Asset-backed tokens have a wide range of potential for increasing access to investments and encouraging those with lower income to invest fractionally.
Using blockchain and automated smart-contracts access to valuable assets can be increased because not only are the assets borderless, but it is now cheaper and safer to invest. In the past, unless you had access to lawyers and financial advisors, not to mention investment capital, it was not possible to participate in many valuable investments.
Asset-backed tokens can help fractional and trustless participation in investments such as shared real estate ventures and ownership or intellectual property and royalty payments.
Because the blockchain is immutable and public, and have applied smart contracts, ownership, and due diligence are not only more accessible but has improved accuracy.
What are Asset-backed Tokens?
If you don’t know much about cryptocurrency, a lot of noise you hear is about its market volatility. And while there are many inaccurate and hysterical reporting of the challenges that face cryptocurrency, the incredible volatility of such assets is unobjectionable.
Given that there are over 8000 cryptocurrencies being traded and used today it can be difficult to judge the value of many of these. Adding value is what asset-backed tokens aim to do.
This article discusses the merits and potential of asset-backed tokens, also referred to as stablecoins.
A quick look at some examples of asset-backed token use cases include:
· The issuance of corporate shares, debt or equity via a security token.
· Real estate investment trusts (REITs), for investors that wish to diversify their portfolio to include real estate. Real estate investment trust tokens would also allow customization and may be purchased by investors willing to accept a certain credit risk, for a pre-determined duration.
· Equity from commercial properties and rental income. Retail investors who have a relatively modest amount of capital are currently unable to diversify into the commercial property and rental market. Ownership fractionalization through security tokens offers the opportunity to democratize commercial and rental investing.
· Intellectual property asset-backed tokens, such as film licenses and royalty payments, may be distributed to every party who owns a portion of a patent, film, or book.
· Accounts payable and receivable, represented by security tokens, has the potential to replace supply chain finance and factoring, with tokens and data flowing between accounts receivable and accounts payable, in ERP systems.
So Why Do Asset-Backed Tokens Matter?
Security tokens, mainly driven by asset-backed tokens, are a huge trend today, especially after the hype over utility tokens.
This unique group of tokens is of great importance because they enable investors to store a value that is not related to the US dollar or other fiat currencies, most of which are prone to inflation. Besides, security tokens ensure higher liquidity, as they permit the fractionalization of ownership of valuable assets, like houses, so that more investors could own portions of the same asset. For example, there are “Coins” that allow holders to own fractions of diamonds, as for some people it would be very expensive to purchase an entire diamond. A blockchain-based infrastructure aimed at security tokens would be quite welcomed by retail investors, who can get exposure to various markets by investing small amounts in fractionalized assets. For instance, they can choose to buy 0.1 tokenized Amazon stock.
Another important advantage is that asset-backed tokens allow a higher degree of compliance. Financial regulators such as the SEC will soon be able to track security tokens much easier than regular securities. This is because the distributed ledger technology (DLT) ensures a high level of transparency. Regulators may join the blockchain network where the given securities are issued and traded and verify whether the transactions are in line with the requirements.
Blockchain doesn’t just ensure a convenient way to hold ownership over a physical asset, but it also helps the relevant parties to automate transactions. We might see more institutional investors and platform providers turning to asset-backed tokens, and the motives are clear — they represent a much better alternative to the current ecosystem built around traditional assets.