Digital assets seem to be at the tip of everyone’s tongue in the financial industry today. How are they defined and what do they represent?
One of the most common definitions is that they are assets which are issued and transferred using distributed ledger or blockchain technology.
What does this actually mean? Let’s illustrate with a bit of history.
The anonymous Satoshi Nakamoto created Bitcoin back in 2008 as a network for peer-to-peer online payment. An alternative to the established financial infrastructure based on trusted intermediaries, Bitcoin relies on clever use of technology to offer a new paradigm shift: replace the intermediaries with a blockchain protocol as the main trust anchor. The way the blockchain protocol was designed allowed control of the past (immutability of the recorded data) and the future (consensus protocol).
By removing the intermediaries, the trust in the system would be increased as we replace our trust in organizations (susceptible to mistakes, fraud and corruption) with a trust in the technology (once battle tested, always behaving in the same manner). Also, by getting rid of the high operational expenses for the intermediaries we would reduce the transactional costs. And the less the transactions cost, the more we will trade between each other.
The birth of bitcoin represented the birth of the currently most popular type of digital asset — cryptocurrencies.
Even though the original vision of Satoshi is (still) not materialized (Bitcoin is primarily used as a “store of value” today rather than a “medium for exchange of value”), an important takeaway was that the underlying blockchain technology has proved as a viable architecture, potentially to be applied in other use cases.
Hence the birth of Ethereum, a blockchain with general purpose smart contracts support, back in 2015. The development of Ethereum was funded through an Initial Coin Offering (ICO), a novel type of capital raising using cryptocurrencies. For the invested capital, the investors get a proportionate amount of tokens issued on the blockchain. In the upcoming years (especially during 2017–2018 period, often labeled as the ICO craze era), this would prove to be the killer case for application of blockchain technology. Unfortunately the ICOs also proved to be a magnet for every imaginable scam on earth. However their place in history is secured as the backbone behind the new concept — token economy.
What do these tokens represent? Virtually anything from the physical world.
The startups raising capital back in 2017–2018 mostly tried to define their tokens as a service or utility tokens, to be used in their platforms to get access to some services/features. This has become a hot topic of discussion with the regulators, who often considered them securities and subject to investor protection laws.
A much more serious approach was the introduction of security tokens (representing digitally native assets) and tokenized securities (representing tokenized form of existing physical assets). Asset-type agnostic open standards like ERC-1400 (Security Tokens Standards Suite) were being developed to allow tokenization of all kinds of financial instruments (private equity shares, bonds, funds etc.).
All these different types of tokens can be categorized as some form of digital assets.
For several years, the legislation was unclear and behind. However, the recent developments could be a start of tectonic shift: this year Boerse Stuttgart Digital Exchange and SIX Digital Exchange were authorized to operate a digital exchange of digital assets by their respective German and Swiss regulators.
But then again, why is it important to me and why should I care?
The reduction of the operational expenses (remember, technology replaces the trusted intermediaries) should result in the lowering of the barrier to entry for investors. This should result in democratization of investing, i.e. no longer exclusive to those eligible for high tickets. Companies should be able to raise capital from a larger investor base. Retail investing should become a thing.
Another very interesting aspect is fractional ownership. For example, a fine piece of art might be represented with millions of tokens on a chain and its ownership distributed to thousands of investors. The same can be done for companies, real estate and vehicles. The possibilities are literally endless.
In the not so distant future, you might be a proud minority owner of a villa in the Mediterranean. Or you could invest in the next album of your favorite musical artists and vote on the tracklist. Or you could raise capital and start producing green energy products. The choice would be up to you. All these things should be doable in a much easier fashion than today.
Sounds cool. But how much longer do we have to wait for it?
The good news is that these developments are in the early adopters phase (available and already used by some). There is a well spread belief that the climax will happen at the intersection of development of digital identity, securities and payment tokens (e.g. CBDCs, yet another form of digital assets). Once the early majority phase is reached, the world of tomorrow might be very, very intriguing.
Co-founder and CEO of Blokverse and CTO of Securities Grid, startups focusing on blockchain based solutions. His focus of interest is application of blockchain technology for privacy-preserved digital identity and the emergence of digital assets as the next evolution of financial technology. He has 19 years of experience in designing, architecting and launching enterprise solutions.