For the last several years, cryptocurrency
has been a topic of major focus. This interest includes niche crypto-centric
communities and in the general population. The change is partially due to the
massive growth of Bitcoin toward the end of 2017. Within the course of that
year, prices jumped from $900 to nearly $20,000. To some, it was a sign of
the legitimacy of cryptocurrency since so many people were buying into it and
using it for everyday purchases. When prices fell, naysayers took it as a sign
of the volatility of the currency. Since then, prices have stabilized. Now,
cryptocurrency is more frequently used than ever before, attracting cryptocurrency investors back into the market.
With cryptocurrency proponents finally feeling
secure in their investments and ongoing usage, it’s worth wondering whether
their perception of value in the blockchain can carry over to newer, even more,
complex applications. Notably, we’re in the early stages of seeing the
development of asset tokenization, which is the application of the blockchain
for tokenizing both tangible and intangible assets.
For asset tokenization to work, it requires
the full faith and activity from a majority of the population. Cryptocurrency
investors will ultimately serve as the gateway for this public acceptance. In
this role, they will become a potential barometer for the application’s
legitimacy and force of persuasion for skeptics.
The Basics of
Asset Tokenization
Before we explore this topic in full, we need
to understand the basics of asset tokenization. It’s best to think of this
as a kind of marriage of publicly traded stocks and blockchain-based exchanges.
In publicly traded companies, authorities can issue fractional shares of
ownership in the company.
These are sold in the form of “shares” whose
value is calculated based on the percentage of ownership and the total value of
the company. Under most conditions, any consumer can buy or sell these shares
from and to other consumers. This concept is limited in scope. Only
corporations can issue shares this way. And, they’re subject to an inordinate
number of rules and regulations.
Asset tokenization relies on the blockchain
to conduct exchanges, almost immediately making it more secure and less
susceptible to fraud. More importantly, it allows the distribution of
fractional shares of ownership in practically anything. It could be a sole
proprietorship, a partnership, a physical asset like a building, or even an
intangible asset like the rights to intellectual property. Therefore, it has
the potential to revolutionize many industries since it enables owners and
creators to raise funds more easily. Also, it provides an alternative form of
compensation and investment for interested parties.
The
Persuasion Problem For Cryptocurrency Investors
However, asset tokenization’s growth is
limited by the number of people willing to accept it as a form of legitimate
exchange. Fiat currency is money issued by a government that isn’t
backed by a physical commodity. Instead, its value is based on the value people
believe it has. Similarly, the value of a tokenized asset (at least one without
a physical counterpart) will depend on the public’s belief in that fractional
token’s value. Similarly, the economics of buying and selling these fractional
shares of ownership will be based on substantial market participation.
One of the biggest challenges is persuading
people to participate in the system. For business owners hoping to save capital
early on by compensating employees in shares of ownership in the business, it
means convincing employees of the value of this compensation.
For musicians wanting to be paid fairly for
their creative work, it means convincing both audiences and producers to switch
to an alternative system. In these small-scale cases, a meaningful presentation could be all it takes to persuade your audience.
In the context of society at large, there needs to be a more significant change
in public opinion.
Using
Cryptocurrency as a Bridge
Cryptocurrency could feasibly serve as a
bridge connecting people who are relatively unfamiliar with the blockchain to
the concept of asset tokenization. Currently, there are more than 32 million Bitcoin wallets set up. This is a substantive
base of users that can generate meaningful traction in the price of the
currency. Thanks to the volatility of the currency in the past, hundreds of
millions of people understand what Bitcoin and other cryptocurrencies are (to a
degree). And, they may now have enough faith in the system to see it as a form
of legitimate currency.
In this context, cryptocurrency investors are
experts when it comes to blockchain-based exchanges. If they apply their
enthusiasm and good faith to asset tokenization, they could represent a base of
32 million (or more) willing participants. Plus, they could serve as
ambassadors to people who may otherwise struggle to understand asset
tokenization and its value. Evangelists pushing for the public to understand
the benefits of cryptocurrency should have little trouble transitioning to
evangelize the benefits of asset tokenization.
The Next
Level of Cryptocurrency?
It’s appropriate to think about asset
tokenization as a natural extension of cryptocurrency. In some ways, any
tokenized asset will function almost like a self-contained cryptocurrency. In
addition to rallying behind a single, universal cryptocurrency, there would be
an ecosystem of different forms of tokenized exchanges. This would be a kind of
all-digital, universally translatable, and secure platform for bartering and
compensation.
There are some challenges for asset
tokenization to overcome in addition to public persuasion. Notably, developing
a tokenized asset would require the expertise of a blockchain developer. However, not all
companies or creatives would have access to an expert or a platform through
which they could develop it.
Additionally, there may be significant
regulatory hurdles that follow. For example, will the SEC consider tokenized
assets as securities or a form of currency? Bitcoin and other cryptocurrencies
are facing similar scrutiny from regulatory agencies all over the world.
Therefore, it’s unlikely to be a long-term problem. There is just a short-term
ambiguity that may be hard to navigate.
Again, one of the greatest advantages of
asset tokenization is that it already draws from existing cryptocurrencies as a
foundation. Regulatory agencies that draw up plans for how to regulate
cryptocurrencies will have a much easier time developing new rules and
regulations for digitally tokenized assets. It’s like they have a blueprint in
place already.
Prioritizing
the Benefits of the Blockchain For Cryptocurrency Investors
Cryptocurrency and asset tokenization are
inherently different concepts. Yet, they originate from the same important
technology: the blockchain. And, it’s the blockchain that’s going to drive the
future of economics and personal exchanges. Though cryptocurrencies will grow
along their own trajectory, they’re also serving as our first introduction to
the blockchain’s capabilities and advantages in full force. This is almost like
a warmup to the full potential that the blockchain could bring.
In that context, cryptocurrency investors are
among the first advocates of truly revolutionary technology. They’re going to
serve an important role in garnering public acceptance for future applications.
If asset tokenization is going to take off, it’s going to require collaboration
on the part of blockchain developers, company owners, consumers, and regulatory
agencies to create a common agreement about the benefits of the system. Thanks
to cryptocurrency, we’re already progressing in this direction.
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