The financial world greatly lags behind other sectors that are leveraging the power of blockchains to fuel growth and innovation. Tokenization is one such technology which has the potential to revolutionize the way we manage and transfer value.
Tokenization is the process of converting an asset or ownership rights into a unique unit, or a token, that lives on a blockchain. Because any item that is considered valuable can be tokenized, this technology has a broad spectrum of possible applications.
The potential ramifications of this technology on the global financial system go beyond any one fund tokenizing, rather the impact lies in the promise of offering new opportunities for people around the world to participate in the financial system and build a better, fairer future for everyone. Here are five biggest opportunities where tokenization will best traditional finance:
1. Leveling the Playing Field : Access to premier financial services is limited to a privileged few for the sake of maintaining efficiency. For example, private equity is one of the most opaque and difficult markets in which to participate, with massive minimum investment thresholds often in the millions, yet it has outperformed the S&P 500
2. Greater Liquidity: With high-value assets, the price of a single share can be exorbitant, severely restricting the pool of potential buyers. This can make it difficult for investors to sell their holdings and access their capital, especially in times of financial stress. More buyers and sellers means more volume, which means more flexible, liquid markets.
3. Cost Savings via Disintermediation: Traditional finance is riddled with high fees and hidden charges and intermediaries. On an institutional scale that amounts to a massive maw of fee extraction that needs to be addressed. And when funds are forced to manage their massive portfolios without automation and instantly veritable sources, it is a known tax.
4. More Transparency: In both traditional financial markets and private equity markets, the liquidity problem can be exacerbated by a lack of information or transparency, leading to uncertainty and decreased confidence among investors. This problem impacts retail investors too. Educated traders can only exist insofar as information is available.
5. Fractional Ownership: How do markets work for these large assets with few reference points? Low-volume markets are inefficient markets and they are this way because the pool of buyers for high-value assets is naturally limited. So how do you split up high-value assets in an intuitive, trustless way? Historically you haven’t been able to.