Blockchain explained

How tokenization and digitized assets can help investors unlock trillions from the economy

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light boxesIt would be hard to argue that in many ways we are already living in a digitized economy. We use apps to send money to our friends, pay bills, buy our groceries, and more. But the truth remains that we see vast areas of our economy remain restrained by analogue. Some items have proven easier to digitize than others, based on accepted practices, the number of players that must interact in a given ecosystem, and the necessary intermediaries to exchange value. Take your house, for example. Its ownership rights must be represented by a deed, purchase rights, tax records, affidavits, or other records. To transfer those rights, share them with others, leave them to your children, or even to simply refinance a mortgage, you need a paper trail that grows in complexity with each new transaction.

Representing ownership rights digitally could have numerous benefits. Digitization could reduce the costs associated we associate with human error, make exceptions easier to identify and fix, and ultimately help instill more trust in the process while alleviating the need for intermediaries helping to build more trust in the process. You could sell your home — or even sell shares in your home — digitally to trusted parties with reduced need anyone to verify or validate data. It is designed such that there are no lengthy processes, no extra charges from middle-people, and no volumes of paperwork. This would be a huge benefit to homeowners, but also to the economy at large. By bringing ease-of-transaction to cumbersome, unwieldy assets like homes, commodities, heirlooms, and more, we could potentially help investors unlock trillions of dollars from the economy.

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This work is already underway, thanks to tokenization. By representing ownership rights for physical assets digitally on a distributed ledger or blockchain, our goal is to dramatically reduce the number of intermediaries and paperwork economic participation usually requires (a pair of international banks, for example, could exchange a convertible token instead of converting and re-converting to and from the host country’s currency in each intermediary bank it must pass through to complete the transfer).

These digital assets, often called tokens, also address a liquidity problem affecting many assets, from real estate to fine art and precious metals. These assets aren’t easily transferred into cash, making them difficult to exchange. With tokenization, we can break these assets up into fractions, expanding the potential pool of buyers and making trade much more attractive. Tokenization can also open up new markets by facilitating innovation and building trust, bringing together buyers and sellers in more accountable exchanges than they’ve had access to before.

A digital exchange for minerals

One industry where movement toward digital assets may be particularly helpful is for trading of rare and industrial metals. In most mineral transactions, a buyer may not necessarily need all of volume being offered, which then requires an additional negotiation over the size and pricing of the order. Fractional shares made possible through tokenization and a digital marketplace solve both of these problems, making it easy for mineral buyers to purchase precisely what they need, and making it easier for major and small players alike to access new markets.

IBM is working with Nornickel and Atomyze to do just that, by developing a platform, in the public IBM Cloud, that uses The Linux Foundation’s Hyperledger Fabric distributed ledger technology to represent physical assets like industrial or rare metals in digital form. Once the platform is operational, it is designed to make trading easier, speed transaction times and create a permissioned way to monitor transactions. The goal is for issuers to be able to tap financing on better terms, expand their pool of investors, and become more efficient.

This is only one of many industries where we see tokenization offering potential benefits. In international payments, for example, tokens could create a market maker for exchanging currencies of different value. In real estate, tokenization could make property more liquid by facilitating fractional shares. Tokenization is driving change in other industries too, from commercial properties to carbon credits.

Laying the right groundwork

A token-based economy will not happen overnight. Whilst the technology is proven, change — particularly innovative change in business process — takes time. Indeed, developing these marketplaces will probably require a great deal of regulatory understanding and strong governance structures for these networks to deliver on the trust and transparency they promise. With the right permissioning structure, oversight schemes, and buy-in from regulators, however, we believe the benefits of tokenization will dramatically outweigh the costs. Tokenization and digital asset trading platforms can make expanding access to markets easier, fairer, and more remunerative.

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