Asset management has traditionally been reserved for institutional or high-net-worth investors (HNWI) due to complex regulatory frameworks and the overall cost of the investments. The level of requirements on asset managers, family offices, and private banks dramatically inflates the price of financial advice and asset management services. Professional traders and asset managers must have a brokerage account, while wealth managers carry additional fiduciary obligations. Most financial service providers also need to adhere to the Know Your Customer rules (KYC) and anti-laundering laws (AML) while navigating the maze of directives regarding privacy (GDPR), open banking (PSD2), and financial markets (MiFID II).
No wonder then, that fintech startups using sophisticated machine learning, CRMs, and across the board automation, are quickly disrupting financial niches and putting incumbents out of business. From neobanks outperforming traditional financial institutions, through robo-advisory machine algorithms teaching customers how to invest in place of human advisors, to emerging tokenization platform offering the entirely new world of assets; the financial markets seem to be on the brink of a paradigm shift with a new asset management environment emerging.
What is Tokenization?
Tokenization understood as using tokens to represent an asset has been around for centuries, argues Shermin Voshmgir, a Ph.D. of Economics and a director of the Cryptoeconomics Research Lab at Vienna University. However, with the recent invention of blockchain technology, explained in the pinnacle 2009 white paper, the asset tokenization is now on its way to completely disrupt the asset management industry.
Tokenization on the blockchain means that ownership of the asset can be expressed in the form of a digital token. The token is a piece of code that contains a proof of purchase and the contractual details. The transactions between token buyers and sellers are conducted on the blockchain so that the token ownership can be timestamped and tracked on the digital ledger record. So what’s so disruptive about that? The answer lies in the characteristics of what we call distributed blockchains and the emerging field of DeFi or decentralized finance.
The Significance of Blockchain in Asset Tokenization
Blockchains could be described as another kind of database or a digital ledger with a specific set of characteristics that makes it particularly useful for the tokenization of financial assets.
Blockchain is distributed and decentralized, meaning a copy of the blockchain is stored on private computers all around the world, and it’s difficult for hackers, governments, or other entities to track and influence all the copies. Blockchain lacks a single point of failure, like data centers that could be subjected to attacks and data tampering.
Blockchain is also timestamped and immutable, which makes records additionally secure. For example, data are submitted to the blocks, where each block in the chain contains a hashed number of the previous blocks. Smallest data change will alter the hashed, making the fault instantly visible throughout the chain and easy for the network to reject.
Most common blockchains have their own distributed governance or a network of computers incentivized by the system to validate correct transactions by reaching a majority consensus. The system is inherently designed to function without the need for trusted third parties like governments or lawyers to oversee the process. In effect, transactions performed on the blockchain are both safer and much cheaper than those in the traditional financial sector, which opens possibilities for new businesses and investors to join the market.
New World – New Assets
Asset management and asset investment currently struggle with multiple different issues. The traditional investment vehicles are often too expensive for retail investors; that’s the ordinary people willing to invest small amounts. The system often inflates the brokerage fees with minimal investment amounts exceeding $5000. The ownership is both expensive and timeconsuming and requires many third parties like notaries, banks, and lawyers.
New investment and robo-advisory apps like Robin Hood and Acorns are gaining momentum and opening markets to wider audiences. However, they are still not globally available, and traditional regulatory frameworks impair the broader disruption.
That’s were tokenized assets on the blockchain could push the momentum forward. Tokenization offers a new world of assets that are potentially borderless, accessible from anywhere at any time, and instantly transferable at a minimal cost.
Researchers, enterprizes, and exchanges are currently working with regulators to build new legal frameworks. In the meantime, tokenization already offers a quick and automated way to securitize assets while complying with current local ordinances. Once smart contracts are legally vetted, they can be used across the board to tokenize any type of real-world assets from real estate to art and collectibles.
Why the Real-world Asset Tokenization will Change Asset Management
There are many amazing advantages of using asset tokenization and blockchain to disrupt the asset management scene. Blockchain offers low transaction fees, instant ownership transfer, and, most of all, seamless access from anywhere in the world via the internet or even completely offline.
With open public blockchains, it’s easier for everyone to participate in asset exchange regardless of their financial status. It’s also easier to monitor and audit your assets, although owners’ privacy is still protected, and the actual data on the blockchain encrypted with hashing algorithms.
The assets that were previously expensive, illiquid, and difficult to buy and sell can now be instantly digitized and sold in the form of tokens to one or multiple different buyers. This kind of shared ownership and asset management may soon become a new trend in real estate investment, similar to real estate crowdfunding.
Various technical and legal issues still need to be ironed out before the asset tokenization on the blockchain becomes mainstream. Still, cryptocurrency exchanges and traditional exchanges are already racing to get the share of this emerging market and build new asset management frameworks. Many already collaborate with their local regulators to develop alternative regulatory environments for what they hope will become a new asset class, the crypto assets.