The landscape of the financial sector is rapidly changing. Since the introduction of cryptocurrencies in 2009 and the subsequent crypto boom, we are witnessing a slow, but steady, transition towards a global, decentralized market that combines both traditional securities and tokenised securities.
With traditional securities being around longer as a secure and proven system for investors and traders to participate and grow their funds, their limitations are just now becoming obvious compared to the rise of blockchain and cryptocurrencies. Despite still lacking stability and regulation, tokenised securities quickly shot to fame thanks to their nearly boundless potential, freedom and profits. But how should investors navigate these murky waters of new financial products, regulatory restrictions and technology that is rapidly gaining traction? First, let’s look at the core aspects of traditional securities and tokenised securities.
Stocks, bonds, real estate and other real-world assets are what we refer to ‘traditional securities’. They are still more effective and “safe” when it comes to investing due to the high volatility of cryptocurrency. But they also have many limitations.
Investors are not currently able to trade or send traditional securities directly from person to person. This is because these assets are tied in funds, brokerages, traditional exchanges, banks, etc. It can be difficult to move them when necessary.
Traditional securities can also have a liquidity problem. Usually, large assets attract fewer investors and they are not as accessible to many investors as securities that can be quickly and efficiently divided with something like blockchain technology. In addition, traditional securities enable companies to raise money through venture capital at their earliest stages rather than offering that early investment opportunity directly to institutional investors who can promote growth through an electronic, decentralized sale.
Investing in traditional securities goes through several intermediaries who or financial institutions that serve a few functions: underwriting a deal, soliciting investor interest, ensuring high levels of security & regulation compliance, and successfully executing the transaction.
Tokenised securities are modelled based on traditional ones but offer opportunities for investors to diversify into curated baskets of digital assets that can be traded in real-time on the exchange. Basically, there is no limit as to what can be tokenised as long as it can be legally owned, especially something that’s already bought and sold on some kind of market. The most common examples of tokenised securities include funds and investment vehicles, such as hedge funds, PE, VC, ETFs; commodities, such as gold, silver, platinum corporate equity and debt, such as stocks and bonds, real estate and other assets.
Tokenised securities allow investors to invest in corporate and government bonds, and FIAT denominated international bonds with cryptocurrency or tokens for better availability of investment portfolios for any request (high-risk, low-risk, etc.). Investing is now not just a transfer of money but the purchase of a cryptocurrency, which remains liquid throughout the process and can be resold at any time.
By pairing blockchain technology with the proven and effective traditional financial system, tokenised securities provide a whole new level of liquidity and purchase potential by removing middlemen.
A transition from Traditional Securities towards Tokenised Securities
With mainstream adoption of cryptocurrencies on the rise, interest in managing them as investments through traditional vehicles is also growing. In the past three years, we’ve witnessed the emergence of investment funds, hedge funds, and trust funds— mostly targeted at those who want to gain from growth in blockchain digital assets, but find the process too technical.
Aside from price monitoring strategy, however, the value of the majority of these funds offer involves taking the responsibility for buying, storing, and securing of the cryptocurrencies off the hands of interested investors. A few funds have created portfolios that include several of the best performing crypto assets, designed to spread risk and increase the potential for capital gain.
However, high positive correlation leaves little difference between investing in a single cryptocurrency or a portfolio that includes several of them. Real returns and risk mitigation are achievable through combined assets that have diverse characteristics and high negative correlation.
As more businesses embrace cryptocurrency and the investment sector builds financial systems based on the blockchain, the appeal of tokenised securities as an alternative investment will continue to grow. Unquestionably, their current popularity derives from their ability to serve as a combination of asset classes that provides a number of advantages over the use of existing tokens and investment vehicles.
The Future of Investments – Tokenised, Decentralized and Global
Despite the positive growth that mutual funds and exchange-traded funds (ETFs) have experienced in recent years, from a technological point of view, traditional investment strategies are undesirable to potential investors, because how they work is not always known or understood. In any event, all of the current solutions boil down to the investor transferring money to a financial manager and then waiting to receive profits.
This means investors have no opportunity to control their own funds. Furthermore, the traditional financial system itself doesn’t give investors any technical abilities to ensure that their funds are returned, nor does it provide an understanding of how the money is distributed.
This in combination with the changing consumer sentiment and buyer behaviour has created the need for a new approach to investing. A blockchain-based digital asset exchange adds transparency and, being built on blockchain, increases asset security and information reliability.
At the same time, the ROI potential of the crypto bond market is tremendous as cryptocurrencies are growing rapidly as a global currency because they offer several benefits that traditional fiat currencies, including faster transactions, anonymity (in some cases), and independence from a central authority. Cryptocurrencies currently amount to about 0.03% of global financial assets ($80 Billion Crypto / [$80 trillion in stocks + $200 trillion in bonds and loans]). This may sound small, but only a fraction of the world wealth is controlled by those who have accepted cryptocurrency as a legitimate investment and the increase in crypto exposure is high.
The value of cryptocurrency-based products to an investment portfolio is obvious as more and more industry players like Blackrock, CME Group and MAN AHL are announcing their plans to launch Bitcoin futures and add cryptocurrencies to their investment baskets to increase the range of global benchmark products across all major asset classes.
We’re seeing a number of large and established players on the financial market turning to solutions outside of their immediate scope of business. Namely, cryptocurrencies. With the combined market cap of cryptocurrencies having surpassed $90B as of 2017, this rapid growth has attracted not only private investors, but an increasing number of professional participants. CME Group, NASDAQ and MAN AHL have both announced their plans to launch Bitcoin futures and add cryptocurrencies to their investment baskets to increase the range of global benchmark products across all major asset classes. And it doesn’t stop there. Former bankers at firms such as Goldman Sachs and Morgan Stanley are developing Bitcoin futures and other cryptocurrency derivatives. The Commonwealth Bank of Australia (CBA) is among the many to issue a ‘cryptobond’ for the Queensland Treasury Corporation (QTC), with the claim as the first blockchain bond issuance by a government entity. The CME and Crypto Facilities Ltd., a crypto futures trading platform regulated by the UK’s Financial Conduct Authority that supports currencies Bitcoin and Ripple, have been calculating and publishing the BRR since 2016. All of this demonstrates that the global demand to buy and sell cryptocurrencies is being driven by investors’ interest in transparency, price discovery and risk transfer capabilities, thus creating new market possibilities for venturing into the blockchain domain.
There is a clear trend towards fast adoption of tokenised securities among household names and emerging tech startups in the financial and blockchain sectors. At this point, it is safe to say that liquidity across multiple asset classes will be impacted by the tokenization of traditional assets. The implications of this statement are relevant to all investors, both traditional and crypto, since tokens and crypto have huge potential to revolutionize markets and change the way capital is allocated. They are already making ownership cheaper, easier, more liquid, and more democratized. Now, it remains to witness them enabling features that were not possible through existing technology, business models and financial systems.