Tokenized Securities: Curb Your Enthusiasm
Noelle Acheson is a member of CoinDesk's product team and a veteran of company analysis.
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With the growing interest in tokenized securities due to the strong development of platforms and issuers, we still need to look at the obstacles and what investors are saying.
First, in a nutshell: "Tokenized securities" generally means a cryptographic asset that reflects an investment in not trading on a liquid exchange. A clear example is real estate and private equity, but this concept can also apply to art, diamonds, vessels, and explored items that are difficult to exchange efficiently.
The technology for this is a fast-evolving platform and specific token designs are emerging to help owners, investors, and regulators become accustomed to the concepts.
Harvest announced the platform through its first tokenized real estate investment trust (REIT) through the panel at the CoinDesk Consensus: Invest conference in November, and the entire panel on password asset management was optimistic about the security token .
More recently, SharesPost, a broker-dealer and Alternative Trading System (ATS), said last week that it had performed its first secondary transaction of a security token whose assets were held by the same ATS. This was a remarkable milestone because there are large investors in the US who need to hire qualified managers.
Why such a passion? By packaging traditional assets in exchangeable code, tokenized securities provide a way to increase investment access by lowering barriers such as non-liquidity, high entry points and steep costs.
You can also open up more granular configurability to design revenue opportunities that fit your specific goals and increase transparency in ownership and movement.
The promise is good, but reality is as complex as usual.
One thing that is often overlooked in excitement is that new technology does not create liquidity. The market creates liquidity. Without supply and demand, tokens are not traded. And demand does not necessarily come voluntarily.
And no supply and demand will do so. In a traditional financial definition, liquidity requires a sufficient amount of trading orders for the current price, so large orders do not cause the market to move significantly. New types of investments make it difficult to reach.
Much is not important at first, since the initial tokens (assuming compliance with US securities exemption provisions) are only available to authorized investors. But even those rich investors will want a relatively narrow spread. This only occurs when there is a level of trading activity on the platform.
Also, if the market is to fully realize its portfolio management potential, the derivatives market needs to be on top of security tokens. As final ownership becomes obfuscated through borrowing and hedging, additional complexity of regulation and transparency can result.
Reconciliation is another matter. Immediate settlement is often touted as an advantage by citing more efficient use of funds. Indeed, it is the opposite. Immediately, the buyer must prepare the necessary funds in advance for the relevant account.
In traditional finance, when money is needed, it is not before, but before. Until then, we "rely" on interest payment instruments. The broker gives the seller and the buyer time to be ready to exchange money and assets by providing assurance that the sale will take place. Of course, it may be faster and cheaper to process in a block chain with immediate payment, but this may not be in the buyer's interest.
Another obstacle is conceptual: is it a new asset class? Or are they just reconfiguring the existing ones?
Do you need a new framework to invest in new metrics, dashboards and knowledge bases for new investors? Or are the existing target markets and target markets a little wider? How long does it take to get accustomed to password assets in the latter case? Given the relative "clunkiness" and youth of the new platform, is it really worth it?
The solution is likely to be all these hurdles. Setting up a market is not easy, but it can happen through perseverance, communication, and investment.
The solution can be resolved by innovation on the type of payment methods and programmable money. And the conceptual confusion will be solved over time. Profit is interesting. Even traditional market participants tend to be open about the possibility of improving returns.
Given the increased tokenized security technologies and marketing and increased clarity of regulations, onboarding and release activities are expected to increase dramatically over the coming months. And as the market becomes more familiar with the concept, the originality of the issuer and the sophistication of the investor will create new opportunities for wealth creation and are expected to increase access to revenue and capital. This opens up more potential in the cryptographic space by facilitating further development.
But we must keep our expectations realistic. Running the technology is only the first step. The market is unpredictable and stable demand for these new assets can take time.
Early investors usually earn more than late returns. The higher the risk, the more fair. But no one knows how long to wait.
Image of Harbor CEO Josh Stein through CoinDesk Consensus archive
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