Security tokens unlock the hidden potential of alternative assets

When a new technology arises with the potential to revolutionize old ways of doing things—like email to fax and smartphones to mobile—many people are most excited about the ability to do things faster and cheaper than they were able to with the older technology. 

While saving time and money is undoubtedly beneficial, this kind of technological innovation is predictable and arguably, inevitable. 

For technology to be a true game-changer, it must focus on making something possible that was previously not possible.

Think about Uber, Facebook, and Twitter. Back when the internet started, it was very hard to forecast their existence or the way they’ve shaped the internet to serve us today. Not only have they saved people time and money over traditional methods—whether it be taxis or sharing ideas with the masses—but they’ve also started entirely new industries and transformed the way people interact.

This same thinking must be applied in the development of technologies like blockchain, which offers many opportunities to investors beyond obvious use cases like cryptocurrency.

Moving beyond time and cost savings

Most financial assets could benefit from blockchain technology by way of faster processing times and lower transaction costs versus more traditional methods. However, looking at things through this narrow, cost-benefit lens is limiting investors from unlocking the full potential of tokenization, especially when it comes to things like alternative assets. 

We must move beyond the typical goals of time and cost savings and instead focus on how blockchain can open up an entirely new world of investment opportunities that didn’t exist before in traditional markets.

There are classes of assets—like real estate, revenue share agreements, and art—that have never been an option for most investors before. By nature, these alternative assets are less liquid than traditional assets (e.g. stocks) and often come with long or complex processing when traded or sold, making them unattractive to investors.

This is where security tokens really have a chance to transform the industry rather than just enhance it. They have the ability to make these typically illiquid investments much more liquid and therefore palatable to investors. They can also make it possible to quickly and easily trade investment vehicles that have almost never traded in the past–like revenue share agreements.

It will be most exciting to see entirely new asset classes—programmatic derivatives, non-fungible token (NFT) securities, and more—that can only exist due to blockchains. Again, in the 1900s it was very hard to predict Uber and Facebook, yet in hindsight, it’s obvious. As more and more enterprising individuals begin exploring the new design space created by blockchains, we’ll begin to see these brand-new asset classes take shape. We’re still only in the beginning.

From real estate to revenue sharing

Revenue sharing is an interesting use case that really highlights the innovation blockchain can bring to the finance world. These agreements are relatively scarce, and none trade on a functioning secondary market. Even though many founders would prefer them to giving up equity in their early-stage company, the lack of liquidity and difficulty of trading these assets makes them less attractive to potential investors. If these agreements were tokenized, they could potentially find liquidity pools through centralized or decentralized exchanges–making them much more appealing to investors.

And this isn’t limited to revenue sharing. Real estate is another alternative asset that suffers from traditional market forces and could benefit from tokenization. Real estate transactions take a long time to complete–often months–and have many contractual complexities, which makes real estate much more difficult to sell in traditional markets. In fact, today most investors can only buy assets like a sector-specific real estate investment trust (REIT) on traditional markets; buying high quality real estate is not possible for the typical retail investor.

When tokenized, however, real estate becomes a much better asset for investors since transactions can process almost instantly and without needing a complex contractual negotiation. Security tokens also allow investors to hyper-target specific real-estate assets with both long and short bets; something that has not been feasible before. 

Imagine the future where the cash flows and ownership of every apartment unit, warehouse, office unit, retail unit, and piece of land is tokenized. In this future, you could invest in all apartment units higher than the seventh floor that have views over Central Park in New York City, south of 90th Street.

This is impossible today, where the average investor could only invest in one apartment unit with their own leveraged capital, or in a REIT that has several apartments dispersed around New York City.

The future of alternative assets

Market participants like lawyers, transfer agents, and broker-dealers are still needed in alternative transactions on the blockchain, just as they are in traditional markets. The overall process, however, is simplified enough that trading complex alternative assets is practical for the first time. In the past, the costs and complications far outweighed any benefits these assets provided to investors. Blockchain essentially lowers the barrier to entry for these assets.

What this means in the long term is that new classes of alternative assets will be available for the first time for many investors. This has the power to increase investment return potential, increase diversification opportunities, and allow new kinds of assets to be traded on secondary markets, thereby reducing the typical lengthy holding period of these assets. It also gives founders and CEOs new vehicles to raise capital, with assets like revenue sharing becoming a much more attractive option for potential investors. 

When harnessed correctly, tokenization truly has the power to transform the finance industry and help alternative assets grow in popularity. It’s time the industry takes note.  

Graeme Moore is head of tokenization at Polymath, a decentralized platform that makes it easy to create, issue, and manage security tokens on the blockchain. A Bitcoin enthusiast, Graeme is also the author of the first-ever ABC book about Bitcoin, “B is for Bitcoin.”