By Colin Butler, Global Head of Institutional Capital at Polygon Labs
The financial world greatly lags behind other sectors that are leveraging the power of blockchains to fuel growth and innovation. Tokenization is one such technology which has the potential to revolutionize the way we manage and transfer value.
Tokenization is the process of converting an asset or ownership rights into a unique unit, or a token, that lives on a blockchain. Because any item that is considered valuable can be tokenized, this technology has a broad spectrum of possible applications.
The potential ramifications of this technology on the global financial system go beyond any one fund tokenizing, rather the impact lies in the promise of offering new opportunities for people around the world to participate in the financial system and build a better, fairer future for everyone. Here are five biggest opportunities where tokenization will best traditional finance:
1. Leveling the Playing Field : Access to premier financial services is limited to a privileged few for the sake of maintaining efficiency. For example, private equity is one of the most opaque and difficult markets in which to participate, with massive minimum investment thresholds often in the millions, yet it has outperformed the S&P 500 by more than 70%, and with less volatility, since 2001.
Tokenization addresses some of these access inequities by creating tokens of ownership that are tradeable peer-2-peer (P2P), regardless of geographical location or presence of financial intermediaries, and have the capacity to be fractionalized into smaller units of entry. This opens up new opportunities for people who previously had no access to financial services, and levels the playing field.
2. Greater Liquidity: With high-value assets, the price of a single share can be exorbitant, severely restricting the pool of potential buyers. This can make it difficult for investors to sell their holdings and access their capital, especially in times of financial stress. More buyers and sellers means more volume, which means more flexible, liquid markets.
Massive minimums created for the sole purpose of remaining efficient impose massive barriers to entry. Tokenization and digital assets are the logical solution with easy to navigate asset infrastructure, real-time trading on an accessible P2P marketplace with near-instant finality, increased liquidity and reduced asset-cash conversion windows.
Liquidity is also important for the broader economy. Without it, investors uncertain about their ability to liquidate will demand higher returns to compensate for the additional risk, driving up the cost of capital and making it harder for businesses to fund growth.
3. Cost Savings via Disintermediation: Traditional finance is riddled with high fees and hidden charges and intermediaries. On an institutional scale that amounts to a massive maw of fee extraction that needs to be addressed. And when funds are forced to manage their massive portfolios without automation and instantly veritable sources, it is a known tax.
It does not have to be this way. Tokenized assets cut out intermediaries and enable P2P transactions. There is no need for verification and approvals when a distributed ledger provides the necessary information on command. This not only reduces costs but also makes the process faster and more efficient.
4. More Transparency: In both traditional financial markets and private equity markets, the liquidity problem can be exacerbated by a lack of information or transparency, leading to uncertainty and decreased confidence among investors. This problem impacts retail investors too. Educated traders can only exist insofar as information is available.
With greater opportunities for fraudulent activity and the prevalence of information asymmetry, where some investors have access to information that others do not, creating market inefficiencies, lack of transparency is a persistent problem in traditional finance. Tokenization and digital assets offer a clear solution with a permanent, immutable ledger of transactions. This increases transparency and accountability, helping to build trust in the financial system.
5. Fractional Ownership: How do markets work for these large assets with few reference points? Low-volume markets are inefficient markets and they are this way because the pool of buyers for high-value assets is naturally limited. So how do you split up high-value assets in an intuitive, trustless way? Historically you haven’t been able to.
But with fractional ownership, wherein the representative token is distributed into fractional tokens, avenues open for smaller investments and greater access for more people to private equity opportunities, increasing the pool of potential investors and increasing overall liquidity. In total, fractionalization allows for more efficient capital raising, as tokens can be easily traded and transferred on blockchain platforms, providing a more efficient and streamlined process for both investors and issuers.
The brief list above has only scratched the surface of what tokenization and other blockchain-enabled technologies has to offer to the world of finance. What is at stake is the possibility of a financial system that is fairer, more dynamic and better serves the greater economy.
About The Author
Colin Butler is the Global Head of Institutional Capital at Polygon Labs, driving education and awareness within the institutional investment community. Prior to Polygon, he spent 18 years in financial markets. He has worked as Head of Business Development at a global L/S equity hedge fund, the Global Revenue Officer in a company that used AI to quantify human decision-making, and a variety of other leadership roles that spanned institutional equity sales and trading, private wealth management, and alternatives marketing. Colin has the ability to describe both the novel technology and institutional opportunity of Web3, to connect with institutions across industries. He is eager to educate investors about Web3 in general and Polygon in particular, a new technology that promises to disrupt many facets of traditional industry, from brokers and banks to global logistics and supply chains. He lives in New York City.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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