Tokenizing Securities, Replacing Lawyers and You: How Will Tokenization Disrupt These Legacy Industries?
Both investors from around the world and Wall Street have waited with bated breath for the securitization of assets to reach the mainstream. This high-potential, high-value industry is gaining momentum rapidly, with 2019 being marked as a year of great development for the sector.
Global capital markets are valued at an estimated $118 trillion, and if only a quarter of that value were issued as digital securities, the industry would scale to a grand $20 trillion, a far cry from the numbers of the past three years. Institutional investors have kept a keen eye on these developments, with many moving to adopt or launch digital securities of their own across various industries.
These are the industries that will likely be disrupted by tokenization.
Smart contract technology is making inroads into the legal sector. Previously, many have cited beliefs that traditional contracts will be superseded by smart contracts alone and that lawyers will become redundant. This is optimistic, and not necessarily true. Legal agreements often call for complex executions and payment schemes, making it more likely for technology to enhance the work of the legal sector than replace it.
Instead of written agreements which can take extended time to create and execute, auto-enacting and programmable smart contracts will create more efficient legal processes, saving valuable investor time and money when investing in digital securities. In terms of real world implementation, it may still take some time for courts and the rest of the legal sector to implement the technology alongside more traditional legal agreements.
The use of digital securities in real estate is one of the most promising applications of the technology so far. The tokenization of assets is set to power fractional ownership in a new, more efficient manner with lower costs and fewer intermediaries involved than ever before. This type of ownership applied to digital securities will allow investors to earn profits, dividends, interest and more from both residential and commercial properties.
By far the biggest example of real estate tokenization was the fractional ownership of the St. Regis Aspen, with stakes sold through crowdfunding website Indiegogo in which Elevated Returns closed $18 million. The St. Regis Aspen is a luxury resort located in Colorado, featuring 179 rooms, conference spaces and incredible views of the local Rocky Mountains.
Tokenization will surely disrupt and upend the legacy real estate industry.
Covered bonds, such as the debt securities typically issued by the financial services industry or corporates, will also benefit from a digital securitization overhaul.
Digital securities and distributed ledger technology are introducing new standards for bond management and secondary bond trading, reducing the costs and resources needed for both.
Recently, French investment bank Societe Generale issued a €100 million covered bond as a digital security on the Ethereum blockchain, in which the bank was the sole investor- and other institutions will follow suit, with opportunities open to the public entering the pipeline.
Bonds mixed with the digital securities model and collateralized against a group of assets can also provide a measure of protection to investors- if the financial institutions were to become solvent, the bond will still be covered. Digital securities are predicted to bring value to covered bonds and debt issuance by assisting with scalability, reducing the time it takes to reach the market and bringing many other advantages.
The tokenization of securities also creates new possibilities for the traditional financial system- one that is putting ownership and control of funds back into the investors’ hands. Both new companies and existing institutions have started breaking down the obstacles surrounding mass-adoption of digital securities.
Digital securities will enable financial institutions to offer portions of assets as investment opportunities, simplifying ownership and transfers or ownership efficiently and legally. Tokenization of financial assets also carries advantages for investors, by allowing them to simultaneously diversify their portfolios and participate in investments that would previously have been unavailable to them such as cross-border real estate investing.
Blockchain-based development will be key for the financial sector to create an interconnected, global financial sector in which investors have access to investment opportunities anywhere, any time.
Both Wall Street and investors are set to benefit from an influx of digital securities and asset tokenization across various sectors, which is predicted to snowball into a high-value, high-potential sector this year. Increased efficiency, transparency, cost-reduction and an interconnected financial sector could be a reality sooner rather than later. Digital securities are forecast to become a significant part of the global stock market, and the legal industry, real estate, covered bonds, and the finance sector are amongst many others which will implement and build on the technology that is already stirring excitement today.