It is said that diamonds are forever, but the newfound gleam of the digital token has come to truly represent eternal, revolutionary wealth for many investors, with recent commercial history defined by the paradigm shift brought about by distributed ledger technology. The merging of the digital world with the physical, through the tokenisation of real-world assets, can transform our world financially and must be understood by those aiming to stay ahead of market dynamics.
The value of tokenisation
Tokenisation allows for radical change in our understanding of rights in real-world property, such as equity, credit, real estate, intellectual property, and commodity rights; traditional assets can be represented in the digital market. This is achieved through the translation of these rights onto the blockchain, which serves as the secure and decentralised record of digital transactions that the framework of this form of finance is built upon.
The combination of these two spheres of value has huge potential and has been forecast to represent 10% of global GDP by 2030. It’s not hard to see why predictions are bullish; the appeal for investors is obvious:
- Fractionalisation of real-world assets into smaller units with built-in transfer restrictions, which enables accessibility for a wider base of investors than historically seen and means these assets can interact with other tokenised assets on the blockchain.
- 24/7 global trading, irrespective of time zones, due to the blockchain’s independence from traditional financial institutions such as stock exchanges.
- Greater efficiency, as it cuts out ‘middlemen’ and allows all transactions to be completed instantly, directly, and digitally, ensuring immediate asset delivery and financial compensation for traders.
- Transparency, as investors avoid the shady, risk-averse nature of traditional trading due to the inherent market transparency of the blockchain, which provides a clear, immutable history of ownership transfers.
In short, they have access to fast, transparent, 24/7 distribution and trading without the need to be beholden to the cumbersome operational necessities present in traditional trading.
The world of law, therefore, is also presented an opportunity here, given that these murky, uncharted waters have to be navigated, with lawyers being needed to reify digital promises as enforceable and reconcilable with real-world implications, negotiations, and finance. A new regulatory universe will have to be tackled, and will likely affect all portfolios from small personal wealth builders to international commercial investors.
Challenges and mapping the road ahead
While there is huge potential upside in the idea of tokenisation, there is also a need for the consideration of risks and challenges. Liquidity, particularly in a secondary sense and in exit liquidity, is nowhere near guaranteed, given the novel and early-stage nature of the market for tokenised real-world assets.This is compounded by the struggle of valuation of these assets, as their value is derived from real-world external pressures that can render the digital market susceptible to manipulation and volatility. This dependence on the interconnected nature of digital market actors also means that rights in these units, and therefore the so-called independence granted by the blockchain, are at the mercy of the ever-present winds of change that have bankrupted and broken many other digital traders.
There is also a concurrent legal challenge presented by the international interaction of property rights in this sphere. Property rights, legal titles, and asset transfer laws heavily depend on national legal identities that would be under tension to conform and be accountable to each other in a space where detachment from state pressure is a primary selling point. New regulations, as such, may also render traders and transfers limited at points, and could damage the very viability of the market in a long-term, interpersonal sense given the importance of user-to-user interaction on the blockchain. Lawyers themselves would have to struggle with classifying the legal essence of tokens, since they can represent equity, derivatives, debts, or contracts, and how this can interfere with regulatory practices. The clash of the blockchain with the traditional institutions of ownership it sought to break away from has implications for everyone involved.
Importantly, then, we must conceive of tokenisation as a primarily legal endeavour. The development of token classification, standardised in-platform international regulatory frameworks, compliance mechanisms, and sanctions is crucial to the survival of tokenisation as a potential area for investment. The balancing of the blockchain’s decentralisation with public asset networks is a tough act, and the requirement of such a level of innovation is something lawyers should see as a serious opportunity to influence global markets; their success could rewrite the future of finance.
