- Many businesses and investors are looking for ways to diversify their investment portfolios or overcome common investment obstacles.
- Blockchain – specifically the tokenization of assets and fractional ownership made possible by the technology – stands poised to democratize the investment sphere and change how we view capital.
- Alex Rosen shares a few questions business leaders can ask themselves to determine whether tokenization is right for their organization.
Many economic indicators now trend downward as a result of the COVID-19 pandemic, yet a few bright spots remain. For example, RealT set a new milestone in March when it became the first company to sell $1 million worth of real estate on the blockchain. Many others have tried this – to both revolutionize real estate investing and integrate it with blockchain – but none have succeeded like ReaIT.
What's the company's secret, then? It's quite simple, actually: a strong, well-executed concept. RealT offers investors the chance to crowdfund real estate purchases. Imagine, for example, an office building is worth $100 million and can be divided into 100,000 ownership shares worth $1,000 each. Investors buy these shares, known as "tokens" (which they can easily acquire, exchange or use) to automatically claim their share of rent money. Instead of having one or several property owners, the building can be a source of income for thousands of people.
RealT isn't the first company to try democratizing the real estate market. Because real estate can generate revenue and gain value simultaneously, it has always been viewed as an appealing alternative to securities such as stocks and bonds. However, the high cost of entry excludes many investors, and the laborious process of exiting a deal turns off a large swath of people.
The concept of spreading ownership among a larger pool of investors has always held a lot of appeal theoretically, but it proved logistically difficult – until the advent of blockchain, that is.
The technique RealT employs – tokenization – makes it much easier to divide ownership of real estate or any class of asset. Previously, keeping track of a fractionalized asset with hundreds or thousands of owners would have presented significant administrative hurdles. But when blockchain can record all of those assets as tokens, they become transparent for all parties to see yet impossible for any party to alter. Essentially, this creates a permanent audit trail that ensures transparency and builds trust, which makes fractionalization viable for the first time.
Regardless of which asset they represent, tokens are highly divisible and easily exchanged, making them far more accessible than traditional investment vehicles. With the proof of concept now complete, expect to see tokens backed by blockchain used to facilitate investment into everything from intellectual property to sports cars.
In short, we're entering an entirely new era of asset ownership, and this pattern will likely continue. Research from Deloitte notes that smaller disruptors (such as RealT) and traditional financial infrastructures alike are looking to play a role in the tokenized assets sphere, boosting the chances of this investment type going mainstream.
What blockchain means for business capital
Businesses currently have three options for accessing the assets they need to operate: buy, lease, or outsource. For some companies and assets, that limited number of options is enough. But for many more companies, the all-or-nothing nature of these options only makes it more difficult and expensive to acquire everything from heavy equipment to real estate to computers.
Blockchain offers an entirely new way for companies to think about capital, including where, when, why and how they apply it. When an asset is tokenized, companies can purchase all of it or just a portion. That might sound onerous or insignificant, but in practice, it transforms the relationship companies have with capital.
Let's consider another example: Think about the excavator a construction company needs to complete a project. Practically, it doesn't make sense for the company to buy the excavator outright because it's expensive to store, hard to maintain and so on. Financially, it also doesn't make sense to lease the equipment or hire a third party because of all the inflated costs. Rather than choosing between two or three less-than-ideal options, companies can now use tokens to calibrate exactly how they allocate capital toward certain assets.
Rather than buying 100% of the excavator, the company could purchase tokens equivalent to 25% of the ownership and pay rent to whoever owns the remaining tokens. In turn, some of the rent would be paid back to the company because it has a 25% claim on all rental revenue generated by the excavator. It's like renting and owning at the same time.
That might sound hopelessly complicated, but tokens make it simple by virtue of running on the blockchain. Transactions recorded on the blockchain can trigger smart contracts, which administer themselves by activating disbursements or levying penalties based on the contract's terms and the actions recorded on the blockchain. In the excavator example, recording who owns what, when rent is paid, and how that money is disbursed happens automatically – with the complete confidence of all parties involved.
As more companies mimic the success of RealT and fractionalized assets become ubiquitous, your company can start to choose the assets you want to own with granular precision. Because buying and selling tokens involves such low levels of friction, all assets become liquid assets that your company can leverage strategically. That applies to the assets the company needs to operate as well as those it could simply benefit from having.
Would it make sense for a company to own part of an excavator it doesn't need or an office building it doesn't occupy? Possibly. Now that the process is possible through tokenization and trustworthy thanks to blockchain, it's a question companies should be eager to answer.
Is your business ready for blockchain and fractional ownership?
Even though tokens offer many advantages and a low barrier to entry, you shouldn't rush to tokenize everything in your portfolio. First, prove tokenization is the best option for your business by asking yourself these questions.
1. How do we acquire assets today?
Are you acquiring assets out of necessity or simply because you lack the flexibility to do anything else? If you lack other options, you might have never considered the diversity and efficacy of your portfolio before – but that should change.
Companies of different sizes in various industries will approach this issue individually. But with tokenization making it possible to invest in so many assets other than traditional securities and blockchain enabling new ways to extract value from those assets, everyone should consider a fresh approach at the very least.
Fractional ownership also gives investors the opportunity to diversify their risk over more assets, offering them finer control over their investment portfolios. This could lead to better or possibly more consistent results with a less risky portfolio.
2. Do we need alternative financing options?
Initial public offerings and private equity both offer access to more capital, but they also bring risks and restrictions. If you're looking for alternative sources of financing, you might consider tokenizing parts of the business or the assets you own.
By doing so, you bypass the centralized exchanges, unshackle yourself from the demands of venture capitalists, and tap into the 90% of retail investors who lack accreditation. Whether they function as an alternative or additional source of financing, tokens give you far more control over your company's financial future.
3. Can we ensure regulatory compliance?
Regulations dictate the types and quantities of investors allowed to purchase tokenized assets. Similar regulations exist around what kinds of assets can be tokenized, especially within public companies. There might also be legal considerations around tokenizing an asset directly or through a holding company.
Before wading into the token economy, familiarize yourself with all applicable regulations, particularly the penalties for noncompliance and the obligation to comply with rules in foreign jurisdictions. Regulations governing tokens are very new and evolve quickly, sometimes to the point that it undermines the ability to freely exchange those tokens. However, the immutable audit trail created by blockchain makes it vastly easier to prove compliance, which should help streamline how regulators enforce and administer the rules.
It's rare that something as radically new as tokenization makes such intuitive sense. By removing unnecessary obstacles between investors and assets, however, this technique topples the traditional gatekeepers and unleashes a wave of economic opportunity in the process. The question now is whether you're poised to take advantage of it.