With the tokens, the smallest parts of real assets can become attractive for Turkish private and institutional investors.

Asset-backed tokens are picking up speed. The markets are extremely volatile and react to every announcement with price fluctuations. The DeFi sector is growing in importance and cryptocurrencies are becoming increasingly popular. The time around the pandemic is full of surprises and the moods of investors are changing like flags in the wind. Gold is in demand like never before and the call for asset-backed tokens is also reaching the traditional financial markets. But what are asset-backed tokens actually?

Tokens can be used in order to be able to represent an equivalent value in digital form. Thanks to blockchain technology related to the Bitcoin hype, they are in great demand. But in addition to the unique possibility of digitizing any form of property, they can mainly be used to finance companies as part of ICOs.

There are different types of tokens, for example utility tokens are responsible for the smooth operation of a peer-to-peer network. And the security tokens, which are also known as equity tokens, represent a company participation. Investors are thus promised a form of participation, for example in an expected profit.

Financial Regulators in Turkey value ​​crypto tokens either as securities within the meaning of the Securities Trading, depending on their design. Valuation as an investment is also possible, but then the crypto tokens are subject to the provisions of the Capital Markets Act.

The best-known tokens are certainly the ERC-20 tokens based on the Ethereum blockchain. It is a series of tokens based on the cryptocurrency Ether. The standard protocol has existed since 2015 and specifies the rules and the functionality of the tokens on the Ethereum blockchain. They ensure interoperability between interfaces. The tokens describe functions or events and ensure uniform transactions at high speed. They can be traded anywhere platforms support the Ethereum standard.

Non-financial assets tradable

Asset tokens are value-based and linked to real economic goods. For example, the following system positions can serve as security:

• Precious metals like gold
• Property
• Equipment such as wind turbines
• Company shares
• Bonds
• Raw materials
• Art
• Infrastructure
• Staple food

Asset-backed tokens are directly linked to the external asset. While stocks and bonds are liquid, they do not require high volume trading and liquidity in the secondary market. The primary market denotes the liquidation, i.e. the creation of the securities and their liquidation.

It is the financial market on which the initial issue of financial capital takes place. The secondary market, on the other hand, refers to trading on the stock exchange. Here the securities change hands and the trading costs only remain low if the secondary market is liquid and transparent.

The liquidity of the secondary market is strongly correlated with the trading volume of the asset. Asset-backed tokens are assigned to illiquid investments. You have a higher chance of a better return than the classic investments, but these are linked to additional risks. Investing in illiquid assets reduces the strategic and tactical flexibility of investors.

Their term is usually fixed in advance and an early exit is either not possible at all or only possible at large price discounts. Asset-backed tokens are only suitable for investors who have a long-term investment horizon in mind. The value for illiquid investments is determined using valuation models and not, as is the case with the valuation of listed instruments, by the market itself.

Control of the asset-backed tokens via DApps

Generally speaking, illiquid assets include non-fungible material goods such as private equity and private debt. The real values ​​mentioned above in the list may also include OTC equity (private equity) and unrated debt (private debt). In both cases, the financiers can be both private individuals and institutional investors.

What all illiquid assets have in common is the fact that they cannot be sold in a very short time or without high costs and only in high volumes. Investors are not deterred by this, however, because the illiquidity usually brings them higher returns. In this context, non-fungible describes the property of goods to be determinable in terms of unit of measure, number or weight.

In the context of decentralized applications, the so-called non-fungible tokens can be used, for example, to digitize a collector’s item or an investment item or to ensure the storage of identification and ownership data on the blockchain . Asset-backed tokens are an asset class that suffers from illiquidity. But at the same time billions of US dollars are stored in vaults around the world, protecting their owners against inflation.

Asset tokens can, for example, bring in capital for art lovers to expand the collection of rare art. The headlines about the income from art auctions, some of which are well above expectations, are known worldwide.

While the owner of the art object can look forward to liquidity, the investors, in the best case, can expect a handsome return. The best use cases for asset-backed tokens are in those where a lot of money can be collected quickly. These are usually the cases in which tokenization ensures an increase in equity or the debts of large established companies, for example, are made digitally tradable.

Tokenization makes fractionation possible

There are quite a few investors who are looking for a certain credit risk and a fixed term for their investment. The tokenization of corporate capital or corporate debt is therefore one of the most popular use cases for asset tokens. Immediately afterwards are the REITs, the real estate investment trusts.

The commercial real estate investment sector is currently unaffordable for most people. With the fractionation of property through asset tokens, all those investors who are only interested in relatively small investments could get their chance. License fees are another option for using asset tokens.

Tokenization enables liabilities and claims from patents or film rights to be digitized and thus creates multi-layered cash flows. Finally, there is the option of supply chain financing, in which the asset-backed tokens represent the liabilities and receivables of secured debt. The tokens could then be used in an ERP system between the modules of the vendors and the customers.

Another advantage that speaks for the spread of asset-backed tokens is the integration of the due diligence process. This includes an examination of a person or a company with regard to economic, legal, tax and financial circumstances.

The due diligence law is one of the measures to prevent bribery and corruption as well as to prevent money laundering worldwide. The laws have an impact on international trade relations and could flow into the process of tokenization.

This dynamic creates even more liquidity and could open the markets further to the average investor. Investors would get by without external auditors, because smart contracts that are integrated into the asset-backed tokens could partially take over these steps automatically. Smart contracts are necessary for processing the investment and can be viewed by investors.

Asset-backed tokens also for ICOs

With asset-backed tokens, ICOs in particular should blossom into serious investments. Thanks to blockchain technology, there is significantly increased transparency compared to classic start-up financing. But there are also risks, because there are many hybrid models on the market in which several types of tokens are used for an ICO.

The art for investors is to differentiate the asset-backed tokens from classic crowd financing or a fund. But apparently the crypto capital market is still waiting for its revolution in terms of asset tokens, because even seven years after the first ICO, crypto assets have still not been able to establish themselves properly on the local financial markets.

Although the crypto assets have not been among the regulated financial instruments yet, they are therefore subject to the AML Global Directives. There are still legal loopholes and uncertainties at numerous levels. Crypto assets exist as a virtual entry on a blockchain.

Similar to trading in securities, they enable simple and uncomplicated tradability of the asset positions that are behind the crypto assets. But why have efforts to widespread use of asset-backed tokens so far failed?

Reasons for previous failure of the crypto token

Legal Framework

The legal framework for digital tokens poses major problems with regard to their valuation and accounting. Because major investors must adhere to the requirements with regard to the two points mentioned. For example, funds or insurance companies currently have no way of assessing them against the background of the diverse types of appearance of crypto assets. This means that institutional investors have so far largely distanced themselves from the possibility of investing in crypto assets. There is also a requirement to minimize the risk of loss for private investors and small investors.

The “numerus clausus of assets” defines the type of assets in which funds or insurance companies may invest. Crypto assets are currently not listed in the possible assets and thus the circle of potential investors is significantly limited.

Risk management

In addition to insurers, institutional investors also include banks and fund managers. Therefore, compliance with requirements for proper risk management is of crucial importance, because the selected investments must be adequately backed with their own funds. While the backing for shares is not a problem, this becomes a hurdle with the tokenization of real estate, because as an indirect capital investment, real estate would then also have to be backed with their own funds.

In the context of risk management, however, the question of seizability or treatment in the event of insolvency also arises with crypto assets. However, these questions have not yet been answered. In addition, the tokenization of real estate would mean that a low-risk, long-term form of investment would become a highly volatile position in the portfolio. This is likely to deter institutional investors in particular from investing in crypto assets.

Civil law aspects

As the regulatory classification of the crypto tokens in Turkey has not provided light in the dark tunnel, the civil law aspects are largely unaffected. Investors should be pleased that a prospectus was published in accordance with the regulations, but the lack of civil law evaluation is rated negatively, so that the tokens are passed on to him in such a case.

Real assets thanks to tokenization

Generally speaking, now is the time for real assets. So companies, real estate, even art. Because when it comes to solving the crisis, politics will again not be honest: all the money that is now being distributed left and right is not conjured up, but it is the money of the citizens. Or the debts that are being incurred now are the debts of all of us. At some point every single citizen will have to pay for this party. But because you want to avoid this unpleasant truth as much as possible, you will solve this problem skillfully by printing money and devaluing it. And because the technology used in everyday life has a rather deflationary effect, you will not notice that so much at the consumer goods level. I don’t expect hyperinflation in consumer goods, but in assets.

According to current estimates, around 40% of all assets are not bankable. It starts with the luxury villa and ends with the jewelry collection. But with distributed ledger technology, these non-bankable assets can be made available to the market. In the form of asset tokens, the shares in previously very private assets can be traded. They can be issued in small denominations and have thus become an interesting option for a new investor segment. In the retail market in particular, private banks and asset managers can break new ground.

Asset-backed tokens can be used to acquire either rights of use or shares in the ownership of the property. In addition to real estate, there are primarily collections of, for example, works of art, vintage cars or jewelry, as well as intellectual property rights and raw materials that can be digitized with these tokens. But also renewable energies, sugar or wheat as well as film licenses and the financing of supply chains belong to the area of ​​possible use cases for asset tokens.

Future market digital assets

The market for digital assets is developing rapidly and traditional institutions are well advised to adapt and prepare for this development. According to experts, the digital development in the form of tokenization of products has long been unstoppable and will progress under all circumstances. In their opinion, tokenization is part of the business of the future for the asset management industry.

Private and institutional investors get access to asset classes without intermediaries on the basis of blockchain technology. The use of smart contracts enables the automatic issuance of share certificates and reduces transaction costs.

Global wealth is currently valued at approximately $ 205 trillion in financial assets and approximately $ 127 trillion in non-financial assets such as real estate. Assuming average growth of 4 to 5% per year, total wealth by 2025 will be around $ 405 trillion.

If you believe the numbers, there are currently only around 230 billion US dollars of global wealth in digital assets. But assuming only 1% of digital assets by 2025, this amount would be 4.1 trillion US dollars. (Source: World Council, Worldbank Coinbase 2019 and Credit Suisse WM Report 2018).

Blockchain technology enables tradability, and ultimately liquidity, of the non-financial assets in the secondary market. Interesting methods are also available for start-ups to use crypto tokens to create new opportunities for financing, profit and cost savings.