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There is no doubt that blockchain technology will continue to play a major role in the future of capital markets. Asset tokenization is frequently being hailed as one of the most exciting developments in decentralized ledger technology, enabling real world assets to be fractionalized and traded seamlessly. Many believe that tokenization will lead to increased liquidity for traditionally private & illiquid assets. In order to truly understand the role Web3 will play in the future, we need to examine these developments in context.
With major institutions preparing to integrate tokenization into their workflow, retail investors are eager to learn about new investment opportunities, and yet, there is little evidence that these assets will be available to non-accredited investors any time soon due to regulatory limitations. In fact, while institutions are looking to blockchain and DeFi to unlock liquidity, they remain primarily interested in creating liquidity between themselves. Asset tokenization itself will not change the status quo. Asset tokenization does not inherently create transparency.
In order for tokenization to reach its full potential, blockchain-based infrastructure must be put in place to streamline due diligence; what’s more, this infrastructure must leverage advancements in collective intelligence to create a more trustworthy basis for valuation, diminishing the ability for asset owners to manipulate data and eliminating any single-point of failure. Decentralized data validation is the very essence of blockchain. Transparency will lead to liquidity, not the other way around.
Will tokenization expand access to capital markets?
Retail investors should temper their expectations; as most tokenized real world assets are likely to be considered securities, the regulatory pathway for issuers is quite clear. Security token offerings will have to comply with the SEC’s rules, and most of them will only be available to accredited investors. And while the Jobs Act of 2012 introduced Reg CF as a viable alternative to invite retail participation, it still placed significant limitations on crowdfunded raises, capping both total and individual contributions.
These initial offerings are only a part of the equation; liquidity is really defined by the market for secondary trading. For private assets that are already traditionally opaque, on-chain asset trading could easily continue to run into the same problem of obscure and inaccurate valuation. In other words, there is a strong and serious demand for high quality and trustworthy data, which creates inflection points that encourage more trade executions. This data must be available in real time, with auditable and cryptographic proof, including third party validation. This data must also be directly attached to the assets.
Migrating to a set of blockchain-based systems will require some serious upfront labor. Private markets cannot move from paper driven processes to “trustless” technology overnight, but by creating a clear pathway for asset managers to leverage blockchain-based middleware, enabling efficient data management and aggregates valuation data to the assets themselves, asset tokenization could do more than boosting liquidity: it could create radical transparency in private markets.
Building for the Future
Managing two separate data management systems for one asset can be cumbersome. In order to fully take advantage of asset tokenization, the next generation of asset owners will need to have options to integrate blockchain-based technologies frictionlessly into their existing workflows. This means having Web3 integrated options for accounting, management, and governance. For existing assets, there is a cost incurred from migration, but the payoff is the potential to achieve real transparency, and thus, ability to access capital in new ways.
Let’s consider small business as an example. For new businesses, this is a clear opportunity to start on the right foot. Future business owners will organize their business entirely on-chain from day one. In the early stage, business formation, operating agreements, governance rights, and treasury management can all be brought on-chain, laying the foundation for a new generation of transparent operations management. Accounting, hiring, inventory management, and reporting come next. Real time data will allow all stakeholders to monitor key performance metrics at will and with confidence.
These blockchain-based management systems will not only be for big corporations alone, but every business owner, regardless of size, will also have access to these tools to improve their operational, governance, and capital management. These are the resources necessary for small business owners to scale. No more unorganized filing cabinets. No more stakeholder disputes. No more accounting discrepancies.
By creating a robust infrastructure for on-chain business management, next-level transparency can lead to clear third party audits and valuation marks, making the due diligence process more efficient for potential investors. The ability to extract an accurate asset value for private assets in real time is revolutionary, not just for primary issuance, but also for secondary trading. This can be achieved in a decentralized manner: collective intelligence can remove single-party failure in data validation and add new value dimensions to give a more complete snapshot of an asset before purchase.
Collective Intelligence for Trust
Data crowdsourcing comes with its own set of challenges, the most important of which is data quality. In order to validate the accuracy of data and provide valuation insights, the individual or entity auditing the data must be trusted. This brings in the importance of credentials. Whether discussing home appraisals or financial audits, the data validator must be qualified to give their professional opinion on the documents reviewed. This qualification needs to be verified on-chain as well, existing in the same ecosystem as the asset itself.
While there is a significant place for licensed validators, data validation does not need to be strictly professional in nature. For instance, in the housing market there are many factors that play into the overall decision to invest: school district performance, neighborhood conditions, crime statistics and living expenses can all contribute to an investor’s decision to buy; to contribute these types of data points you might need only live in this geographic location. These data points can add new value dimensions to better understand and predict trends. The ability to aggregate this information in one place, knowing the contributor is giving a qualified opinion, can add to the full picture.
The Future with Oraichain Labs US
It has taken thousands of years to establish the layers of trust that enable present day capital markets; blockchain cannot simply create a trustless utopian society overnight. In order to achieve the long term mission of accessibility, we must learn to adopt existing trust mechanisms to make DLT more than alphanumeric strings and 0x addresses. This means bringing organizations on-chain first with familiar and comprehensive tooling and dealing with securitization once trust has been established At Oraichain Labs US, we are committed to bringing more valuable data on-chain by creating equitable resources for all asset owners.
Liquidity is an indication of healthy data ecosystems, not the result of tokenization.
About Oraichain Labs US
Oraichain Labs US (formally Oraichain Labs Inc.) is a US-based technology company focusing on the development of blockchain-based infrastructure for real-world applications.
