The Liquidity Problem in Digital Securities: Insights from the TokenizeThis Summit

On day one of the inaugural ‘TokenizeThis‘ summit, organized and hosted by Security Token Market, various topics were/are set to be addressed, with each touching upon the current state and ambitions of the burgeoning digital securities sector.

One particularly intriguing panel took the time to look at a longstanding hurdle plaguing many real-world-assets (RWAs) when viewed as investments – Liquidity.

The Panel

Before taking a closer look at how tokenization can solve liquidity issues among various asset classes, here are those who took part in the panel to share unique insights and analysis.

• Cass Sanford – Deputy General Counsel at OTC Markets Group
• Richard Luftig – Managing Partner at Castle Placement
• Jamie Finn – President and Co-Founder at Securitize

Key Themes of the Discussion

A recurring theme among the conference's first panel centered around the importance of interconnectivity among industry participants and strategic marketing to educate investors on the nuances and potentials of tokenization if liquidity is ever expected to improve.

The robustness of any investment environment, particularly one tethered to technological innovations like tokenization, is typically significantly improved by seamless interconnectivity among industry participants. Interconnected networks facilitate the creation of a more unified, fluid market, enabling the effortless exchange of assets and, consequently, bolstering liquidity. Jamie Finn emphasized the importance of a cohesive ecosystem, highlighting that “there is a real need to work together across this ecosystem and really connect the dots” to propel the digital securities sector forward.

Meanwhile, Richard Luftig pinpointed just how critical strategic marketing can be in highlighting the potential of tokenization to the investment community. He ardently stated, “You can't just throw up a marketplace and hope that people will come. You can't do a capital raise and hope that people will come…you have to build a system to bring investors to the opportunity.” This underscores the need to dismantle knowledge barriers and enhance investor enlightenment regarding digital securities and tokenization through meticulously crafted marketing strategies.

Lastly, inevitability over time emerged as a pivotal theme. The progress of digital securities, propelled by tokenization, is not merely a transient trend but appears to be an inevitable progression, gradually morphing from an alternative investment strategy into a mainstream conduit for asset trading and investment. The transition may not be free of challenges, but the trajectory towards a tokenized future is as clear as it has ever been.

Solving the Liquidity Problem

Liquidity has perennially remained one of the pivotal aspects underpinning the dynamics of investment among any and all asset classes. The ‘TokenizeThis' conference – which is the first to be held by the team at Security Token Market – illuminated this, particularly zeroing in on the role of liquidity in the growing digital securities sector as it grapples with navigating the intricacies of making tokenized real-world-assets (RWAs) lucrative investment opportunities.

Liquidity refers to the ability to quickly buy or sell an asset in the market without affecting its price significantly. High liquidity implies an easy conversion, while low liquidity indicates a slower, potentially more price-impactful sale process.

Importance to Investors:

Liquidity within an asset class is of importance to investors for a variety of reasons.  The include,

1. Easy Entry/Exit: Investors can enter and exit investments effortlessly.
2. Price Stability: Highly liquid markets tend to have more stable prices.
3. Reduced Costs: In liquid markets, the spread between buying and selling prices is typically lower, reducing transaction costs.
4. Risk Management: Enhanced liquidity allows investors to better manage their risk, adapting to market changes swiftly.

Tokenization and Liquidity in Illiquid Assets:

So, with liquidity playing such an important role in investing, where does tokenization fit into the picture?  This process refers to the conversion of physical, tangible assets, or even intangible ones, into digital tokens on a blockchain. This involves issuing a blockchain token (security token) that digitally represents a real tradable asset. These digital securities can then be bought, sold, or traded on a secondary market. A key advantage of this is that it allows assets to be divided into smaller, more affordable shares, making them more accessible to a wider range of investors and potentially providing additional liquidity to the asset owners.

1. Fractional Ownership: Tokenization allows assets to be divided into smaller, more affordable units, enabling more people to invest with lower capital, thereby increasing the investor base.
2. Global Accessibility: Tokens can be traded on a global scale, enhancing accessibility and expanding the potential pool of investors.
3. 24/7 Markets: Blockchain enables around-the-clock trading, providing continuous opportunities for buying and selling.
4. Smart Contracts: Automated compliance and transaction management via smart contracts streamline processes, reducing barriers and delays in trading.
5. Secondary Markets: Creating a secondary market for tokens representing illiquid assets can further enhance their liquidity by providing an additional platform for buying and selling.

In essence, tokenization democratizes investment and broadens access to capital markets, particularly for traditionally illiquid asset classes like real estate or fine art, by breaking down financial barriers and enhancing market fluidity.

Final Thoughts

After hearing everything that each panelist had to say, it is quite clear that while tokenization efforts may hold the solution to many issues surrounding liquidity, there is still plenty of road to travel before getting there.  As previously touched upon, the following are a few key themes that were made clear.

• Interconnectivity among industry participants is required.
• Marketing to educate investors and companies on tokenization is needed.
• Tokenization of RWAs is inevitable – the only question is over what timeframe.

Each of the panelists left viewers with these final thoughts on the future of digital securities.

“There are friction points in our markets today that I do believe can be solved with some of these innovate products” – Cass Sanford, Deputy General Counsel at OTC Markets Group

“It comes down to a couple of things that the people on the panel discucessed – quality, credibility.  The technology, although complex, plays a huge role in facilitating trust and credibility – and that's the opportunity” – Richard Luftig, Managing Partner at Castle Placement

“The products are there.  The platform is there.  Come out and try it – that's the key thing here is we're all learning together, and you've got to use this stuff.” – Jamie Finn, President and Co-Founder at Securitize

To continue learning about digital securities, a recording of day one of the TokenizeThis Summit can be found in its entirety HERE.