Here’s a loaded question: Why is securitization important for cryptocurrency? There’s a lot to unpack here, mostly because over the past year Australia, Norway and Japan have accepted crypto as an official form of payment (digitally, of course). So it’s really a significant development for the “cryptomarket” to enter the real world. However, first thing’s first, let’s clearly define the meaning of the word, securitization.

Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming it (or them) into a security. The phrase “securitization chain” appeared with the popularization of the film, ‘Inside Job,’ about the 2007–08 financial crisis, it describes the process by which groups of illiquid assets (usually debts) are packaged, bought, securitized and sold to investors.

The Importance of Being Securitized

Specific assets are pooled together and repackaged as interest-bearing securities. Securities are financial or investment vehicles that are bought and sold in financial markets similar to how stocks and bonds are traded. For example, there are no derivatives for diamonds — no futures contracts, etc., like there are for other commodities that come out of the ground. There are a few reasons for this:

Until the year 2000, diamond trades were run by a monopoly that controlled the price.

Diamonds are more of a consumer product than a commodity.

There’s no objective standard for pricing diamonds. You could have two diamonds that weigh exactly the same and have the same grade, but one gets a better price because it has a different shape.

Circle of (crypto) life

The Crypto Space Is Maturing

The lack of full transparency in the various stages of securitization hinders accurate risk assessment and enables fraud, for example, issuing concurrent mortgages on the same asset (or the inclusion of non-existent assets). The first generation of security token platforms are emerging with technologies such as Harbor, Polymath, Securitize, and TrustToken leading the charge. Inadequate control of the credit pool may provoke a default on the bonds issued, problems which are exacerbated by the proliferation of low-quality auditing and rating that contributed to the sub-prime mortgage crisis.

If you read the white papers of security token platforms such as Harbor, Polymath, or Securitize, you will find many commonalities in their architecture model. Those common components represent some of the fundamental building blocks of security token platforms. On top of that, tightening regulation draws parties towards more structuring of information, which further complicates the process of securitization. Blockchain provides a powerful solution to all of those challenges, namely by:

An immutable trail of changes that enables instant audit during all stages of the process, starting from loan origination to changes of ownership in the secondary market for securities. Immutability significantly cuts due diligence costs. Improving price discovery and liquidity by making security prices more accurately reflect true value. Creating a single and standardized source of information instead of multiple data silos across different entities. This makes information sharing easier and streamlines the process at different stages, reducing costs and time consumption. Disintermediation and simultaneous recording of data into blockchain boosts the speed and reduces costs as well.

Most people may not know it yet, but the crypto question of the hour — can Bitcoins be securitized?— already has been answered. There are many other relevant building blocks of security token platforms, but the aforementioned list represents a good start to understand the DNA of this new type of crypto asset. This push towards accuracy, transparency and truth through a trustless system would benefit borrowers, lenders, and investors worldwide.