Before the 2008 crisis, combining home loans and selling them to investors was a very profitable business for banks. The cause of the crisis was the inability of many borrowers to repay the debt (mainly subprime mortgages, the ones that are of very high risk), it undermined the securitization market and caused losses in the trillions of dollars. Generally speaking, it was a triumph of greed — hungry bankers sold so many high-risk mortgages, investment banks mixed them up with low-risk mortgages, thus making a “relatively” stable product, rating agencies pretended everything was ALRIGHT and assigned AAA ratings to these products, and so on and so on.

Human nature.

In 2018, eleven years later from the Financial Crisis, global structured finance issuance increased by about 18% yearly over to approximately $500 billion during the first half of 2018. The U.S., China, and Europe all recorded considerable growth, while Australia and Latin America experienced declines. In their report, experts foresaw that the growth will continue to approximately $1 trillion of global securitization by year-end 2018.

Nowadays, Credit Suisse Group AG, U.S. Bancorp, Wells Fargo & Co. and many more are testing the distributed ledger technology and blockchain as ways to facilitate tracking securitization of assets. Deloitte claims that “blockchain, along with smart contracts, promises to transform many activities in the securitization lifecycle”.

A Little of Likbez

This is a simplified example of how mobile payment tokenization commonly works via a mobile phone application with a credit card. (Wikipedia)

Initially, tokenization was used to describe a process when a sensitive data element is substituted with a non-sensitive equivalent, referred to as a token, that has no extrinsic or exploitable meaning or value. Thus being said, tokenization is a process similar to encryption, though not exactly. In a sense, it’s more like public and private keys — where private one is a sensitive data element, and the public one is a token. Example — in accordance with PCI Council, an information security standard obligatory for all credit and debit card providers, payment card number (PAN) which includes personal information of the cardholder, must be tokenized and replaced with a surrogate value called a token. Then this token is used when transacting and etc.

With the advent of blockchain and cryptocurrencies, tokenization got a broader meaning. According to Strategy&, asset tokenization describes the process of converting assets into digital tokens on a blockchain. Under potential assets for tokenization, the list:

Fiat currencies (described in one of the past articles);

Commodities;

Real estate;

Art and collectibles and more.

And so what?

The difference with the past notion of tokenization is clear: while tokenized PAN in the example above doesn’t have an intrinsic value, it cannot be traded. Instead, tokenized with ERC-20 Ethereum-compatible blockchain house, mortgage, business, and other stuff can be easily traded once listed on the exchange. Yes for sure there is a number of legal obstacles, but the possibility is already created.

Brave new world

What is particularly intriguing me in this surge for liquid, tradeable and tokenized world is this: the assets around us and even our time (just think for a while about digital advertising and the time you spend on Facebook and Instagram) are becoming constantly bought and sold, I believe there will emerge even more marketplace (like OLX or Avito, but with a much broader functionality) that allows trading automatically everything, from things to time spent with other people, let alone other types of tradeable things that I cannot or don’t want to imagine (dark market).

George Michael — Freeek (2002)

I believe that the programmability of tokens (that becomes possibles with smart contracts) opens up a way to a totally liquid world. Various combinations of assets (as long as everything becomes asset) can be sorted, grouped and sold in the most efficient way (Nash equilibrium). The only thing that cannot be solved here is risks so risk management specialists and game theory graduates (tokenomics) will be of high demand in the future.

With all the arising concerns, I believe that a sort of Basic Income must be enacted, as the coming situation is designed to stimulate global inequality. What if this basic income for every single person would be formed out of his or her real estate property, savings, taxes, estimated free content consumed (you won’t have to pay for Netflix anymore!) and so on, tokenized and grouped into a General-Backed-Security (GBS), and sold to a group of high-income individuals as a bond? What if there would be a data breach or people default on their debts? Debts for free content supposed to be consumed within the next 10 year?

So many questions, so few answers.