Liquid Gold, How tokenization and blockchain expose new investor opportunities

We live in a world where the lines between the physical and the digital are increasingly blurred.

Paper stock certificates are a thing of the past. Cash use is in free-fall in most economies. Both have been replaced by their digital equivalents. Audio and video discs have for years been supplied with downloadable digital copies. Industrial components can be bought as digital files, and the physical asset printed on site, from valves and cogs to entire buildings.

These aren’t new concepts, though. These are simply changes in how the same value is delivered to the same market. However, the world of investment is on the cusp of a genuine transformational opportunity thanks to one emerging technology: Blockchain.

Transformative technology

Blockchain and digital assets are opening the door to new markets, products, and processes for institutional investors. They’re being used to tackle some key pain points in investment, including the speed with which trades can reach finality, the transparency of trading records for price discovery, and the creation of liquidity for previously illiquid assets.

The first blockchain, underpinning Bitcoin, was created in 2009 to automatically record the ownership and movement of assets in a way that can be trusted and verified by any party. Blockchain – a chain of blocks of transactions validated and confirmed by the network – delivered the transparency, reliability, and trust that was required.

Financial institutions realized very quickly that this was transformative technology. More than 40 of the world’s largest banks collaborated on the creation of the world’s first financial services blockchain, R3 Corda. ING and Credit Suisse executed their first blockchain-based securities transactions more than five years ago, and in 2020 JP Morgan executed their first intraday repo settlement on what has now matured into their Onyx Digital Assets platform. Apollo Global Management announced plans in late 2022 to offer a new fund on the Provenance blockchain in partnership with fintech company Figure.

Innovation is constant, the technology is maturing, and there is adoption at scale. Blockchain’s potential to smooth the complex processes of financial services is being realized.

From physical to digital, old and new

Tokenization is the most exciting application to emerge from the innovation of blockchain and digital assets. While the Bitcoin blockchain recorded the movement of fungible (identical) assets between owners, later developments gave us unique programmable assets – non-fungible tokens. Tokens – also known as digital assets or NFTs – can be natively digital, or a twin of something in the real world. They can interact with software and gather data. They have investable value. Here are a few examples of how they are already being used extensively in finance and investing

• Miami’s Blocktower Capital manages a broad asset portfolio, including tokenized real world credit assets such as loans, trade finance and invoice factoring.
• London securitization firm Tradeteq has to date processed more than $29 billion of financial instruments from private debt to real world real assets, both on and off-chain.
• The US Bureau of the Fiscal Service is building out the tokenization of grant funding parcels after a successful proof of concept. This simplifies the distribution process, gives them greater transparency on the flow of money, and even allows grant parcels to be fractionalized to reflect real world behaviors.
• In France, Konkrete DAO is working with Ethereum and Kleros to deliver real estate yields from liquid tokens backed by property assets.
• Singapore’s DiMuto agrifood supply chain tokenizes fruit and other perishable goods at harvest, commoditizing the digital asset and enabling access to trade finance.

Speed and safety

Blockchain technology is maturing rapidly. Bitcoin rolls steadily along at a matronly seven transactions per second, with finality in around an hour. Newer chains process thousands of transactions per second with almost instantaneous finality. The newer technology also tackles the elephant in the room: sustainability. Bitcoin’s security remains uniquely dependent upon the use of energy, but the hundreds of newer chains have carbon footprints comparable with major ERP systems.

Regulation is also evolving to meet the needs of this brave new world. The early involvement of banks and financial services ensured that consumer safety was always going to impact the use of blockchain and digital assets. Regulators are starting to make headway in applying existing rules for consumer protection to digital asset businesses. Strong action against money laundering, including the recent breakup of dark web exchanges, has reduced the options for cyber criminals and fraudsters to hide from forensic investigators.

Moving forward with blockchain

The handful of examples here are simply the tip of the iceberg. Digital assets and blockchain-based processes have already started to transform the industry and open up new products and markets.

There are tantalizing glimpses of changes to come. When transparent price discovery removes opacity and uncertainty, what will be the impact on price arbitrage? Will asset registries and digital identity one day combine on-chain to provide a single source of truth on asset ownership? The possibilities are endless – and they are here to be discovered.