In this second article, we will discuss the advantages of tokenization as it relates to the coming blockchain revolution. It is also necessary to mention some regulatory issues that tokenization might encounter.
The Future of Capital: Tokenization
It is highly likely that the tokenization of assets will cause a significant price change for some assets. If tokenization achieves global saturation, many different types of real assets will be included in the blockchain system. For example, in the case of real estate, there will be tokenization of assets of different qualities, which will allow for a new method of their evaluation. It is possible that at first tokenized real estate will be valued at a lower cost, but after the market develops and grows everything will return to normal.
This will be possible through the globalization of capital, which will significantly increase demand. Ambitious tokenized projects will be revalued highly rewarded when the amount of tokenized assets have grown. Then these assets will acquire new features, such as voting, analysis, dividends, and the possibility of quick unrestricted transactions among many others. As a result, the market built around tokenization will become more sustainable.
Accordingly, digital assets will see a massive inflow of cryptocurrencies, which would not be available without tokenization. Increased demand will catalyze the growth of price, demand, and associated expectations. The hype around cryptocurrencies is also important here: already today the word “blockchain” in the company name increases its capitalization.
Additionally, asset tokenization may provide a second wind for some traditional markets. Some people may say that this is in effect a financial bubble, but bubbles do not form in uninteresting and unclaimed markets. Tokenized assets’ price growth is essentially an added value to the new opportunities that will open with the transition to blockchain.
So, tokenization is a perfect way to increase capitalization and raise an asset’s value. Unfortunately, not all asset types will be equally affected.. The growth will primarily affect real estate and private entities. Stocks, commodities, and other investment instruments may be modified to a lesser degree.
Imagine that investors from all around the world are able to invest in London real estate, in compliance of local laws and with full rights and benefits. Or even that it’s simply possible to buy shares in private entities. With tokenization, these theoretical scenarios are becoming reality.
How will the Blockchain Evolution Begin?
Tokenization will interest the companies that have enormous registers, complicated databases, and deep depositories. These companies will be incentivized to actively engage with legislators tasked with regulating the modernizing capitalization environment.
In the newly emerging system of blockchain, transactions will be held without bank accounts and currency conversion, and the number of documents needed for the identity verification will significantly decrease. So, the traditional financial world and a large part of the blockchain industry will converge, but banks will still play an essential role in the overall technological adaptation
Alternatively, classic stock exchanges will generate demand of tokenization. But it should not be expected that traditional stock exchanges will emphasis the tokenization because in this case, the main issues will be regulation and technical opportunities.
Will tokens with smart-contracts be able to replace traditional equity? There are significant barriers, but technically it’s possible. However, we already know that any future possibilities included in the smart-contract will outweigh the costs of such an upgrade. Additionally, any fiat assets converted to blockchain will evolve and carry extend their functionality.
Thus the Blockchain Evolution will begin with a strong motivation for traditional financial institutions to convert their systems and practices in order to take advantage of more efficient technology, and this will force legislators to regulate the system and institutionalize these systemic changes.
Problems and Pitfalls
Traditional banks and stock exchanges will continue to be the primary gateway between cryptocurrencies and fiat money. But it is highly likely that in the foreseeable future governments will be forced to regulate t these type of transactions . For example, Nasdaq is currently testing a way to trade on blockchain but offline, or without a connection to the crypto world. There is a high degree of certainty that as partnerships between financial institutions and the cryptocurrency industry continue to develop and reach critical mass, regulators will be forced to adapt their approaches, and this may prove to be beneficial to the industry.
For now however, it is not clear how governments will relate to cryptocurrencies as free-exchange entities, especially regarding taxation policy.
Another important problem for future regulation resides in the fact that blockchain technology develops so fast that no regulator will be able to respond effectively to the challenges of the blockchain system. Improvements in the blockchain community simultaneously solve old diseases and outpace the regulators. Let’s use decentralized exchanges as an example here. What can the Security and Exchange Commission (SEC) regulate in this realm? Hostings and domain names? Yes, if SEC wishes to do so. But standards for decentralized exchanges are not developed yet, and soon it will be possible to transfer money from different wallets between various blockchain ecosystems (so-called atomic swap). In this case, attempts to regulate the blockchain will be doomed to fail.
The significant advantages of tokenization will make the blockchain revolution inevitable. In the nearest future, the majority of companies will tokenize their assets, and government regulators will have to adapt to the changing reality.
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