Here’s Why Interest In Tokenizing Assets Is Starting To Surge

As much of the blockchain technorati prepare for Consensus Week in New York City next month, one of the big buzz terms that will be front and center of the conference, and various activities surrounding it, will be that of tokenized assets. That is, the creation of a digital representation of a physical asset. Could it truly be the business game-changer many believe it to be?

“The idea that some existing tokens will be considered securities, is hardly interesting,” scoffs Nils Veenstra, Director at BECON, a blockchain-focused event and research organization.  “However, the fact that we can now take existing assets and tokenize them, that is exciting,” he adds.  Veenstra says that the company’s research is indicating that a growing number of institutional investors are paying close attention to this new space and that the particular take-way is that the interest level is not only from people in the technology space but within the wealth and asset management and property development as well.

In fact, Veenstra is so convinced about the power of this new arena that the organization has now dedicated a series of conferences across Europe and Asia dedicated specifically to the topic and which will kick off in New York City just before the Consensus conference.

But is such fervor truly warranted?

Many in the space say that tokenized assets offers improved liquidity. Traditional assets, such as real estate investments or private company stock, are notoriously illiquid. It is difficult and expensive to transfer ownership of such assets.  Both buyers and sellers must find each other through traditional methods such as networking and specialist brokers.

Peter Smith, chief executive officer of Blockchain Ltd., speaks during the Lisbon Web Summit in Lisbon, Portugal, o Photographer: Paulo Duarte/Bloomberg

© 2016 Bloomberg Finance LP

Tokenization, on the other hand, allows a simple and efficient ownership verification and transfer system, powered by the blockchain. Evangelists of the space claim that it is also much easier to create compliant exchanges given the transparency that the technology provides. Traditional international barriers to, for example, real estate investments are said to become a non-issue via a tokenized asset approach, as well.

“When you tokenize assets, they are recorded on an irrefutable ledger, allowing a transparent public record,” explains Elizabeth White, CEO of The White Company, a blockchain payment company.  “This avoids confusion from managing a cap table and makes it easier to understand how much equity is within a company, for example.”

However White believes the true business break-through is the divisibility of assets that tokenizing affords.   She continues, “Assets such as real estate have traditionally imposed high minimums. The reason has always been simply that it’s impractical to deal with hundreds, let alone thousands, of investors, keeping track of their investment value, income payments, transfers of ownership and more. But tokenized assets can be administered entirely on the blockchain, and funding of the investment, transfers and redemptions can be done automatically.”

She says that such action could allow a company to be able to accept an unlimited number of investors because there is no practical difference between having 10 or 10,000. Once this is in place, it also means that minimum investment amounts can be smaller and that investors seeking to sell are not required to transfer ownership in blocks. This means that smaller investors are to be able to participate in opportunities, according to White.

However, there are elements at play beyond simply that of the financial and technical. This drive toward a completely different approach to traditional management of physical assets is intriguing. Indeed, why do we find this notion of making the physical digitized or taking that which was singular and making it multiple in ownership fascinating beyond just the efficiency of it all?

Such beliefs and desires are also compounded by culture. “Western society is more strongly individual, and much of our society is defined by property rights and ownership more than some other parts of the world,” says Rhue. So it’s not surprising that the U.S. seems to be taking the lead in this part of the blockchain narrative.

According to Rhue, the concept of land ownership, much of which is the focus around tokenizing assets, was originally a pre-condition to vote and highlights the importance of property in our notion of civil engagement and worth and therefore could be also be said to subconsciously drive the growing fervor around this new arena.

And, of course, there are all the legal implications of this space. “I think it’s actually important to remember that nearly all discussion, either for or against, is purely theoretical at this point,” says Greg Gilman, co-founder and general counsel at Science Inc, a startup incubator that has invested in and mentored dozens of technology startups including Dollar Shave Club.

Gilman says that standardization and volume will cause costs to decrease in the future and likely make it easier for a QC to accept new tokens, but for now, custody remains a gating issue. He also says that issuers of such tokens are asking investors to make three bets.  First on the soundness of the underlying business, as with any investment.  Second on the fact that the token will be listed on an exchange, and third that there will be real liquidity in the markets at some point. None of these are guaranteed.

“Combine all that with the custody issue, and tokens present more of a problem for people than they do an opportunity,” says Gilman. “We and others are working on solving some of these problems, and I expect the landscape, especially given discussions at major conferences in the space and more, will look considerably different by the end of 2019 than it does right now.”

This post first appeared on Forbes.com. To see the original, click here.