At this point, you’ve probably heard of Bitcoin.
For those who missed it, Bitcoin is the world’s first digital currency. It also just became a global phenomenon.
In 2017, Bitcoin became the subject of massive media attention. In fact, nearly every news outlet — from CNBC to Fox — was buzzing about it.
Under all this attention, Bitcoin finally shed its early identity as “cash for nerds.”
It became an investment for a global audience, many of whom are curious about what makes Bitcoin so unique and powerful.
The answer to that question is “blockchain” — one of the terms that digital token investors have had to become familiar with.
In this report, we talk a bit about blockchain, mainly to educate investors who want to know more about the technology.
We also look at one of the most valuable technology opportunities that Bitcoin and its blockchain brethren have introduced. That technology opportunity is called tokenization.
So, let’s get started with a brief explanation of blockchain…
Benefits of Blockchain 101
Blockchains are incredibly powerful technologies that are busy changing the ways in which multiple industries handle and catalog information and data.
Investors tend to conflate the terms Bitcoin and blockchain, but they’re actually two separate technologies that exist in a state of symbiosis.
Bitcoin is capable of being an economic powerhouse because of blockchain technology.
A blockchain is a distributed public ledger. Just picture it like a giant jumbled spiderweb — there’s no start or center and no central controlling entity.
The information stored in a blockchain is collected and put into “blocks.”
In the case of Bitcoin, the information being stored on its blockchain is transaction information.
With Bitcoin, there is a public record of the money that’s being spent on the blockchain.
As we mentioned above, blockchains are also decentralized. This means that they are not controlled by one central entity.
In the world of digital currency, this is a huge benefit to many investors and users who don’t like the idea of their money being tied to a central government or bank.
That’s a lot to absorb, mainly because you just read a breakdown of one of the most complex technologies on the market within just a matter of sentences.
For now, just remember these takeaways.
- Blockchains are secure.
- Blockchains are often public.
- Blockchains are transparent.
- Blockchains allow for the trustless exchange of assets.
Now, let’s move forward to take a look at tokenization…
What Is Tokenization?
Tokenization is the process of converting the rights of an asset to a token on a blockchain.
If that sounds confusing, don’t worry. You’ve likely already heard multiple examples of tokenization with the recent boom of the digital currency market.
Blockchain companies often come onto the market through a process called an initial coin offering (ICO).
An ICO is when a company offers a token in lieu of stock. That token can be held like stock if the buyer (investor) thinks that it will increase in value.
In the ICO example, tokenization has already added value to our economy. It allows small companies to gather funding through a new breed of digital venture capitalism.
It also allows investors to hold stock and participate in venture capitalism without going through a regulated market. Without regulation, ICOs are higher risk. That said, they are still revolutionary.
That being said, tokenization isn’t just intended to replace stocks.
It has gathered the interest of both technologists and financial companies around the world that have realized we could add lots of real-world assets to blockchains.
And if we do so successfully, we’ll change the ways in which we exchange assets…
Why Is Tokenization So Important?
Tokenization is important for one huge reason: Our current assets system is confusing.
In our world, hundreds of assets exist. There is oil, real estate, stocks, and gold — and that’s just the start.
In their current state, these assets are tricky to handle. They are cumbersome and tend to come bound in legal documents.
These assets are also hard to divide into segments and distribute. If you choose to invest in them, you often get handed a slip of paper that represents your investment.
That is where tokenization comes in.
Instead of relying on an antiquated paper system — which is as hard to organize as it is to track — investors could learn to lean on a blockchain system where the assets they’re trading have already been converted to digital counterparts.
This may seem like a big step, but we already primarily rely on electronic systems.
Most commodity exchanges have nixed paper documents and send electronic records instead. But the costs of sending electronic records is high. With blockchain, the costs could be lowered significantly.
And there is another problem: trust.
In our current system, there are always two trusted parties. You can see an example of this in the image below.
For you to call an Uber, you need to go through a centralized application. For you to send money to another individual, you need to send money thru a centralized bank.
With blockchain, you don’t need to worry about trust, because each transaction is transparent and can be peer to peer.
Certain blockchains — most famously, the Ethereum blockchain — also offer the benefit of smart contracts, which set parameters in the code.
Imagine it like this: You want to pay your landlord rent, but you only want the money to leave your account on the 30th of the month. You put that information into a smart contract, and then, without any action from you or your landlord, money will be moved from your account into theirs.
This is a huge step for the exchange of assets and funds.
Tokenization could also allow individuals to exchange assets between other individuals, instead of relying on central companies.
Currently, the clear majority of the world’s assets are held by central companies. But if individuals could trade assets between other individuals through blockchain, this would shift the market dynamically.
To understand this even better, let’s look at another real-world example…
How Will Tokenization Work in the Real World?
Say you want to buy some gold…
In today’s world, gold may be attained in multiple ways. Out of these ways, two are the most common. You can either go to your local bullion dealer or go online and order the gold through an online dealer.
But with blockchain, all of that could be different.
Say you don’t want to deal with the hassle of actually attaining the physical gold. With blockchain, you could buy gold online and receive a token version instead.
In this case, you would have a digital token that represents your legal buy, entitling you to all of the rights of ownership.
Even better? All of the information pertaining to your gold purchase would be stored on the blockchain.
Having access to this information would help in keeping consumers safe from fraud.
It would also allow them to diversify their assets because they wouldn’t have to buy one gold coin but could instead buy small amounts of a wide range of coins, with varying traits and values.
The example that we just gave you is an example of how tokenization works with tangible assets.
Tokenization also works with intangible assets, like patents, copyrights, and brand names…
Major Industries Tokenization Will Disrupt
It’s likely that tokenization will disrupt hundreds of industries. That being said, there are some clear early adopters.
The first of those industries are trading systems, which will likely adopt tokenization to speed up the transfer of tangible assets.
Tokenization could allow multiple companies to trade assets among each other, whether those assets are stocks, oil, and even gold.
Tokenization will reduce paperwork and the associated fees, which could lower operating costs.
Beyond that, since tokenization leans on a blockchain, the record keeping for the assets being traded will be impeccable. If there’s ever a legal dispute, both companies will have the record of it.
In these cases, the use of tokenization may remain highly contractual, with the physical assets remaining with the original stakeholder. The token just representing legal ownership.
Another industry poised to be disrupted is music licensing.
In our current world, musical licensing is complicated. And with multiple streaming and purchasing platforms out there (iTunes, Pandora, Spotify, etc.), it isn’t getting any simpler.
Tokenization of musical assets will allow artists and producers to have a clearer record of where the song is being distributed, assuring that an accurate payment is made.
In both of the systems that we just described to you, you see how tokenization allows trades to happen far faster in a much more transparent environment.
This is the beauty of blockchain…
The Challenges and Next Critical Steps
Over the course of this report, you’ve learned about blockchain technology, Bitcoin, and the power of tokenization.
Here at Wealth Daily, we’re expecting tokenization to be a major part of our evolving global economy.
More importantly, we’re anticipating that tokenization will be something that investors must become familiar with. So, by reading this article, you’re taking a critical step in getting prepared for the future.
Of course, there are still some legal hurdles that must be overcome before tokenization becomes mainstream.
One such legal hurdle is regulation — an issue that we finally saw come to a head in digital currencies in 2017.
Currently, the first form of tokenization, initial coin offerings, remains largely unregulated.
For a brief window this year, ICOs were raking in obscene amounts of venture capitalism and distributing tokens to a wide range of investors.
You can see just a few examples of these sums in the chart below.
That’s some big money.
The Securities and Exchange Commission (SEC) quickly stepped in, stating that some of the tokens created through ICOs are actually assets and are subject to securities law.
Though initially met with frustration from companies utilizing ICOs, this kind of regulation is critical to market health.
The regulation of other “tokenized” assets should become easier as regulators start embracing this technology. It will be easier for regulators to control tokens in their own space (e.g. a gold regulator regulates gold and an oil regulator regulates oil).
It’s unlikely that the federal government will stop the tokenization of assets in other sectors.
In fact, processes have already been started for streamlining the tokenization process.
Delaware just recently started legislation that will allow companies to use blockchain for their books and finances. From here, it’s just a question of whether regulation can keep up with the technology.
Some other legal hurdles will have to fall before we start putting some physical assets onto blockchains.
There will also have to be conversations about token holder rights and whether it’s the individual or company issuing the token that has more rights than the holders.
The bottom line is that we’re looking at something that could potentially change the ways in which we handle transactions and data. It is a huge shift in our markets. It may be one of the most important events in capitalist society.
That said, we’ll be keeping an eye on tokenization as we head into 2020.
If you want to learn more about tokenization, blockchain, and digital currencies make sure to subscribe to our free e-letter Wealth Daily.