The Organization for Economic Cooperation and Development (OECD), through a report, points out the need to address with openness the developments of the new financial paradigm linked to the tokenization of assets.
The OECD prides itself on being an international organization working to build policies to promote prosperity, equality, opportunity and well-being for all.
How did we get here?
Bitcoin and Ethereum have enabled millions of people to trade digital assets at a market-determined value without intermediaries and central supervisory authority.
What has given value to the cryptocurrencies created on these chains is a feeling of trust in the technological and economic fundamentals of the underlying blockchain network.
If at the beginning these chains were only used to transmit native cryptocurrencies, over time representative tokens with different standards have also been introduced.
Thanks to Ethereum and its smart contracts, the token economy was born, thereby revolutionizing the fundraising system, which can be divided into three phases:
- ICO = Initial Coin Offering;
- IEO = Initial Exchange Offering;
- STO = Security Token Offering.
The most numerous cases involved utility tokens, which represent a token that can be spent on platforms developed by start-ups. The representation of FIAT money with the advent of stablecoins was also very successful. Eventually, we have seen the development of the first tokens representing physical assets such as gold or securities.
The apparent frenzy of a group of enthusiasts and a growing community of visionaries, dreamers, speculators or just curious people, financed and unleashed one of the biggest financial revolutions in history.
But these steps were only the beginning, the analogy with traditional finance requires that we divide the various possible and imaginable tokens into categories:
- Cryptocurrency = digital currency in which the price is set by market forces;
- Security token = represents the value of an underlying asset and not the property of the company that issues it;
- Equity token = representation of a share of ownership;
- Utility token = representation of a coupon that can be spent on service platforms;
- Debt/obligation = representation of a debt or mortgage security.
Today the largest consulting firms in the world such as Deloitte and PwC are interested in the phenomenon, and they are observing the great advantages expressed by this technology, especially in terms of asset tokenization. Their reports always include the need to seize the opportunity in time to change, favouring developments and avoiding to stay behind this strong trend that is difficult to slow down.
Some Theoretical benefits include:
- Disintermediation and efficiency: increase in earnings by issuers and users of assets.
- Transparency: greater confidence in the financial architecture.
- Accessibility: even small capital can access a large investment market without banking intermediation.
- Increased liquidity: access to new capital that was previously unattainable.
Security Token Offerings
STOs are an offering of security tokens on the market, a generic term for certificates representing property rights that can be valued in monetary terms. This category includes equities and bonds, real estate investment funds and derivatives.
STOs can be located between an ICO and an IPO. They are similar to an ICO only because the investor receives a token on the blockchain representing the underlying asset. Whereas like in an IPO, the security token represents a contract with an underlying investment asset.
It should be considered that the tokenization of assets could reduce information asymmetries by giving more transactional transparency and increasing the availability of data on the issuer, on the characteristics of the assets as well as improving the mechanism of price discovery.
However, these virtues require interoperable networks and a system that does not create an imbalance between the use of on-chain and off-chain products that would cause liquidity imbalances, giving room for arbitrage mechanisms.
The advantages for small and medium-sized enterprises are great. SMEs would see potential investors grow thanks to access to global markets and liquidity never seen before.
Tokenization of physical assets
The tokenization of physical assets needs a firm analysis of the issuer of these financial instruments. The connection between what is on the blockchain and the real asset is an essential point of centralization of trust and therefore needs systems that guarantee a correct behaviour.
- Regulatory arbitrage = some differences in approach to regulations could favour the search for cross-border advantages.
- International cooperation required
- Financial education essential for retail investor protection
What will be tokenized has a potentially unlimited scope. Regulators such as the US SEC and the European OSMA are preparing to manage useful rules for consumer protection in a future where this new industry will play a key role in the financial sector.
Tokenization allows for the creation of a new financial system that is more democratic, more efficient and more extensive than any experience to date.
Tokenization is already a reality. New players are rapidly building their infrastructure, the traditional market and infrastructure are showing signs of openness to mass adoption. Obstacles to widespread adoption are mainly due to regulatory problems.
These barriers can be overcome with the support of all traditional players. Only institutions that are committed to understanding and fostering technology will build a prosperous future for their citizens.
Also, it is important to say that OECD, talking about tokenization of real assets, mentioned Ekon, the gold stablecoin created by Eidoo.
The need for a central authority
The OECD has well understood the need for new international cooperation to limit regulatory arbitrage and promote the safe development of the ecosystem.
What began as a zero-trust technology obliges states to organize themselves to make the rules homogeneous in what appears to be, to all intents and purposes, a process of financial globalization of a liberal nature.