“Tokenizing the World” — Let’s Cut the Crap

Facing reality about the tokenizer hype

These thoughts have been inspired by many profound conversations on the topic at Witnet‘s office

Over the past year, a trend has grown in popularity in cryptoland: there’s suddenly a rush to “tokenize” all of the world’s assets. We’ve probably all read the “tokenized securities” slogans from some of the tokenizer hype creators worldwide.

First, I’d like to clarify that this is not about any of the so-called world tokenizers personally, but about the noise they’re creating around a topic which, if any, has little added value to currently existent alternatives. Saying this trend is going to revolutionize the world and create zillion dollar markets is absolute nonsense only meant to increase expectations.

First, we’ll look at what “tokenizing the world” means and what initiatives in this line of (lack-of-meaningful-)thinking are trying to do. Then, we’ll explain why this is mostly hype. Last, we’ll expose why the players backing this trend are doing so.

What Tokenizing Means

Tokenizing is a concept that evolves from the ICO trend that exploded in the crypto space throughout 2017. Tons of tokens were launched with no meaningful incentive mechanism designed into their system and few-to-none future usecases. Most were simply created to raise funds for projects or even outright scams.

There’s nothing wrong with tokens themselves. Bitcoin is its network’s token and so is ether. Both are proving their value as we advance into the future of cryptocurrencies. They have incentive mechanisms designed into their networks which make them useful to keep those networks working and providing value to their participants.

The first distinction that must be made is that in the context we’re referring to, Tokenizing commonly refers to creating Security Tokens. These are tokens that are meant to act as digital versions of financial securities, exist on a blockchain, and be traded between buyers and sellers. The following is one of the most popular post written on the topic:

Tokenizing the world is basically making every asset you can imagine (a building, a company’s shares, a wooden chair) into a security by dividing its monetary value into tokens. Let’s dive into detail.

Why This Trend Is Overhyped

We’ll use Pompliano’s post (linked above) as he is the most acknowledged face of this trend. We’ll later study how and why this is quite popular among a certain public. Let’s now look at some of the reasons tokenize everything backers use to promote their initiatives:

“Lower Fees — Many fees associated with financial transactions are derived from payments owed to middlemen (bankers, etc). Security Tokens remove the need for most bankers which reduces fees, and smart contracts may one day decrease the reliance on lawyers as well. These smart contracts will reduce the complexity, costs and paperwork with managing securities (collecting signatures, wiring of funds, mailing of distribution checks, collection of W-2s, Sending K-9s, etc)”.

Why would you use a smart contract or a public blockchain for digitizing paperwork? The internet has been around for 30 years. Great digital databases too. A number of online websites remove need for fees associated with financial transactions already. Just check out Robinhood’s $0 fees.

“Faster deal execution — The more people involved in a deal, the longer it usually takes to execute. When Security Tokens remove middlemen from investment transactions, they enable accelerated timelines for issuers to successfully offer their security. Additionally, immediate trade settlement on the secondary market for Security Tokens will become an attractive advantage for issuers & investors too”.

Let’s remember we are talking about securities. Securities, by definition, can only be acquired by accredited investors. This means any tokenized security issuer must undergo exactly the same diligence as a normal security issuer. Immediate trade settlement is again not a technological problem: tokenized securities will face exactly the same regulatory issues normal securities do.

“Free market exposure — Most investment transactions today lack exposure to a global investor base. For example, it is hard for investors in Asia to invest in private US companies or real estate. With Security Tokens, asset owners simply market their deals to anyone with an internet connection (within regulatory limits). This free market exposure should lead to a significant change in asset valuations since any asset that is not exposed to a free market is mispriced”.

“Within regulatory limits”. Well, there you go! Any U.S. accredited investor can buy U.S. securities online, so the tech is ready and it’s being used. If it’s harder to open this to a global market (free shouldn’t be mistaken with global) it’s because of regulatory issues. And again, legally compliant tokenized securities will be under the same scrutiny as securities.

“Larger investor base — When asset owners can present deals to anyone with an internet connection, the potential investor base is drastically increased. For example, would you rather show your investment opportunity to only US accredited investors & institutions or every potential investor in the world? Competition is healthy and a long-term net good for financial markets”.

Lack of regulation around this is exactly what some non-compliant ICOs have taken advantage of, and one of the reasons why the Tokenized Securities hype train exists in the first place: to make these issuings legally compliant. What you can do with Swiss securities, you’ll be able to do with Swiss-regulated tokenized securities. Same with every other regulation. Tokenized securities won’t be a relevant cause for an increase on the investor base. If anything, speculation will.

“Automated service functions — Lawyers are less middlemen and more service providers in most transactions. With Security Tokens, issuers will begin to use smart contracts to automate the service provider function through software. This doesn’t mean that lawyers will disappear, but rather that their role will be more advisory based”.

Smart contracts are brilliant technology. But again, let’s not mistake ourselves: there’s no intrinsic need to use a public blockchain every time you want to automate a real world process. Since digital securities will need to abide with national regulation, lawyers will actually have more work than they do now.

“Lack of financial institution manipulation — This is a complex topic that is sure to be controversial. The short explanation is the likelihood for corruption and manipulation by financial institutions is decreased if those institutions are removed from the investment transaction process”.

While I agree with the last statement, a simple CTRL+F in the post shows 0 results when you look for the word “decentralized”. Although it’s quite hard to fully understand what this hype train is truly proposing regarding technology, it definitely seems decentralization is not the plan. Which would mean this initiatives would end up replacing current financial institutions with new ones, not removing them for good. The tokenizer trend is in fact quite popular among corporate executives. Any interesting conversations about this in the buidler community? Not many I’m aware of!

Reality is that all long term improvements proposed through time from world tokenizers are things that can pretty much be done today. Before Bitcoin, your money was actually the government’s property. Before Ethereum, platforms and products could easily be censored. What couldn’t be done before all this hype, and what has been done since then? Anyone has been able to tokenize anything for years now and nothing meaningful has happened besides some viral tweets. Tokenizing real estate, tokenizing telecommunications, tokenizing our brain… I believe we’ll see how some of these experiments actually come to life, some might even gain speculation-driven popularity, and 99% will completely fade away. There’s no thought whatsoever going into building incentive mechanisms into cryptoeconomic systems for the long term feasibility of these pseudo-tokens.

Who’s Behind This And Why?

Interesting technologies can lure in unpopular early adopters. Pornographers saw an opportunity in the advent of the internet. So did money launderers in cryptocurrencies. This situations made popular the “blockchain not bitcoin” speech among industry incumbents and corporations.

I’ve personally been in a room with executives of public companies discussing “blockchain” initiatives. They’re absolutely clueless about the true possibilities of the technology. They’re really quick to buy the “blockchain not bitcoin” argument, believe they’re working on important technology and release some PR about how R&D is core to the company.

“We know we must tokenize X” being “X” the company’s core asset is quite a popular thought too. Big companies have seen what happened with internet startups in the 90s and 00s, and they’re aware they must stay up to date on trends (buzzwords) like “blockchain”. So they attend conferences and panels where tokenizing is all they talk about. Only this time, when market reality hits, they won’t be able to acquire startups and keep the ball rolling. Crypto shifts power. It will be interesting to see what happens.

After discussing why the amount of hype behind this trend is nonsense with world tokenizers, they usually come to two arguments. It’s happened to all the people I’ve talked with who have tried to explain them the facts I expose in this post. The arguments encountered are:

We are not sure exactly how, but asset tokenization is the future.

I believe there are huge possibilities around tokens. Enormous. But this doesn’t mean any of this hype makes any sense. Where are you seeing the kind of tokenization you’re talking about? Security offerings like the one Sia is planning are struggling to be as compliant as possible, and those that will be compliant will undergo the required process for any security. Securities are great tools for investors. That proves nothing new. Tokenization for the sake of tokenization is a solution looking for a problem.

The improvements in liquidity and global access are a _illion dollar market.

As I’ve talked about in the previous section, these improvements are greatly exaggerated and overhyped, if existent at all. That being said, to sustent your argument on a prediction is just nonsense squared. Not only do you predict the glorious future of a doubtful innovation with no technology to back it up, but you strengthen your argument with a market cap prediction out of the blue.