May 30, 2024
As the cryptocurrency revolution took centre stage during its peak, there were certain blockchain use cases whose potential was overshadowed simply because of the rabid chase for speculatory returns. The fractionalisation of real-world assets is one such application – a use case that has had a lot of interest, but as of yet – is waiting for its catalysing moment to truly show what is possible. In this article, we’d like to explore the wide-reaching implications of this technology and what it can mean for our world.
One of the ugly truths of our modern financial world is just how much of an advantage the rich and well-connected have had in terms of access to high-return investment assets. While most of us have been forced to be content with traditional equities, government bonds, and other vanilla asset classes, a small minority have taken advantage of a wide range of alternative investments that have provided a far greater risk-reward profile with significantly less competition.
There are many reasons for this dichotomy including high costs of entry, regulatory restrictions, closed networks, and opaque investment landscapes – all of which have served to keep substantial wealth within a small portion of the population. In fact, the World Bank states that as many as 1.7 billion people do not have access to basic financial services, never mind the advanced investment vehicles that are on offer to the rich.
However, this looks set to change.
As technology has evolved, we’ve seen several examples of real assets being fractionalised, allowing for them to be highly liquid and tradeable in much smaller pieces. For example, equity crowdfunding platforms like CrowdCube and StartEngine have emerged, offering the opportunity for smaller investors to make bite-sized investments into privately held start-ups with sky-high potential. Another example is Masterworks which is a platform for investing in fractionalised art pieces, bringing a previously inaccessible asset class to the world. These are all significant innovations because by reducing the barriers to entry and opening these investment opportunities to anyone, it democratises alternative investments and expands their horizons beyond the investors and venture capitalists in closed networks.
This democratisation has been further accelerated by the introduction of blockchain technology which can actually instantiate real, verifiable, fractions of real-world assets and make them instantly tradeable without third-party intermediaries. Research from BIT Markets suggests that the tokenisation of global illiquid assets has the potential to become a $16 trillion industry by 2030. The impact of this cannot be understated as it is set to transform the financial world as we know it and usher in a new era of alternative investment classes that are fully accessible to everyone.
Blockchain-enabled fractionalisation opens up a wide range of new opportunities for innovation, and many companies have started to pioneer new business models to leverage the fractionalisation that is now possible. Here are some examples:
By fractionalising the ownership of these thoroughbreds, they’ve created a vibrant secondary market for an asset class that was previously opaque and reserved only for a select few
These are just a few examples of new business models that are emerging, and the stark differences between them demonstrate just how versatile and widely applicable this blockchain fractionalisation can be. When you consider the fact that this tokenisation can create highly programmable containers of information that can be enriched with all sorts of metadata, protocols, and logic, these assets can be a critical part of a new digitally-enabled financial system. Many have even likened it to “money legos” which evokes the idea that by creating these new building blocks, we can build from first principles and craft a new financial system that is better suited to the modern world.
A great example of this is how real-world asset tokenisation dovetails with another important blockchain innovation: decentralised finance (DeFi). This is the idea that we can now build financial systems, products, and networks that don’t rely on centralised third parties who control the transaction flow and manage the credit risk. When you’re able to tokenise real-world assets effectively, the DeFi ecosystem can then really thrive because it connects the digital world with the physical world. By enabling use cases like staking, lending, and trading – the combination of DeFi and tokenised real-world assets can nurture an entirely new wave of innovation that can be transformative if it reaches its potential.
Of course, there are still some challenges that need to be overcome if this is to reach its full potential. In many jurisdictions, regulatory restrictions have still not yet caught up with the innovations that we’ve seen in the blockchain space. The hype cycle around cryptocurrency attracted millions of speculators who weren’t actually buying for the underlying substance and this damaged the industry’s credibility, which must now be rebuilt in the eyes of many regulators. As such, it is still unclear how legitimate companies should be operating – with many high-profile US companies like Coinbase, Gemini, and Bittrex leaving the USA because of regulatory uncertainty. Regulators need to provide clarity and a clear set of guidelines to stabilise the industry and avoid the sorts of situations we saw with Terra Luna and the infamous FTX debacle.
Nonetheless, these challenges are surmountable and with so much potential for game-changing product and business model innovation, it would be naïve to bet against companies like these making a real impact on the future of the industries they’re a part of and of the wider financial system as a whole.
As mentioned above, there are various regulatory constraints are still prevalent across the world – and it remains one of the most significant challenges for the wider adoption of fractionalising real-world assets. But there have been lots of encouraging signs that suggest that the tide is starting to shift. Forward-looking governments and regulators are starting to acknowledge the potential that this technology has for driving innovation and financial inclusion, and in many cases, it is starting to become a priority for the future of the financial sector.
This change in mindset is driven by a diverse set of stakeholders that are pushing for new financial models to come to the mainstream. Companies, investors, and even everyday citizens are lobbying for the opportunity to fractionalise investment classes and thus diversify asset ownership within their countries.
In many aspects, Asia is leading the way in crafting these new regulatory frameworks that allow for tokenisation and the many use cases that it enables. Here are a few examples:
Thailand has introduced a regulatory framework for offering investment and utility tokens, as well as guidelines for operating digital asset businesses in the country through its ‘Emergency Decree on Digital Asset Businesses’.
Japan has implemented clear guidelines on the regulation of digital tokens through an amendment to the ‘Act on Settlement of Funds and the Financial Instruments and Exchange Act’.
Hong Kong has made some regulatory changes that allow tokens to meet the criteria to be eligible for retail investors, while also introducing a new framework for virtual asset trading platforms – making it less complex and arduous for ordinary citizens to tokenise, trade, and distribute digital assets.
These are just a few examples coming out of the APAC region and more countries are set to follow, especially those looking to attract leading blockchain developers and business builders to their shores. It’s clear that regulatory innovation is the quickest way to encourage these new business models to emerge and while many countries are holding back and entrenching traditional finance, these countries are embracing the future of this technology and creating space for a new type of financial system to be born.
Some may think it’s too grandiose to consider how this sort of innovation can shape society but the more you think about it, the more you’ll come to realise that this is just the beginning of a momentous shift in how we view ownership itself.
Ever since the dawn of capitalism, ownership has been an important pillar in how we craft the world we live in. It has separated the haves from the have-nots, it has been the foundation for both economic growth and disparity, and it remains the one aspect of modern life that allows us to pass wealth down to the next generations. The fractionalisation of real-world assets has the potential to transform what ownership means to us and shift our identities as investors.
The moment that a seemingly illiquid, hard-to-sell asset can be tokenised and traded on a secondary market, it receives a new lease on life. And so do we. A combination of real-world asset tokenisation and DeFi opens up opportunities for lending, staking, and rewards in these alternative assets and this can rapidly democratise the state of investing across the globe. We can all become investors in our own rights – shedding the restraints of the gatekeepers and taking our financial futures into our own hands.
Naturally, we must consider the ethical and intellectual consequences of giving over this power to a population that seems hellbent on speculation and risk-chasing. We need global regulation that encourages the right behaviour and helps us to avoid the sorts of disasters we saw with Terra Luna and FTX. But with the right educational foundations and specific programs targeted toward improving financial literacy, we can shape a future that is fair, open, and abundant. This is a once-in-a-lifetime opportunity to use technology to enhance the human species and allow for a new era of economic growth – one that doesn’t rely on traditional finance.
The only question remains: are we brave enough to walk this new path?
