The SEC is not messing around when it comes to prosecuting companies that misrepresent themselves as “utility tokens” when they are technically securities, but regulation is not inherently a bad thing (in fact it’s intended to protect people). Those of us involved in the blockchain industry in 2017 lived through the gold rush: we witnessed many successful token sales, learned about hundreds of blockchain use-cases, and the lucky ones even came out of it with a profit. Though the popularity of cryptocurrency skyrocketed, major institutions remained skeptical, as the space was commonly referred to as “the Wild West.”
Fast forward to today and major firms such as Deloitte, Amazon, and Microsoft are implementing blockchain technology solutions. The Wall Street Journal even created its own cryptocurrency (more for educational purposes than for profit). While development of blockchain-based solutions has increased, the price of cryptocurrencies across the board has dropped. Experts say the ‘ICO party is over.’
Regardless of whether or not speculations predicting the end of the ICO play out, the technology industry is essentially a game of trial and error. Innovation involves hypothesizing solutions and sending them out to battle to see if they remain standing. What we see occurring now is a shift in interest toward security tokens and the tokenization of assets.
Security tokens are not cryptocurrencies, but SEC-approved tokens representing ownership in a digital asset. Tokens may be classified as securities via the Howey Test if they are considered an investment in a common enterprise, and if there is an expectation of profit as a result of the company’s work. Former Snap employee and security token evangelist Anthony “Pomp” Pompliano strongly believes in the future of tokenized securities, coining the hashtag: #TokenizeTheWorld.”
There are a myriad of reasons for Pomp and other experts’ strong opinions on this subject. First and foremost, the finance industry is plagued by inefficient systems. The alternative asset industry in particular could use some restructuring. Alternative assets refer to assets, such as rare art and real estate, that have been historically difficult to trade and therefore have poor liquidity. For example, there are only so many people who are both interested and capable of affording a rare Monet painting. The small pool of potential buyers means that despite its high value, the Monet painting is a highly illiquid asset. By tokenizing a rare piece of art, it is possible to increase the pool of potential buyers by enabling the purchase of tokens representing fractional ownership. Blockchain technology allows for the tokenization of such assets as well as the secure and transparent tracking of transactions pertaining to the exchange of these tokens.
Inefficiencies in trading platforms and processes cost the $7.7 trillion-dollar alternative asset industry $80 million annually. OpenFinance Network (OFN) simplifies the clearing and settlement process, that is the time it takes for a trade to complete, by leveraging the automation enabled by blockchain-based smart contracts.
What does the future of finance hold? Expect to see more asset tokenization, especially in the real estate, art, and traditional finance industries.