Tokenization: Hidden Obstacles Behind the Tool of Tomorrow

April 24, 2020

Securities, art, real estate — almost everything now can be tokenized. For several years tokenization promises to change the way we invest in assets, no matter the type. However, the massive pivot from traditional investing still didn’t happen. (And it seems that the outbreak of you-know-what won’t help the situation).

As a platform that focuses on tokenized assets, we believe that tokenization has great potential to revolutionize the financial market. However, we are trying to keep our heads cool and see the real picture. In this article, we will focus on the problems of tokenization.

Technology and life always evolve faster than regulation and it will always stay this way. That’s why the first and the most obvious problem behind the active tokenization of financial assets is the regulation.

Regulation won’t be developed overnight and officials will proceed with the development of new laws with caution. These laws might become a great challenge for regulators and the process will slow down innovation and create obstacles for some issuers.

Without clear regulation in place on the most developed markets, risks won’t worth the struggle for most market players. Mass adoption of traditional asset tokenization is going to take years to fully develop.

However, we have proven that it is possible to conduct a fully compliant campaign in Estonia already.

Another problem that goes along with the regulation is the lack of professional law expertise in the field of tokenization. Only a few lawyers have experience in the successful legal structuring of new offerings and even they won’t be able to provide 100% guarantee that everything will go smoothly in the given timeframes, there is always a room for complications, as everything with crypto, you don’t know what to expect.

Officials may have different opinions on the same matters. It is hard to predict the results of your application, the negative ruling might be based on minor procedural inconsistencies or on the discretion of a particular official who interprets the law differently.

An Obstacle II: Secondary Market

So the problem with the regulation generates a whole new problem — lack of secondary market. As far as most jurisdictions go, the regulatory framework for the secondary trading of tokenized securities has not even begun to shape up yet. This circumstance is not to be blamed on regulators — after all, these secondary markets have started to take off relatively recently.

But how soon will other jurisdictions catch up? As more laws in various countries are beginning to cover the process of security token issuance, it probably won’t take governments too long to put similar rules for secondary markets in place. Given that issuance and secondary trading of tokenized assets basically represent different steps in the same “issuance-offering-secondary trade” chain, this assessment might be not far from the truth. We believe that one of the main mistakes of regulators is an attempt to apply the same old security laws to new instruments. As current laws don’t consider obvious benefits of blockchain technology and therefore tokenized instruments still exist in a system that is filled with intermediaries.

However, this doesn’t mean that waiting for the regulators to take action is the only option security token market players are left with. There are other possible solutions to the problem: for instance, the recent study by ASIFMA suggests that instead of building their own secondary trading facilities, companies could use the operational infrastructure provided by existing regulated securities exchanges and trading platforms — given their regulatory status and the fact that many of them have already started digital transformation projects to embrace blockchain, this could work.  

In order to overcome this problem, Tokenomica has already partnered with the Financial and Investment Group Wise Wolves Group.

The new partnership will allow Tokenomica to leap forward in the development of the platform. Together with Wise Wolves Group, Tokenomica will be able to develop the infrastructure for a fully compliant secondary trading facility for tokenized securities which is scheduled to launch later this year.

An Obstacle III: Slow Adoption of Crypto

Another problem that is partially related to the regulation is the slow adoption of cryptocurrencies. But regulation is not the only issue with the slow adoption of crypto by people and on the other hand, in most cases, you won’t be able to launch the offering of tokenized instruments in fiat.

While today, only about 10% of the world’s population have purchased cryptocurrencies. We’re seeing 2x growth in year-over-year statistics, and daily trades in digital assets can eclipse $10 billion.

We’re still in the early stages of the technology, and it’s natural to be skeptical of things we don’t fully understand. Though this growth is promising, we have some ways to go before digital assets can be considered “mainstream.” And as an alternative form of money, digital assets must provide alternative value offerings to our legacy systems in order to have value in itself. Even as the balance tilts toward adoption, only 10% of the 10 % mentioned above understand the capabilities, and limitations, of cryptocurrencies

An Obstacle IV: Lack of Flexibility and Responsiveness From Big Market Players

Tokenization brings a number of awesome advantages, utilization of the blockchain technology makes it possible to simplify a long-lasting list of inefficiencies. But are numbers these big for big guys?

Ok, they might save here and there but is the game worth the candle? For them, no, they want guarantees that everything will work smoothly and saving a dime (not literally, but a dime for them) will always be a priority compared to something that is not proven to them.  

Conclusion I: Ideological

So why tokenize now? Based on the obstacles mentioned above, this question will arise for almost everyone. Without the secondary market, clear regulation and guarantees it is harder to have a blind trust in something that might fail you at some point.

But even in the early stages of development,  the offering of tokenized instruments is already a working solution for businesses that seek funding. Promised advantages, such as programmable compliance, decreased issuance and set-up costs along with more control over your business are already here to take.

If you have a working business and active customers that will be willing to trust your ideas and will become your shareholders — go ahead and conduct the offering of the tokenized instrument now, it will work for you but there will be a bit of a headache and no one will give you the exact timeframes on when your asset will be traded on secondary markets. You will be the Magellan of the financial markets (without slaughtering innocent natives, of course, we look only on the romanticism of expeditions).

However, there is also a practical, pragmatic side.

Conclusion II: Practical

From a practical point of view, you have to understand that the content always prevails the form — type of the offering in this case. There won’t ever be another hype with tokenized financial instruments like there was with ICOs. There is no magic wand to cast you gigantic sacks of cash or brand new Ledger Nano-S with access to all the BTC in the world. And it is a good thing, as the new tool will allow us to build a real regulated market together.

But is it worth the risk now?

Well, as we said before, all obstacles mentioned before are possible to overcome but it takes time, hard work and patience, just like it is with building a working business. You will simplify a lot of processes compared to classic offering but you will have to understand that there are problems and the full potential of the technology will be revealed in time.

Become the part of tomorrow today, register on Tokenomica now!