Tokenising
Tokenisation is a buzzword which has been catching fire recently. To provide a blockchain-based means of identity for underlying security and yours truly have been discussing, regulating, operationalising, and selling since 2019. An aeon in the modern day. This isn’t new, we tend to think of technology and forget the underlying use cases or business reasons. This is one of the major reasons why tokenisation efforts have failed. Let me explain why and what I think is the way forward for one use case.
Having tokens to establish identity isn’t new. Look at this image. It is a Sumerian birth certificate dating back 4000 years in cuneiform with the details of the child, the parent's name, location, time of birth and few other details. 2000 BC. This is a token. It establishes a representation of an underlying “thingamabob” and this now can be used for a variety of other economic activities such as establishing citizenship, buying goods, investing in their names, taxation reasons, and so on. Was done 4000 years ago. An Equity Share is a token. It establishes the fact that the holder is the owner of a part of a joint stock company. And you can trade the token and depending upon the number of tokens, you get dividends and voting rights. Nothing new but the focus isn’t the technology – the clay tablet or the paper certificate or a demat registry. The focus must be on what you are doing with it.
Have been chatting quite intensively with so many of my firms and it is so exciting to be a little part of developing this ecosystem. Let’s see a typical fund life – cycle, say using PE as an example (the argument should work for most close-ended funds and needs to be slightly tweaked for open-ended funds). Phase 1: structure and set up a fund; Phase 2: capital calls; Phase 3: investment period; Phase 4: Harvesting period and ideally Phase 5: start the cycle again with the next fund. These phases overlap.
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The reason why there has been little progress is because the entire ecosystem isn’t there yet and we keep banging on about the technology only and ignore the business side. You need the regulator to agree to have a tokenised fund, you need the technology base to do the capital calls and an investor educated on why a token is better, easier and faster than traditional registry entries/investor DD/money transfer/custody, etc. etc. You need the ability for the token to hold details of the investor AND the fund AND the valuations in an easily accessible manner and have the tech/process/governance/security/smart contracts to manage this. Then when you are investing (you could be investing in tokens via tokens to give an extreme use case example), how will you reflect that in your original token and can your fund admin, primary investor, secondary market investor, custodian etc. manage this? Phase 4 – when you are exiting – how will that reflect in your token and finally, how do you showcase your prior performance in your next fund in Phase 5?
Not easy, is it? So you break it up – don’t boil the ocean and focus on the number 1 issue for your GP buyer – Phase 2 - raising capital- where alternatives are hurting right now and will hurt for the foreseeable future. Start having the allocators in place, then ensure the primary private placement framework, secondary (trading between a closed group of investors) market and tertiary market (go to crypto exchange to trade) are lined up and operating. That’s where the biggest business case stacks up. Tokenisation can and will reduce costs, upend the fund market infrastructure, make it much more efficient and it’s so exciting to be part of this journey. Will be doing some major stuff in this area in 2024 in GIFT City, UAE and possibly in the UK 😊 watch this space.
Business builder, Educator/trainer. Web3 believer. Change accelerator
8moBhaskar totally agree when you say people are banging on about the technology... I have just started getting involved with RWA projects and can sense very quickly that the main challenges are all regulatory and token distribution/demand related. The tech will soon get commoditised and is already becoming available as SaaS products
SVP Strategy and Business Operations - Liminal
11moManhar Garegrat