Asset Tokenization, what, why and how.

Crypto token is a secure digital record. That record could contain anything, rights to any assets. That record can be viewed as a container, or a wrapper. Traditionally investors always bought assets in different containers. A company’s shares are containers, stock that gives investors percentage of ownership in a business. If an investor wants to buy gold, chances are he or she would buy an ETF or a Futures contract or an Option, these are containers that give investor exposure to gold. How do the investors choose the container? It is based on the attributes that these containers have, based on investors’ understanding of the instrument, access to technology, access to credit, appetite for risk, etc. Crypto containers have unique attributes and represent a new choice for investors. It doesn’t mean 100% of the investors will choose these new containers going forward, but some significant percentage of the investors will. Of course, this percentage will vary from asset to asset. The utility of the crypto containers will also vary from asset to asset, a potential customer base will vary as well. Buying Amazon or Google stock in crypto wrapper for investors in the developed countries makes no sense, at least until the crypto securities trading develops to a point when it becomes cheaper to trade securities that way, but for investors in developing and emerging markets like Russia, mainland China, etc. this would make a lot of sense. Local brokers could be charging higher commissions, counter-party risk could be high, investor protection laws in practice are questionable in many of these countries. Plus, crypto tokens have new attributes that could be very appealing to the investors. Tokens are fractionable, if a small investor wants to buy 100 dollars’ worth of Amazon stock he can’t really do it easily, but with tokens it is possible. Tokens are mobile you can have them on your phone, sell them from anywhere in the world at any time for dollars or another cryptocurrency and have access to your capital right away instead of having to wait for wires from your broker. Tokenization of assets could also make assets more liquid. If we look at tokenizing a real-estate project, a hotel, for instance, the investors in such project would be able to sell their tokenized shares in the project whenever they want as these markets develop.

Asset tokenization is a natural progression of investable funds. The market went from closed-end funds to mutual funds to ETFs each step reduced cost, friction, and uncertainty for the investors. Going from ETFs to CTFs (crypto traded funds) is a natural progression of that process. CTFs will be cheaper to create and operate. It takes on average about a year and two-three hundred thousand dollars to create an ETF and additional one–two hundred thousand dollars to maintain one. CTFs can be created and maintained for a fraction of the ETF cost and in a fraction of the time. These savings will be passed to the investors. CTFs will trade 24/7 with real-time creations and redemption capabilities, giving the investors more options and more flexibility. But the biggest utility of the CTFs is the new type of baskets that can be put into such structures. Until now ETFs were confined to a single market. Only securities that are listed in one jurisdiction can be combined in one ETF. CTFs will have no such restrictions, issuers will look to combine stocks and other assets from any jurisdictions. Analysts from different markets will collaborate to create groundbreaking tokens. Stock pickers from Brazil, Russia, India, and China could create new BRIC security token using their local expertise to find “diamond in the rough” companies and put these companies into a single basket. How many of such baskets will be tokenized? Thousands I hope. Because it is cheaper and faster to create these tokens and it is cheaper to maintain a CTF in a tokenized format, many will be created and offered to the investors around the world. As long as the handling of the underlying assets is handled with transparency, security, and discipline, as long as the information about all the tokens and baskets they represent is readily available and trusted. These products have a very good chance of gaining a significant market share in a short period of time. SPDR the first ETF was created about 25 years ago. It was a slow going in the beginning, but now ETF industry has over 4 trillion dollars under management and is still growing quickly.

For the CTFs to gain market acceptance and trust we need to borrow some features from the ETF industry: we need fungibility, flowing of assets into and out of CTFs has to be simple and frictionless. Real-time token creation and redemption are needed. The handling of the underlying assets has to satisfy the highest custodian standards, the asset holdings have to be audited periodically and NAV has to be calculated daily. Liquidity in the CTFs has to equal the liquidity in the underlying assets from day one. And on top of this all, these products have to be transparent with full disclosure. All the information about these products has to be public. Investors have the right to know what each of the tokens is holding, what were the results of the last audit, etc. and blockchain is a perfect public platform to host all this information.

In conclusion, CTFs are a natural progression of the traditional investment funds (ETFs). CTFs will borrow the best of the ETF structure and practice and add a healthy dose of the blockchain, creating a new category of crypto financial products. CTFs represent new worldwide financial supermarket where every asset and every basket of conceivable combinations of assets will be tokenized and offered to the investors in a fair and open marketplace.

Welcome to the tokenized world!

Dan Raykhman, CEO of Fungible Network

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