Ten years after the invention of bitcoin, the general market is
starting to realize – with a big push from Facebook – that digital money
using blockchain technology is coming.
Behind the scenes, the next market is already kicking into gear as it
becomes clear to all major players that not only is digitization of
money on the way, but also digitization of ownership of assets, a
significantly bigger financial market with massive global social and
economic implications.
A few weeks ago, I co-hosted a closed workshop for
London City institutional investors and bankers about digital
securities. We split into round tables, and each table was tasked with
rating the advantages of digitizing securities by importance: increased
liquidity, efficiency, cost, post-trade streamlining, asset prices,
fractional ownership, speed, global access, new financial products,
business models etc.
When it was time to present the results, it became clear there was no
consensus. Every table came up with different ordering, and within each
table there was little agreement.
Following the event, I spoke to participants and realized that every
person in the room was thinking about an asset class close to their own
heart. Some were rating advantages for public stocks going digital,
others were thinking about real estate debt, others thought of private
equity.
In the big picture, the ranking doesn’t matter, because digitization is inevitable.
Securities will go digital because they can
Let’s explain, but first, here is a simplified account of what it means to digitize ownership:
Ownership is essentially data. Society agrees that owner X has rights
in asset Y and protects these rights with the power of the courts and
police. Like any data, ownership can be digitized.
Today, most global assets are private. To trade them, the seller and
buyer go through a lengthy and expensive process, involving lawyers,
accountants, etc., and then everyone signs documents which detail what
rights the buyer gets. The combination of all documents across all
owners is the ownership. Let’s call these documents “Analog Ownership.”
Public markets are more efficient – they have electronic records of
ownership, but it is still not a digital item. Trades require multiple
entities to settle each transaction across ledgers. Those public
platforms are expensive and inefficient, with a very limited launch
capacity.
Enter security tokens, for which a master set of documents and smart
contracts define the rights of any token holder. A blockchain keeps a
record of who owns each token, replicated in consensus, so no one entity
controls the ledger.
You can then hold your tokens (yourself or with a custodian), or
trade them (every transaction checked for regulation compliance, using
AI).
Ownership essentially becomes a digital value which can be broken down into smaller parts that can flow instantly all over the world.
The main feature of digitization is not that securities are stored in
0s and 1s (that’s “electronic”), it’s that digitized securities can flow instantly on global networks.
What happens when a market transitions
Markets that go digital experience four stages. Let’s look at the music industry as an example:
Stage 1: Analog
Music is recorded on vinyl records. You can only buy the records your local shop gets.
The ownership equivalent: Most private transactions are local, require real-world contact.
Stage 2: Digital Format
Music is recorded on CDs. It’s now more portable, electronic, but not a fundamental change.
The ownership equivalent: Excel sheets, cap table management software…
Stage 3: Innovation!
Hackers discover they can send music files around – underground P2P
platforms, illegal file sharing, music execs trying desperately to
protect the old order, Napster, legal action…
The ownership equivalent: ICOs – just like music sharing 20 years
earlier, it was developers who realized the potential of tokens to
connect people directly and change the rules of the fund raising game,
and also similarly, it only took authorities two years to fight back and
enforce regulations.
Stage 4: Digital
At this final stage, music becomes truly digital and the market
embraces the new format with legal and commercial solutions and new
business models on a fast network. Applications like Spotify emerge,
which allow every user in the world to listen to any song they want
(they don’t have to buy a full record), whenever they want to.
Even better, algorithms and AI can create combinations and
personalized discovery lists, new artists can get to market faster and
cheaper, funded by new business models that 20 years ago would have been
rejected by every single label executive.
The ownership version: Digital securities. Ownership can flow, like
songs – think about a Spotify-like app that gives every user access to
every single (relevant to them) asset in the global market.
When people ask, “Will investors want digital securities?,” the
answer is, “Do people still listen to songs?” Once all securities are
digital and instantly available (within regulations), it’s all about the
asset. The format is instant and transparent.
But with that, everything changes – availability, discovery, pricing
and business models leading to a new flowing, digital world. Will it
happen overnight?
Of course not, there are many hurdles to be overcome and solutions to
be found, but the drivers are so powerful that digitization is
effectively inevitable.
The difference between billions and trillions
Music is a market worth tens of billions of dollars; ownership in general encompasses hundreds of trillions of dollars.
In fact, “securities” is an umbrella name for dozens of asset
classes, very different from one another. Each of them is typically
bigger than the entire music market and targets completely different
types of owners, investor pools and application flows. Some are
retail-facing, many are mostly institutional with massive financial
entities trading through investment banks and major exchanges.
However, at the bottom of all these asset classes, one truth remains:
ownership is still data and is still about who has rights to what –
that can now finally be digitized.
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