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How the Tokenisation of Assets Disrupts the Financial Sector – A Deltec Bank knowledge management series.

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How the Tokenisation of Assets Disrupts the Financial Sector – A Deltec Bank knowledge management series.

August 08
21:06 2019
How the Tokenisation of Assets Disrupts the Financial Sector - A Deltec Bank knowledge management series.
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.

The methods of investment that every industry uses could see an overhaul soon. As for the financial sector, the institutions who are not ready to evolve with the tokenization of assets risk getting left behind.

What Is Tokenisation?

The tokenisation process issues a blockchain security token that represents a tangible asset. They typically come from a security token offering to distinguish them from the initial coin offerings that occur in the industry.

Different tokens can represent unique assets in the financial sector. You could have them be for payments, utility, or equity. It could provide evidence that an investor is part of an investment fund or owns specific real estate items.

These security tokens are then tradable on the secondary market.

What Are the Benefits of a Token Economy?

There are critical areas of friction in the creating, buying, or selling of securities in the financial sector today. The tokenization of assets helps to relieve this stress while providing some specific advantages for investors and sellers to consider.

1. It offers greater liquidity.

Instead of turning assets into cash for liquidity, tokenization allows for private securities to become tradable on the secondary market. This advantage also works for non-liquid assets, such as jewelry or fine art, as it can capture more value from the underlying item.

2. It is more accessible.

Tokenisation provides an opportunity to create more access to a broader audience. It reduces the minimum investment amounts significantly because a token is highly divisible. Investors could purchase assets that represent a tiny percentage and then consider their value on the secondary market.

3. It reduces the minimum investment period.

Since an investor can take their tokens to a secondary market, there would be a reduction or elimination of the minimum investment periods for assets. Tokenisation creates a global market that is theoretically always open, which means trading could happen at any time. As long as the activities fit within the existing regulatory limits, there would be more financial management flexibility.

4. It would be more transparent.

Security tokens can embed the rights and responsibilities of the holder onto the blockchain. This information can also contain an accurate record of ownership. That means more transparency would occur with each transaction because everyone would know the ownership history of each opportunity.

5. It would be cheaper.

Tokenization relies on smart contracts to fulfill the exchange process. These algorithms integrate into the blockchain to trigger actions when predetermined parameters are met. That means transactions are faster because of this automation. Because the administrative burden is lower, costs would go down too.

Challenges of Tokenisation

Before a token economy can evolve, there must be regulatory alignment. It is not unusual for security regulations to be variable in different jurisdictions. Unless rules allow for the free, international exchange of security tokens, the advantages of this transition will be undermined.

Compliance could happen at the token level, becoming embedded into the blockchain just like the ownership history.

The approach to tokenisation has been uneven up to this point. There are some positive signs for investors to consider in the coming days. Switzerland and Malta have already made steps to accommodate a market that uses security tokens. The data generated by these efforts will help other countries formulate a similar plan.

Disclaimer:  The author of this text, Robin Trehan, has an Undergraduate degree in economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.

About Deltec Bank

Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.

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