August 2021 | Illiquid assets promise stability and return opportunities with a comparatively low risk. They are a must for every portfolio, especially in the low interest rate environment. Their only shortcoming is that they naturally lack liquidity. Digitisation, and especially the tokenisation of assets, is changing that. This is because it creates the basis for a tradability that did not exist before.
While videos from space can be streamed live without any problems nowadays, the capital market is only really digitalised at the front end. Even for listed securities, the actual execution time of a trade often takes two days or longer. For alternative asset classes, liquidity is usually almost non-existent, and if it is, then only in conjunction with high transaction costs. Take the example of alternative investment funds (AIF): anyone who invests in classic tangible assets such as real estate, ships, aircraft, renewable energies or private equity via this vehicle is tied up for between four and 30 years. That is a long time, especially when life circumstances change.
This is where tokenisation creates new perspectives. Because tokenisation digitally divides assets, rights and obligations into many small individual parts. Instead of a physical document, a digital token defines the respective ownership. And it is precisely this token that can be traded. In this way, even illiquid tangible assets finally become liquid: as digital securities on the blockchain.
Tokenisation is rapidly gaining in importance
Studies by the World Economic Forum (WEF) predict that by 2029, around ten percent of global gross domestic product (GDP) will be tokenised. And so tokens may also be the future of securities settlement – according to the Bank of International Settlements. The figures from the latest Security Token Report by Cointelegraph Research speak a clear language: in 2020, almost 5 billion US dollars were raised in the course of Security Token Offerings (STOs). By the end of the third quarter of 2021, the global market capitalisation for security tokens is expected to exceed the 1 billion US dollar mark, according to the authors. By the end of 2025, it could already reach around 9.5 trillion US dollars.
Tradability of the tokens ensures liquidity
Once the primary market issue has been carried out, digital securities can be transferred at any time. Due to regulatory conditions, trading is only possible P2P or P2P via digital “noticeboards” or through the integration of a market maker. This makes it possible to enter and exit interesting and lucrative projects at any time – and around the clock, independent of stock exchange hours. In the medium to long term, it can also be assumed that tokenised securities will become marketable.
The advantages of tokenised assets at a glance
- Liquidity even for previously highly illiquid assets such as tangible assets
- Simplified global transferability around the clock, 365 days a year without dependence on stock exchange opening hours
- Uncomplicated trading for a larger audience and especially across borders
- Integratable compliance functions such as whitelist management guarantee tradability only among identified participants
- Lower transaction fees even for complex instruments such as limited partnership interests
- Cost savings of up to 65 percent compared to traditional securitisation
- Full transparency with simultaneous manipulation security based on blockchain technology
One for all: neoFIN’s STO platform makes illiquid assets liquid
But how exactly can these advantages be exploited? To provide investors and issuers with the best possible transparency and simplicity, neoFIN is building a new STO platform together with Cashlink and Tangany. It will map all processes around the legally compliant issuance, management and custody of tokenised tangible assets with a sustainable character. This also includes the development of a P2P marketplace for digital securities. In addition, the concept of the one-stop shop also holds considerable advantages for issuers. Until now, the technical part of tokenisation, the subscription process, trading and distribution have mostly taken place on different platforms. The uniform access for investors, issuers and distributors makes it easy for illiquid tangible assets to achieve the desired liquidity.