Awhile before starting FinFabrik and the arrival of a tidal wave of cryptoassets I had been pitching the concept of fractional ownership enabled by blockchain. It was 2016 and the reactions were, well, muted. Reflecting on it today, this was based on a combination of being slightly early and my inability to fully grasp and clearly elucidate the changes this technology may bring to capital markets and the way we invest, particularly into alternative, illiquid assets. Today I am fortunate enough to pursue the same vision surrounded by my very own FinFabrik colleagues, each one of them adding strength to our team.
We have seen impressive progress in the cryptoassets movement. Both the irrational exuberance as well as the current slow-down and gloom are perfectly normal and expected expressions of this development if past technological revolutions are any indication (but let’s leave that to another post).
The cryptoassets space can be structured into several sub-groups, which include the ‘classic’ cryptocurrencies and another concept that we at FinFabrik are most interested in: Digital Asset-Backed Securities (This post offers a more detailed exploration of taxonomy: ). A common reaction from people discussing digitisation of assets, ie, the creation of DABS, is along the following lines:
This does not seem so different from good old securitisation. Why should we put up with all the trouble just to do the same thing in a digital way? Only to use fancy blockchain technology?
Let me illustrate the concept of asset digitisation and the attached benefits, summarising recent conversations and presentations.
Investment into alternative and illiquid assets, both tangible and intangible, follows well-established traditions and rules. This has led to market efficiencies and the rise of investment markets in these assets. We are now on the cusp of the next evolution of this industry based on the revolutionary technology of blockchain.
The method of tokenisation is the digital representation of rights in any asset on a blockchain protocol. These rights can cover a range of privileges with respect to the underlying asset such as ownership (eg, equity), claims (eg, dividend) and governance (eg, voting). Tokenisation allows rights to be recorded digitally in what we refer to as Digital Asset-Backed Securities. This adds interesting qualities to an asset that have the potential to fundamentally change our interaction with it. Allow me to introduce some new language, for lack of better fitting terms.
Added qualities of digital assets via tokenisation
Accessibility: the digital rights of ownership can be broken down into smaller units, hence including a much broader group of investors in an asset class with traditionally high minimum tickets. Imagine anyone can invest small sums such as 1,000 RMB into an office tower.
Tradeability: by putting the entire investment process onto digital rails, friction and complexity costs are significantly reduced. Imagine a direct stake in a building can be traded like a stock.
Investability: it becomes much easier to create truly diversified portfolios from decorrelated assets, even for smaller invested sums. Imagine you can invest 10,000 RMB into a portfolio of fractionalised real estate, art, classic cars, fine wines and others, that usually only someone with 100 million RMB liquidity can invest into.
Programmability: the asset management processes can be highly automated by using smart contracts as a distinct feature of blockchain protocols. Imagine that core processes such as the dividend payments from a digitised financial instrument like a bond can be completely automated — straight-through processing at minimised cost and with an immutable track record.
We are still at the very beginning of this development and adoption will happen in stages. For this year, we will most likely see the most notable impact from use cases focused on improving efficiency in asset management. FinFabrik is particularly focused on connecting high-quality assets and issuers with institutional investor demand. While new technology is neutral by nature and its impact is inevitable, it is for us, the technology players, policymakers and the broader financial services industry to propel and embrace change for the common good of society.
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What is your view — where do you agree and disagree? Please reach out or comment. We are always looking to test our hypotheses and chart our course based on how we believe markets will evolve.