Folks! Let’s talk about something called the tokenisation of securities. That sounds like a complicated grown-up term, but it’s a neat idea.
So, what exactly is tokenisation? Well, let’s break it down...
First, what’s a security? Securities have value and can be traded, like stocks and bonds. When you buy a stock, you buy a tiny piece of a company. And when you buy a bond, you’re lending money to a company, country or city.
Next, what does it mean to tokenise something? Tokenisation means taking something that exists in the real world and turning it into a digital token using cool technology called blockchain. These digital tokens can be bought, sold or traded like the real-world items they represent.
For example, let’s say your family owns an expensive painting. If that painting were tokenised, it would become unique digital tokens. Each token would represent a tiny slice of the overall value of the painting. Then, your family could sell some of those tokens to art collectors and investors worldwide!
So, back to securities...When securities like stocks and bonds become tokenised, they become digital tokens instead of physical share certificates and bond documents. This opens up all kinds of new possibilities!
Why Tokenise Securities?
There are a few big reasons why people think tokenising traditional securities is a good idea:
1. 24/7 Trading
Currently, the stock market only trades during regular business hours on weekdays. But digital tokens can be traded anytime, night or day, and on weekends! So, if you ever want to trade in your pyjamas on Saturdays at 3 am, no problem!
2. No Middlemen
You need a middleman company like a brokerage firm to buy and sell most securities today. This middleman charges fees and commissions that take a bite out of your investment returns. But with tokenisation, you can buy and sell directly without intermediaries taking a cut. Sweet!
3. Fast Settlement Times
Getting cash after selling a stock or bond sometimes takes days or weeks with all kinds of back-office paperwork and procedures. But tokenised securities can settle extremely fast, even instantly. Imagine being able to access your money right away instead of having to wait around. Amazing!
4. Increased Accessibility
Big Wall Street investing companies usually won’t accept you as a customer unless you have enough money to invest. But tokenised systems are more open and allow almost anyone to invest even small dollar amounts. More people participating is good!
5. Better Transparency
On blockchain systems, transactions are updated for everyone publicly instead of happening behind closed doors. This makes things more transparent and trustworthy for investors. Nobody can secretly sneak around doing shady stuff without others seeing it. Hooray for transparency!
How Does Tokenisation of Securities Work?
The tokenisation process relies on blockchain technology. As you may have heard, blockchains are unique decentralised databases that nobody fully controls, but everyone can help run. This gives blockchain systems like Bitcoin and Ethereum some terrific advantages:
Records can’t be changed or hacked once validated and added to the chain of blocks. This prevents cheating and double-spending of tokens.
Transactions happen through peer-to-peer sharing instead of slow, centralised intermediaries. This makes transfers faster and cheaper.
Everything gets recorded publicly for anyone to audit. This makes blockchain networks transparent and trustworthy.
When securities firms tokenise something of value like a stock, bond or fund share, they turn it into a digital token on blockchain that represents ownership. Then, they allow those blockchain tokens to be traded directly between buyers and sellers rather than needing a middleman broker.
To start the tokenisation process, the securities firm works with smart programmers to code up a crypto token template on the blockchain. This token template defines the basic rules - like how many total tokens there will be and where ownership records will be stored.
Next, the firm issues the newly created security tokens to initial buyers. These buyers pay the firm cash, giving them back blockchain tokens as digital proof of ownership. These tokens then get listed on special token exchanges where they can be freely traded between buyers and sellers using real money.
Throughout this token lifecycle, the underlying blockchain updates ownership records securely each time the tokens change hands. Everyone can see the token trading activity take place on-chain. And no cheating is possible thanks to blockchain’s security and permanence. Pretty neat!
Real-World Tokenisation Examples
Tokenising securities is a brand new concept that people are just now beginning to test out. But we already have some fantastic early examples:
In 2019, an apartment building in downtown Manchester successfully tokenised part of itself by turning 5% of the property ownership into blockchain tokens. These tokens were sold to UK investors who now collectively own a small slice of the building!
That same year, German real estate firm Fundament tokenised a €250 million property fund. Investors could buy the fund’s tokens for as little as €1,000 instead of €10 million under old rules - allowing more people to invest.
In Austria recently, the country’s national postal service experimented with tokenising €8 million of their postage stamps! They broke the stamps into small digital tokens and sold them to investors who can now redeem the tokens for actual stamps to mail letters with. Fun!
As you can see, securities tokenisation is just starting but already making things possible that weren’t before. People are incredibly excited to tokenise significant assets that are typically hard to buy and sell shares of, like buildings, funds, renewables projects, sports teams, infrastructure, investment baskets, gold, and more.
What Could Go Wrong? Risks to Consider
Trying new technology always comes with some risks and unknowns. Here are a few things that could go wrong with securities tokenisation to keep in mind:
Buggy Code and Programming Errors
Blockchain code needs to be perfectly written without bugs or errors. A tiny mistake could break a token system or cause it to lose ownership records. Needs improvement! Firms need to triple-check their token programming.
Lack of Regulation and Investor Protection
New tech often moves faster than laws can keep up. Most governments haven’t yet passed firm rules around tokenised securities. This legal uncertainty could allow misconduct that hurts investors until better guidelines are introduced.
Platform Hacks and Token Thefts
While blockchain is super secure, the computer systems built around it sometimes get hacked, and tokens are stolen. People must take security exceptionally seriously when handling digital assets to avoid heartbreak.
Failed or Abused Projects
Some people creating tokenised securities might be scammers with fake or misleading projects meant to trick investors out of money. Like anything requiring trust, there are bound to be unfortunate bad apples causing trouble.
Price Crash Risks
Token markets tend to see a lot of hype cycles, speculation and volatility that could lead to big pricing bubbles or crashes if people aren’t careful. It’s essential to always invest responsibly within your risk limits.
Overall, though, most risks and downsides can be addressed over time as the technology matures. The potential benefits make things well worth trying out responsibly!
Fun Examples
Let me leave you with a few simplified examples to help bring the ideas together:
Shared Classroom Pet
Imagine if our kindergarten class had a classroom pet bunny named Carrots that we all took turns caring for. Now, pretend we tokenised ownership of Carrots by creating 100 digital Carrot Tokens. Each token would represent 1% responsibility for and access rights to Carrots. Students and parents could buy the tokens, trade them, and redeem them to schedule caretaker duties or playtime with Carrots!
Tokenised Lemonade Stand
If Sarah and Mark operated a neighbourhood lemonade stand but wanted help expanding, they could tokenise it! They might create 1000 Lemonade Stand Tokens worth $1 each, representing total ownership. Whoever holds the tokens can redeem them for lemonade or give input on what flavours to offer. Sarah and Mark could sell the tokens to raise money to buy more cups and lemons!
Tokenised Baseball Team
Little Timmy’s local Little League team needs new equipment and uniforms. So Timmy talks the coach into selling off 500 digital Bat Tokens, representing a tiny slice of ownership. Fans pay $20 per Bat Token and can now vote on team decisions and access VIP events. The cash raised pays for great new gear to take the team to the championships!
So, in summary:
Tokenisation means turning real-world things into digital tokens on the blockchain.
This unlocks new possibilities but also requires some caution.
When done correctly, tokenisation could make investing and ownership more accessible.
And that helps get more people involved in our economy’s success
I hope you now understand the basics of tokenisation and why so many people are excited about it.
Feel free to let me know if you have any other questions. Until next time, folks!