Democratizing data science.
Wall Street began in colonial times, with wealthy traders creating the rules of the game. Hundreds of years later, the abscesses of capitalism and deregulation, such as the abolition of the Glass-Steagall Act, led to the 2008 financial crisis. In the aftermath of Lehman Brothers’ bankruptcy, the Bitcoin cryptocurrency was devised, and an experimental financial system was born.
Cryptocurrency has long been seen as a tool used by criminals, hackers, and others in the “financial underworld,” rather than as a legitimate alternative to the current financial system. The reality, as noted by the Drug Enforcement Administration, is that cryptocurrency use is dominated by speculators, not criminals.
However, there is some truth to the idea that cryptocurrency is on the fringes of the financial system. In spite of all the hype since Bitcoin’s birth in 2008, adoption of the technology is relatively low, and it’s not widely used as the “cash system” it was originally intended to be.
The story changes entirely when we look at Bitcoin’s underlying technology, blockchain. Ironically, while blockchain’s first use-case, Bitcoin, originated with the ethos of creating a financial revolution, blockchain is now widely adopted by governments and corporations around the world.
From China’s central bank launching its own blockchain-based digital currency to Dubai’s government making blockchain central to its strategy and Estonia running on the blockchain, this technology is no longer experimental, but a practical way to increase efficiency and transparency in many systems.
Adoption is even higher in the private sector, with at least 84% of organizations surveyed by PwC having at least some involvement in blockchain. These include tech giants from Microsoft to IBM, logistics corporations from FedEx to UPS, banks from Barclays to JP Morgan, and countless others.
Even more importantly, blockchain has the potential to disrupt institutional investments. To give a picture of the scope of institutional investors, they account for three-quarters of the volume on the New York Stock Exchange. Blockchain technology enables an asset manager to “tokenize” any asset, whether it’s equity, debt, a real asset, or even a fund itself. This creates tradable digital tokens backed by that asset, unlike traditional cryptocurrency, which is backed by nothing.
In contrast to an Initial Public Offering, which can take years and cost millions of dollars, these asset-backed tokens can be sold through a Security Token Offering efficiently and easily. Besides more efficient capital raising, these tokens can be sent and received at virtually no cost (just about 1 penny on the Ethereum blockchain), making securities transactions effortless. These tokens also increase the efficiency of KYC/AML compliance.
More than theory, Security Token Offerings are now a regular occurence, selling tokens backed by everything from art to real estate. Further, tokenized funds are emerging to democratize access to traditionally restrictive investment opportunities. For instance, Invictus Capital created Hyperion, the world’s first tokenized Venture Capital fund, and CRYPTO20, the world’s first tokenized cryptocurrency index fund (Disclaimer: The author is a consultant at Invictus Capital).
All of this means one thing for Main Street and Wall Street investors alike: It’s going to be easier and cheaper than ever to have access to global investment opportunities. Wall Street has been the home of institutional investors for hundreds of years, with accredited investor laws and high investment minimums leaving the non-wealthy to Main Street. However, blockchain-based tokens enable open access to investment opportunities for everyone, without investment minimums and with drastically lower fees.
Tokenized assets are simply a more efficient way to record, exchange, and monitor the ownership of various assets. As with all superior technologies, eventual adoption is inevitable.
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