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Tokenizing Securities: Weighing the Costs and Effectiveness Against Traditional Listing

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The concept of tokenizing securities has been touted as a revolutionary step forward in the realm of finance, promising to democratize access to investment opportunities and streamline the processes involved in trading assets. However, despite the buzz and the potential advantages, I remain skeptical about whether tokenizing securities is indeed a cheaper and more effective alternative to traditional listing. I will share some of my thoughts and the intricacies of tokenizing securities, examining its suitability for different types of companies and businesses, and discussing why not all real estate assets are ideal candidates for tokenization.

The Promise and Reality of Tokenizing Securities

Tokenizing securities involves converting traditional financial assets like stocks, bonds, and real estate into digital tokens on a blockchain. Proponents argue that this method offers several benefits, including reduced costs, increased liquidity, and enhanced transparency. Theoretically, tokenization eliminates intermediaries, reduces transaction fees, and accelerates settlement times, making the process more efficient than traditional listing.

However, the reality is more complex. While tokenization has the potential to lower some costs, it introduces new expenses and challenges that are often overlooked. For instance, the initial costs of developing a secure and compliant tokenization platform can be substantial. Legal and regulatory compliance, cybersecurity measures, and the creation of smart contracts all require significant investment. Furthermore, maintaining a tokenized system demands ongoing costs for security updates, regulatory adjustments, and platform maintenance.

Comparing Costs: Tokenization vs. Traditional Listing

Traditional securities listing, particularly on major exchanges like the New York Stock Exchange (NYSE) or NASDAQ, involves significant costs related to underwriting, compliance, and listing fees. Based on what I know, the average cost of an initial public offering (IPO) in the US can range between $4.2 million to $7.6 million, excluding ongoing compliance costs.

In contrast, tokenization can potentially reduce some of these expenses. For instance, tokenized securities can be traded 24/7 on blockchain platforms, reducing the need for intermediary fees and offering greater accessibility. A report by Deloitte suggests that tokenization could significantly reduce operating costs for financial institutions. In my opinion, these savings can be offset by the need for robust cybersecurity measures and compliance with a still-evolving regulatory landscape.

Moreover, the liquidity promised by tokenization is not guaranteed. While blockchain technology enables fractional ownership and potentially broadens the investor base, the actual liquidity depends on market adoption and the presence of active buyers and sellers. Without sufficient market activity, tokenized assets can suffer from illiquidity, diminishing one of their primary advantages.

Suitability of Companies for Tokenization

Not all companies are equally suited for tokenization. The nature of the business, the regulatory environment, and the specific characteristics of the assets being tokenized play crucial roles in determining suitability.

  1. Startups and Small Enterprises:
    Startups and small enterprises, particularly those in the technology sector, may benefit from tokenization as it provides an alternative funding mechanism that is potentially more accessible than traditional venture capital or IPOs. Tokenization allows these companies to tap into a global pool of investors, offering fractional ownership and increasing the potential for raising capital.
  2. Real Estate and Private Equity:
    Tokenization is particularly appealing for real estate and private equity firms. By tokenizing real estate assets, companies can offer fractional ownership, making high-value properties accessible to a wider range of investors. This democratization of investment can increase liquidity and provide more flexible exit strategies for investors. Private equity firms can similarly benefit by tokenizing their fund shares, enhancing liquidity and providing greater transparency.
  3. Niche Markets and Specialized Assets:
    Companies dealing with niche markets or specialized assets, such as art, collectibles, or intellectual property, can leverage tokenization to unlock value and attract a broader investor base. Tokenization can facilitate the trading of unique assets that would otherwise be illiquid, providing a platform for fractional ownership and secondary market trading.

The Challenges of Real Estate Tokenization as an Example

While real estate is often cited as a prime candidate for tokenization due to the high value and illiquidity of properties, not all real estate assets are suitable for this process. The primary barriers include regulatory complexities, the quality of the assets, and market dynamics.

  1. Regulatory Complexities:
    Real estate is heavily regulated, with varying rules and compliance requirements across different jurisdictions. Tokenizing real estate requires navigating these regulatory landscapes to ensure compliance with securities laws, property laws, and anti-money laundering (AML) regulations. This legal complexity can increase the cost and time required to tokenize real estate assets, potentially negating some of the cost savings associated with tokenization.
  2. Quality of Assets:
    Tokenizing low-quality or distressed real estate does not mitigate the inherent risks associated with such assets. The process of tokenization does not change the underlying value or condition of the property. Investors are unlikely to be attracted to tokenized assets if the real estate in question has poor fundamentals, such as low occupancy rates, structural issues, or unfavorable locations.
  3. Market Dynamics:
    The success of real estate tokenization depends on market adoption and liquidity. Without a critical mass of participants in the market, tokenized real estate assets can suffer from illiquidity, limiting the ability of investors to buy and sell tokens easily. Additionally, the perception of tokenized real estate as a viable investment option is still evolving, and widespread acceptance is necessary to achieve the liquidity benefits promised by tokenization.

Personal Perspective: Tokenization vs. Traditional Listing

From a personal perspective, while tokenization offers exciting possibilities, it is not a one-size-fits-all solution. The effectiveness and cost-efficiency of tokenization depend on various factors, including the nature of the business, the regulatory environment, and market dynamics.

For companies in highly regulated industries or those with complex asset structures, traditional listing may still be the more practical and reliable option. The established processes, regulatory clarity, and investor confidence associated with traditional exchanges provide a level of stability and predictability that is crucial for certain businesses.

On the other hand, for innovative startups, tech companies, and businesses dealing with unique or fractionalizable assets, tokenization presents a compelling alternative. The ability to access a global pool of investors, offer fractional ownership, and enhance liquidity can provide significant advantages. I want to emphasize that these benefits must be weighed against the costs and challenges of implementing and maintaining a secure and compliant tokenization platform.

Conclusion: A Balanced View on Tokenization

In conclusion, while tokenizing securities has the potential to be a cheaper and more effective alternative to traditional listing in certain scenarios, it is not a universal solution. The success of tokenization hinges on the specific characteristics of the company, the nature of the assets, and the regulatory environment.

Companies considering tokenization must conduct thorough due diligence to assess the feasibility and potential benefits. They must also be prepared to invest in the necessary infrastructure, legal compliance, and cybersecurity measures to ensure the success of their tokenization efforts.

Ultimately, the decision to tokenize or pursue traditional listing should be based on a careful evaluation of the unique needs and circumstances of the business. Both approaches have their merits, and the best choice will vary depending on the specific context and goals of the company. As the regulatory landscape evolves and technology advances, the potential for tokenization to complement or even enhance traditional financial mechanisms will become clearer, paving the way for more informed and strategic decision-making.

Anndy Lian is the chief digital advisor for the Mongolian Productivity Organisation, a partner and fund manager overseeing blockchain investments for Passion Venture Capital Pte. Ltd. He is the author of the best-selling book, “Blockchain Revolution 2030” published by Kyobo, the largest bookstore chain in South Korea. He was previously the chairman of BigONE Exchange and an Advisory Board Member of Hyundai DAC.