Tokenisation: reinvention of capital markets part 2

Alex Medana
September 23, 2019

Good morning London!

When you call something part 1, you either bluff, lie or commit…Well, I just wanted to leave the door open for refining the ideas I put here.

 

I got feedback, which is another word forgetting beaten up but I very much enjoy the process of refinement because it would be bullshit to stand here (am seating on a plane actually) and pretend I know everything and worse I have thought about everything.

 

I welcome the challenges and the questions as the sure way to progress…or I call that “becoming less shit”, which will be the topic of a vignette. I commit here to write about concepts based on my martial arts’ traipsing that may be useful in a business context. Vignette #1i s about “Yi”, the intent as promised to many coffee drinking friends over the last few weeks and vignette #2 will be about “becoming less shit”.

 

One of these recurring challenges has been on grasping the concepts and differences between tokenisation and fractionalisation.

 

Tokenisation is the process to represent digitally “something else” and in our capital markets context, it simply means a digital representation of the contractual rights over an asset: a digital proof of ownership if you like.

 

As a mental shortcut, we all use these types of phrases “tokenising a building”, “tokenising a bond”, “tokenising gold” etc. and whilst these shortcuts are necessary to help the non-techie, blockchainy joe blog grasp the idea of what we are trying to achieve, they actually create a false illusion.

 

No-one tokenise a building but rather digitalise the access to it (ownership, risk, capital appreciation, cashflow, whatever) that may come in the form of a fund, SPV, trust, equity, bond and soforth.

 

Think of a token as a folder that contains links to a contract between two parties that will transfer an ownership,confers some rights and have a monetary value (intrinsic and extrinsic, the former based on the underlying asset, the latter based on a market price however liquid this market might be).  Well, even that point is not really accurate: a token is an entry in a database and after each transaction there is a timestamp (post consensus and therefore indisputable) that solidifies a proof of ownership or identity. Less sexy no?

 

In that token, you can add the Digital ID of the parties, a price, a quantity…any standardised and agreed attributes at the time of the issuance i.e. mere credentials on a template.

 

A token is an access product to a tangible(financial or not) or intangible asset. Et voila…although any verbiage is deemed to be an unsatisfactory shortcut for some.

 

I often get asked if we tokenise abuilding, a vineyard, a bond, and I always say “yes and?...” pausing before adding “why?”. Tokenisation is the easy part, distribution and liquidity are not.

Fractionalisation is achieved through tokenisation but it may be achieved without (for example, a CFD on a nice UI that is based on a price feed), as long it is contractual and permissible in acertain regulatory or market practice frame of reference. It is about breakingdown an asset into small pieces; a one dollar unit of an art piece,collectible, bond, fund, gold bar, portfolio etc.

 

Fractionalisation today is an utopia but that doesn’t mean we can’t talk and think about it.

 

As an institution or a professional investor you can’t care less about it because your drypowder, knowledge and literacy (among other things) will give you access to just about anything(well, there are rules and limits but I am on purpose speaking broadly here).

The interesting thing for them might be to build and/or offer as a services, tailor-made portfolios built on small bricks,more flexible to construct and where the risks/rewards can be adjusted continuously, dare I say real-time (depending on liquidity, price discovery,risk-appetite, micro and macro factors).

 

As a retail guy, you may want to have access to that Banksy you saw shredded on TV either as an emotional investment(bragging rights included) or as a sensible one (art prices can only go up due to scarcity right?!) so the concept of fractionalisation will endear you.

 

There a fair amount in terms of information, access, suitability, risk protection and so forth that needs to bethought through before we can buy one Mona Lisa’s eye online. This is not about technology: it is about creating a market that DOES NOT EXIST TODAY.

 

Fractionalisation is the ultimate retail product which I call the “portfolio of me”, a hyper-personalised access to interesting investment opportunities, something that I may have created on a whim and I can proudly share with anyone who wants to listen.

I foresee we will swap, transfer those fractions between each other freely but not for another 5-10 years.

Imagine for a second, we chat over coffee(if you can only chat over beer or wine, go for it!) and we show each other the fractions we own. Like the Panini cards of our youth (if like me, you are 200 yrs old!), we could swap fractions for one another, completely OTC. No orderbook, no indication of interest, no request for quote, no bid or ask on a lit market…just you and I bartering like the days of old when the marketplace was only physical.

 

This paradigm might never happen for many reasons: regulatory headwinds, cottage industry’s resistance, sustained information asymmetry, investors’ lack of enthusiasm and so forth.

Getting access to customers, engaging them and retain them bring different challenges and with new products come new learnings.

 

Right now we have decided to have focussed our offering on creating efficiencies for all participants in an ecosystem. Faster,more efficient, cheaper, more secure and private.

The next steps once we have proved our model will be to question the status quo of that ecosystem i.e. why you need soand so intermediaries.

Intermediaries are cutting a transaction into datapoints to fit their narrow workflow (narrow because of regulations, market practices, technological debt or habits). In isolation, they would keep on doing what they have been doing forever because the inefficiencies have been priced in and passed to…you and I, the suckers at the end of the chain.

 

We are enablers but may not stay that way forever! Join our journey to reinvent capital markets.