The Tokenization of Alternative Assets
With an understanding of blockchain and tokenization, the concept of tokenizing equity and other security instruments is relatively straightforward. Instead of tracking a cap table and a group of shareholders with paper certificates and spreadsheets, you track that information digitally and securely on a blockchain. But how do you tokenize assets like real estate? Oil? Multi-million dollar pieces of art from Andy Warhol? What benefits does tokenizing a real-world asset have?
The core of the argument for tokenizing these assets is that it creates access and opportunity to investors that traditionally were barred from committing capital to these instruments. Ari Shpanya, Co-Founder of Slice, stated his mission simply as “we help non-US investors get access to US real estate.” Richard McBeath, the VP of Marketing at Masterworks, which sells fractional pieces of fine art to investors, noted that the project taps both an emotional component in investors, who want to say they own part of a Monet or a Warhol, but also a financial component in them, of how they can actually profit from owning this art.
Daniel Eisner, a Co-Founder of Digital Reserve Technologies, is working on a project called Oilcoin with the aim of taking oil assets and turning them into a global currency. Eisner said, “When you look at many places in the globe, there is
Later in the panel, Eisner simplified his thoughts, stating his belief that tokenizing oil creates a currency more price-stable than anything on the market now as it avoids the volatility of a traditional currency because it is asset-backed and global. “With blockchain, for the first time in history you can create something that is tradeable on a global level. In doing so, what we are really after is changing the way people think about holding assets.”
This echoes Shpanya’s point that the purpose of Slice is to take “an asset that wasn’t liquid and give it liquidity.” The same is true for the other businesses on the panel: bring fractional ownership of assets to the general public, and let them trade those assets on public markets.
While it is a visionary ideal for where markets can go in the future, it has its complications. Jason Kirschenbaum, Managing Director of Elevated Returns, completed an $18M token sale for the Aspen St Regis, and he noted that the process of targeting high-net-worth individuals to participate in the sale was hard in the US, though the ability to bring investors along globally helped the process. The market is still young, and until there is
Later in the panel, Kirschenbaum noted that smart contract auditing is difficult and time-intensive. McBeath cited the complications of building a compliant trading platform, and Eisner the challenge of convincing open source developers to work on your token.
On top of all of this, there are the regulatory difficulties. The complications are such that Elevated Returns abandoned their Regulation A qualification in favor of a Regulation D506(c) offering as they found that process easier, and Masterworks is still waiting for their qualification for their own platform’s Regulation A raise. For greater context, Masterworks’ business operates in such a way that each painting sold on Masterworks to the public has its own LLC and is sold as a Regulation A offering: point being, it’s not easy to get qualified even for those who plan on going through Regulation A qualification regularly.
Eisner, who has spent a lot of time working with regulators, had this to say on the subject of US regulation: “They’ve made it very clear that in order to do anything you need to comply with the laws as written. I don’t think that the laws themselves don’t work. I think that people’s expectations of what the laws should be don’t match what they are. When people first started to look at blockchain technology and all of a sudden you had this ability to transfer an asset peer-to-peer on a global basis, everyone wanted to know why does the law not just let me do it? The reason ultimately is that it’s important to control money flows and it’s important to provide
As of now, Eisner noted that the US is regulating through enforcement, and perhaps there will be some concessions made on a case-by-case or categorical basis, but playing by the rules is the safest choice for entrepreneurs, as the SEC, FinCEN, and CFTC are far from the only regulators on the field. Regulators in every country are very interested in how these new markets will be monitored and investors protected.
In time, the markets will become clearer, and a better global economic system will emerge. “Ultimately, I think the process will get easier,” Eisner said. “The simple process of tokenization itself will be accessible to many.”