With Bitcoin at its helm, cryptocurrency was born with lofty aspirations. Through the revolutionary blockchain technology that powered it, the digital coin was meant to even the financial playing field, eliminate intermediaries such as banks, and maybe even replace fiat altogether. Cryptocurrency was the libertarian schoolboy’s fantasy-come-true. While no one can blame enthusiasts for their high ambitions, the truth is that neither banks nor fiat currencies have gone away, and crypto doesn’t remotely pose a threat to either.
What is happening, though, is that traditional capital markets are beginning to incorporate blockchain technology and digital assets, and the coronavirus pandemic only hastens the process.
The idea was for cryptocurrency to democratize finance just as the internet democratized content and opportunity — it’s a case for digital currency that anyone involved in the space has heard over and over. Before the internet, content creation was reserved only for journalists and creative departments at advertising agencies. Today, it’s almost bizarre for the average person to not post regular content for the world to see. The same is true for finance today, and as social media democratized content, digital assets are at the helm of democratizing finance.
But how was cryptocurrency to achieve these ambitious goals? Blockchain, blockchain, and blockchain. At this point, the industry-shaping technology barely needs an introduction. Blockchain enables crypto to unshackle the masses from the burden of being beholden to archaic banking bureaucracy and closed-door monetary policy that prioritize the wealthy over everyone else. By eliminating the middleman, cryptocurrency enables people to bypass the onerous fees, interest rates, and other restrictions traditional financial institutions impose.
As of today, though, Bitcoin hasn’t achieved widespread adoption. Sure, its price has stabilized between $8,000 and $11,000 and improvements have been made to its payment protocol, Lightning Network payment, which has been hailed as the solution to the cryptocurrency’s scalability problem. But for Bitcoin or any other altcoin to democratize anything, it will need to be adopted on a major scale.
The key lies not with overthrowing traditional financial institutions, but by adapting them to blockchain technology, which is vastly superior to the IT systems that came before it. In plain English? Tokenization.
Tokenization refers to the process of putting major asset classes on the blockchain and digitizing them so they can be divided into tiny shares that don’t exist today. Each of these shares is represented by a token on the blockchain, which also means tokenization offers the greater security that is inherent in blockchain technology.
Tokenization is slowly spreading throughout the world, especially in Europe, where it is beginning to shape the continent’s financial future. Malta, for instance, was the first country to adopt a legal framework that manages digital assets and blockchain. Malta’s framework for Distributed Ledger Technologies (DLT) is creating new business opportunities in a tokenized, regulated environment.
Tokenization’s advantages include liquidity and accessibility. Tokenized assets can be traded easily and distributed to a greater number of investors at lower fees. Today, investment in securities is mostly limited to high-income individuals. Purchasing just a fraction of an asset instead of the whole is more affordable for average people who want to invest.
Around 55% of Americans owned stock in 2019, according to a Federal Reserve survey of consumer finance. That number will grow as tokenization spreads.
The fractionalization and transferability of digital tokens enable investors of all sizes to participate in the ownership of investment opportunities, and therefore the ability to earn passive income. Because digital assets can be broken into smaller shares that exist on today’s stock exchanges, people who might not have so much money to invest can still do so according to their financial ability, so long as they have an internet connection.
Tokenization also offers greater transparency in transactions, as everything is recorded on the blockchain. Transactions are immutable, too: Once tokens are bought by an investor, no one can “erase” the ownership.
As with most technologies that change the world, crypto will work within existing systems, not tear them down, to bring about real change. Regardless of what will happen with Bitcoin and other cryptocurrencies in the future, we will begin to see a greater number of traditional financial institutions incorporating blockchain and tokenization, and as a result, a greater number of people will participate in capital markets. It’s about time.
