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Tokenization and the Future of Cryptocurrencies

07/11/2018 6:00 am EST

Focus: CRYPTOCURRENCY

Monty Guild

Founder, Guild Investment Management

We’ve been aware of cryptocurrencies since shortly after the launch of the bitcoin network almost ten years ago. Still, many years passed before cryptocurrencies and other digital assets matured to the point that it was worthwhile to begin examining them as potential investment vehicles rather than just for speculation, asserts Monty Guild, money manager and editor of Guild Management

That day hasn’t yet arrived, but it is approaching quickly. Alert observers can see the writing on the wall. Accredited investors have asked us to consider starting an investment partnership devoted to blockchain and cryptocurrency investments, and we are considering doing so.

The news media remain preoccupied with the superficial news covering cryptocurrencies’ continued price volatility. Beneath the surface, though, the technologies’ underlying digital assets are developing rapidly, and around the world regulators and established financial firms are racing to grapple with, develop, and take advantage of the promise of the blockchain. 

In our rundown of recent digital asset news below, we’ll point out some examples of these trends.  We are watching these developments because we believe they will ultimately transform global investment markets.

The largest currently existing cryptocurrencies — such as bitcoin itself (XBT) and ether (ETH-USD) — will continue to experience volatility. They have technological problems we’ve often commented on that may or may never be solved. 

Also, as regulations tighten, and fraud and manipulation are cleaned out, cryptocurrency markets will react and change. But the technology underlying cryptocurrencies is here to stay. As we show below in our discussion of “tokenized assets,” this technology is likely to become pervasive in global financial markets. 

We believe that by hook or by crook, investors will end up holding a portion of their portfolio in digital assets -- perhaps not today, but eventually.  We want to be prepared for that day, and to be ahead of the curve — and we want our investment management clients to be as well.

Crypto exchange Coinbase is pursuing licensing on several fronts -- as a broker-dealer, as a registered investment advisor, and as an alternative trading system. 

We believe this strategy is one that many platforms will follow that are currently functioning as cryptocurrency exchanges. They are trying to get ahead of what is already the next major emerging stage of blockchain development -- the tokenization of assets.

Asset tokenization, in essence, simply means that real-world assets are assigned to digital tokens which exist on a blockchain. These tokens differ fundamentally from the first generation of cryptocurrencies, which exist simply as entries in a distributed digital ledger and are not linked to any assets existing in the real world. 

A token, however, could be linked to intellectual property (trademarks, patents, copyrights, etc.), physical assets such as real estate, commodities such as precious metals, or any other real-world asset. 

Of course, tokenization may ultimately be applicable to securities, such as stocks and bonds. NASDAQ’s exploration of blockchain is surely looking squarely at a potential future of tokenized securities markets functioning on blockchains.

By linking assets to a token which exists on a blockchain, users could secure significant efficiency benefits, particularly if smart-contract platforms such as ethereum, EOS, and others are able to scale and achieve their promise (a smart contract is an electronic contract on a blockchain platform that can execute automatically under specified conditions).

Tokenization could reduce trading friction and transaction costs, and clarify ownership quickly and easily (something, as we’ve noted, that’s especially relevant to real estate titling). Tokenization would also make fractional ownership simple and easy.

In a nutshell, tokenization is likely to be the next major phase of the development of blockchain technology, and all the recent blockchain initiatives from governments, financial firms, and educational institutions, will help to move it forward. Tokenization may ultimately eclipse the original cryptocurrencies in significance.

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