just a coincidence, too.
I listened. I didn’t say anything because I knew nothing. These people were true experts – and wealthy beyond words.
I soon learned a lot of terms very quickly as I decided I could no longer watch from the sidelines.
“Ripple” was one of those terms that meant nothing to me pre-crypto but quickly had great meaning in my life. There’s a Grateful Dead song called “Ripple”, and since the coin had some buzz, too (pun intended), I had to make that coin my very first buy. I spent a week trying to get access to an exchange that had Ripple listed. I first wanted to buy the coin at $1.04. By the time I got approved to purchase “XRP” it was trading $2.60. Oops – I guess I missed that. Somehow the lyrics range true as I became fully indoctrinated:
“Reach out your hand if your cup be empty
If your cup is full may it be again
Let it be known there is a fountain
That was not made by the hands of men”
Welcome to cryptos.
Soon, I knew a lot more terms like “Bounties”, “Airdrops”, “Telegram” – and even “ICOs”. I didn’t know what an ICO was a year ago. Now I am working on quite a few of them. One of the first guys I met in this space said being a crypto professional could be measured in “dog years”, and no truer words have been spoken. I’m a humble guy by nature; it’s odd that some people call me an expert. My wife doesn’t think I’m an expert in much of anything. I’m just a guy trying to make sense of this all – and there’s a lot going on. In some ways, maybe too much. But I’m committed to figuring out which trends have longevity and which ones don’t.
In a short time, I’ve seen a lot, read a lot, learned a lot, made a lot of mistakes, met some great people (and a couple not so great ones) and am now using terms on daily basis that weren’t in my vocabulary at Christmas such as “security tokens”, “token swaps” and “trustless environments”.
What a blur.
Over 4th of July, I sat down and said to myself: “What is the biggest thing happening in the space right now? What new idea is the most transformative in a business sense of all the ideas in front of me today? More precisely, what is everyone – including myself – missing? Or to borrow the cliché: “What’s the next very big thing?”
Blockchain is the grand daddy of them all but that’s no secret. Smart contracts are the coolest thing since sliced bread or the invention of the printing press, but everyone knows that, too. Reverse ICOs? Nah.
What’s the next big thing alongside cryptos and blockchain? The one thing that truly could change the world as we know it, with far reaching impacts across global society? In my mind, it’s an easy call and it’s not even close: the tokenization of assets.
“Token-based assets have the potential to open up markets and offer new opportunities because of the decentralized nature of blockchain. Much like the internet 25 years ago, a steady progression of innovation can arise from a real-time, interconnected world with the potential to sequentially and substantially disrupt markets. Putting real-world assets into digital form using tokens so they can be exchanged easily and without friction promises to be disruptive.
Between now and 2021, we expect the blockchain opportunity for providers of blockchain platforms, services and owners of blockchain networks to grow five to ten times greater with a significant portion of this opportunity in the digital token economy. Industries will reinvent themselves, and new digital assets and asset classes will give rise to entirely new primary and secondary markets with low cost and minimal friction.”
I didn’t write that.
One example comes in real estate. Again, from IBM: “Global real estate value was recently estimated at $217 trillion. In real estate, token ownership can be used to give the holder a portion of the rights to a physical property. Unlike a traditional real estate transaction, the asset can be subdivided into numerous fractions or tokens, which might then be offered for sale. A purchaser receives benefits from the asset such as rental income and proceeds if the physical property is sold. By using tokens, a relatively illiquid property becomes highly liquid with minimal friction in buying and selling.”
(Editor’s note: One on hand, this a very complex idea. One the other hand, thanks to IBM’s clear prose, these ideas can be broken down into basic, understandable ideas. By the way, if you haven’t got the memo, IBM (like Deloitte) is absolutely dominating this space as an early adaptor.)
Not a week goes by now where I don’t get a call about a new project seeking to tokenize a physical asset: gold, crude oil, natural gas, real estate, timber, palladium, rare metals, the list is endless. Everything you can think of – and many thinks you’d never dream of – is being tokenized: right now. As you sit here and read this article – it’s happening.
Of course, we don’t see it yet because the rules are still being written in many countries (Hello USA), crypto exchanges can’t properly handle the order flow as these are securities and most crypto exchanges cater to utility tokens, and then there’s the biggest reason of them all: investors’ collective response at the moment is still “Huh?”
Put aside for one moment the logistics and legality, which are no small aspect of this, mind you. Indeed, it’s a near certainty that years from now the US Supreme Court will be forced to weigh in on numerous landmark cases. Set that aside for the moment: let’s merely consider the magnitude of the financial ramifications for now. According to the consultancy BlockWork Groups, if even a tiny fraction of the world’s physical assets are tokenized, this will be a financial game changer of epic proportions:
“There are $256 trillion dollars of real-world assets today. Most of these assets are owned on paper, facilitated by third party broker, and are highly illiquid. Blockchain technology has allowed for a new form of ownership that would reduce the transactional friction of these assets by several orders of magnitude. If even 1% of these assets were tokenized, that would represent a $2.56 trillion market (which should make you stop and think if you’ve been screaming that the crypto market cap of $280B is the biggest bubble in history).”
In order for this to become legitimate in the United States, these assets must be tokenized as securities, says Anthony Pompliano of Morgan Creek Digital Assets. He wrote in a Medium post this winter: “If cryptocurrencies like Bitcoin are considered “programmable money” then you can consider Security Tokens a version of “programmable ownership.” This means that any asset with ownership can and will be tokenized (public & private equities, debt, real estate).
Security Tokens bring a number of improvements to traditional financial products by removing the middleman from investment transactions (usually some form of a banker). The removal of middlemen leads to lower fees, faster deal execution, free market exposure, larger potential investor base, automated service functions, and lack of financial institution manipulation.”
(Editor’s note #2: “Pomp”, a former US soldier, is one of the leading voices in the world on this topic; he’s a must follow on social media on asset tokenization.)
Global exchanges are taking note. The Malta Stock Exchange is reportedly in collaboration with digital asset exchange OKEx to create a new institutional grade security-tokens trading platform. Coinbase, the US leader in cryptos along with Kraken, says it is approved to trade securities after the SEC and FINRA gave them the green light recently. To be blunt, every crypto exchange in the world, one would assume, is scrambling as fast as they can to accommodate the onslaught of security tokens coming to market – and presumably many of these will be tokenized assets because of their striking resemblance to publicly traded equities, including highly-coveted dividend offerings.
According to Tatiana Koffman, Venture Partner at DNA, these assets can be broken down into two categories: one, share-like tokens, which have features such as ownership in an entity, LP shares, voting rights, dividends, profit shares, or some interest in the success of a future entity. And two, asset-backed tokens which constitute an economic right to a real-world asset, such as art, real estate, or power plants.
Tokenization of securities is forcing us “re-examine old habits and ways of operating” according to “Flippening” podcast host Clay Collins. And Wall St. may be the “thing” most disrupted by the tokenization of assets, or securities.
According to a February article in Crowdfund Insider upstart crypto firms like Polymath – which is sometimes described as a “securities token in a box” – will challenge the likes of Wall St. banks and give them tremendous competition in this new sphere: “There is plenty of hype in the crypto space, and Polymath has received its fare share, but its mission is pretty straight forward: it wants to disrupt Goldman Sachs and pretty much every other investment bank out there. And why not? Blockchain is the perfect vehicle to power this type of disruption.
When you go to an investment bank, to raise debt or equity capital, the bankers spin their story as to how they can quickly and easily sell your security to their book of investors. Meetings are held, documents produced, conference calls take place, and the security is pitched to investors far and wide. But this takes a good amount of time, and don’t forget, a lot of money, but hey, it’s what you gotta do.”
The sheer audacity of the projects entering this space at present is impressive and unrelenting. In the past month, I have come to learn about three projects that combined are aiming to raise $1.5 billion by the end of this year in the tokenization of physical assets space alone. Clearly, there are at least dozens of new projects around the world that I will never hear of, and tens or perhaps even hundreds of billions of dollars expected to flood into this space in the next 12-24 months.
As these product offerings are unveiled, I suspect that the pricing of these tokens, or securities, will one day rival that of global exchanges like the Chicago Mercantile Exchange. What’s the difference going to be between a futures, options or ETF contract and a crypto-currency pegged to the price of gold in Alaska, or a barrel of oil in Colorado, or natural gas reserves in the Permian basis? These projects raising money in this space will likely have to “give up the edge”, to use a trader’s parlance, on price to new investors because the concepts are so new and the legal and regulatory minefield is still being cleared.
In other words, if you can find the right dance partners, some analysts say, these types of investments could be highly lucrative until the market itself gets a clearer grasp of how to price these offerings. But this is not legal or financial advice, to be clear, and investors need to do their own research.
No, the purpose of this article is simply to educate investors and non-investors alike about a transformative new financial model that will change how capital is raised, what assets can be brought to market, how they will give liquidity to assets that have been hard to manage or exit for decades, and hopefully be a force for good in the years ahead as blockchain technology, artificial intelligence, fracking, machine learning, space travel, cloning, self-driving cars and so many incipient technologies change the way we eat, sleep, walk, talk, drive – and yes, invest.