Talk of tokenisation within the financial industry has been popular as of late, with initial focus centring on tokenising traditional securities, such as equities and bonds. But there is now talk of extending tokenisation to encompass physical assets, covering property or even artwork. This series of articles touches upon the benefits of tokenising securities, including improved efficiencies in raising capital and trading equities, the democratisation of asset ownership, as well as the creation of a brand-new asset class that has not previously been possible. This article is the second of a three-part series on tokenisation.
Security tokens typically fall into two categories: the tokenisation of traditional financial assets, such as equities, bonds and funds; and a new asset class which involves the direct part ownership of assets, also known as ‘fractional ownership’. Both of these areas are receiving an increasing amount of attention. Below I’ll examine how fractionalisation could change the way we view and manage assets, and potentially even democratise ownership.
Fractional ownership, or fractionalisation, is not a new concept. Shared and syndicated ownership has been around for hundreds of years, ranging from collective agricultural schemes to enthusiasts clubbing together to buy part ownership in a small plane. Yet it is important to acknowledge that the motivations driving participation often differ considerably.
Some use fractional ownership as a way of profiting from the venture they are buying into, such as the part ownership of a hotel, which derives revenue from greater occupancy and charge rates. Others might want to have use of the asset, for example, an individual may have access to a jet for a number of hours per year in return for their part ownership. Others are not interested in using the asset itself but are buying for merely speculative purposes.
There are also other investors who want to own a piece of something due to an emotional connection – such as a piece of art, a historical artefact or a share in a racehorse.
Why create another ‘layer’ with tokenisation?
By tokenising an asset it is possible to securitise the asset and convert it into a tradable commodity. This enables a group of disparate individuals to co-own tiny percentages or large portions of assets that were not previously available to purchase in this way. By fractionalising the physical asset, it is divided into equal units (e.g. centimetres or cubic inches), making it possible to sell those units to anyone. For example, people can have the opportunity to part-own a number of different physical assets, such as a famous painting, or a property.
These assets might not generate any income, thereby giving no reasonable means of return for the asset holders, but they could grow in value as demand and scarcity increases, creating a potential gain or loss if the token or the asset itself is sold. Like almost all other assets – price will be determined by supply and demand, As the asset ownership industry matures, I believe that we’ll begin to see a shift away from traditional models towards the emergence of tokenisation as a new shared asset class, generating opportunities that can benefit individuals, businesses and communities.
Fractional ownership has huge potential
The ability to tokenise an asset gives the owner a way to raise capital for something they never thought possible a few years ago. It reduces the need for intermediaries, which affects the price paid for the actual asset in the first place. Auction houses, for instance, typically earn significant percentages of the sale price and estate agents can charge large fees. In essence, standardised contracts can reduce professional fees. By providing a simple ownership structure, recording the asset’s ownership using distributed ledger technology (blockchain) and having a token/unit to represent ownership, the holder has the ability to trade the assets on a stock exchange – something they were never previously able to do.
Democratising asset ownership
Tokenisation also eliminates geographical boundaries. For example, part-owners of a painting can now be spread all over the world from Paraguay to Manhattan, to Mozambique. It should then be possible for their part-ownership to be easily exchanged/traded on a secondary market to allow this new shared asset economy to flourish and enable people to
raise money or sell assets in a way that was previously inaccessible.
Just as eBay and Amazon have become synonymous with the buying and selling of goods, the emergence of a new market for shared asset ownership is now upon us. No matter what the motivations are for buying those assets, it has never been easier to be a part of the shared asset economy. People across the globe now have the opportunity to join a fast-growing market – buying a stake in an asset such as property or piece of art is no longer something reserved for the wealthy.
For more information, register your interest in Tokenise below.
Tokenise provides an end-to-end capital markets solution using blockchain technology to tokenise securities (including; equities, bonds, funds, royalties, private equity, assets and securitisation vehicles), from primary issuance, secondary trading to clearing and settlement. Tokenise is creating a community for entities that are looking to raise money, and for investors looking to invest in these businesses.