We ask Mozaic Markets CEO, Raymond Harte to explain what exactly is tokenization? And what are the biggest opportunities, benefits and barriers to success?
We are a London-based, globally focussed, FCA regulated fintech firm, part of 2030 Group. We are building the next generation marketplace for traditionally illiquid assets. An ecosystem where the buying and selling of assets will take place in a streamlined fashion with an ever-growing set of global participants, both institutional and retail.
With the use of the latest technological advances in Blockchain and other Distributed Ledger Technologies (DLT) combined with better price discovery through the applied use of Artificial Intelligence, we are striving to bring complete transparency to a marketplace that has lacked both liquidity and transparency to date.
Perhaps most importantly, we are bringing to life assets that were never tradable between participants in the past because neither the technology nor legal structure were in place to do so.
At a high level, tokenization is the process of taking any real-world asset, turning it into a verifiable digital asset called a security token and selling it in smaller pieces to a wide net of investors. This token is structured to ensure that it is deemed to be an investment contract which sits on a blockchain (or another DLT) and is administered by a smart contract. The smart contract is at the heart of the whole system.
It is an immutable protocol that follows predefined rules (decided by the issuer of the token at the outset) to enforce or self-execute agreed upon obligations automatically, without the involvement of third parties. For example, paying rental income every month to an investor.
Yes. In simple terms, it is the creation of a digital twin of a physical asset. However, the foundation of the structure is programmed so that information about and relevant to the asset is constantly updated. I view this as being a key element in our technology and structuring as it will deliver information and transparency to customers the like of which they have never witnessed before.
This will enable investors to make much better-informed decisions independently and in theory should lead to less severe market corrections like in 2008 or 2020, while simultaneously opening up new assets to all investors and new investors to traditional everyday assets they never had direct access to previously.
Today I see three asset classes which present the most exciting potential – real estate, precious metals, and, a broader more tangible theme of ESG (environment and social governance).
ESG is an accelerating priority for senior executives in every sector and every country. They are looking for new solutions and are open to ideas.
Tracking all of the various data points required in each of the ESG categories, as well as the on-going monitoring is all made very possible and practical with blockchain. Opening the door to new and compelling investment opportunities. For example, in forestry. If I’m a forest owner and generating income from plain vanilla timber yield, there are many new opportunities that can be structured to enhance the value of the forest asset. Proceeds of which can be used to develop more forestry, faster, or prevent deforestation, to name a few.
Our ambition is that we can bring transparency, opportunity, accountability and liquidity to existing and new assets for everyone to participate in.
Whether it be a fortune 500 company, an SME or an individual; the one thing they all have in common is the need for reassurance of liquidity. From a corporate needing to acquire another or build a new factory through to the individual who wants to release some equity from their house, the belief that they can access the liquidity as and when they need it is what keeps everything ticking along.
Our mission is for every asset to be represented by a digital twin. One relevant example right now is the housing market here in the UK. Due to the health crisis, it is taking on average six months to close on the sale of a house once a buyer has been found. If a house is tokenized and is represented by a digital twin with all the relevant information regarding searches, utilities, planning, financing kept up to date, this execution period of six months would be dramatically cut down to matter of days.
If I’m a property developer and I want to raise financing for my next development, there are many different pockets of investors with different expectations from the project.
There will be those investors who wish to be involved perhaps in the land part of the project, or those that only want to be involved until planning permission has been obtained, or those that just want exposure to the mezzanine debt.
Tokenization via our platform will enable the developer to offer tailor made tokens so that they can be distributed to a much wider audience of investors around the world, not just the same old handful of local players.
If I own a commercial building, for instance an office block or hotel, having all of the weekly, monthly information around occupancy, utilities, rent roll etc, immediately available and updated on my digital twin will make my asset much more appealing to a potential buyer because:
Without doubt it is the opportunity to invest directly in the actual asset or project. Removing intermediaries and all the costs associated with them.
Being able to get direct access to an asset, from bite size investments to large, in a way that makes sense for an individual’s portfolio, will dramatically change how they go about investing and their whole approach to portfolio construction.
If I’m in a building that I like, for example, I want to be able to review its digital token information and make a decision in minutes as to whether I want to invest a small amount of money in it. Through our Mozaic app, if the property has been digitized, I could review the information and invest in real time while I’m still in the building.
That’s ground-breaking and incredibly exciting.
Over the past 25 years the biggest frustration as an investor (apart from losing money…) has been the lack of information flow and transparency post execution around the assets I’ve invested in. As a result, when I come to sell an asset, I am never confident that the price quoted is actually the price I’m going to receive.
My expectations are not properly managed because the information I’m basing my mark to market pricing on is out of date or not available. I’m referring here to assets outside of listed equity and bonds.
Of course, all of this predicated on the underlying assumptions that the ecosystem and platform bring transparency, security and liquidity to the individual’s savings, investment decisions and holdings.
I think there are five soft and hard factors that have influenced the development and adoption of this technology over the last number of years and remain barriers.
Probably the biggest bump in the road along this journey of tokenization, has been the association of the underlying technology with Cryptocurrency. We know the unfortunate history of crypto over the past number of years and particularly around the ICO craze of 2017. The sad thing is that crypto is an asset not a technology!
I think this mis association and understanding has held back the faster development of blockchain and other DLT platforms in making further progress across a wider set of market participants. Which is frustrating for everyone in the community who are doing great things to make the world a better place.
This is one of the reasons why my team here at Mozaic are spending a lot of time making sure we select the “right” assets to be tokenized first so as we can almost restart or rewind the conversation back to the capabilities of the underlying technology itself.
Partly as a consequence of the negative vibes around crypto but also because of over inflated hype and unrealistic aspirations some players put into the market, there is more than a significant amount of scepticism in the market with respect to anything related to this technology. As a result, significant investment is not being made by either Wall Street or Main Street at this point in time.
Not surprisingly the field has been driven by technologists. They have probably taken us to the point where we now need the “market” to adapt, use, catch up and invest, before significant further development takes place. If you look across the plethora of small firms driving this space, the majority are driven by either technologists or lawyers. There are very few players who have a broad selection of professionals from across various disciplines such as compliance, banking, marketing, investor relations, business development, data privacy, consulting as well as legal and technology.
It is critical to the success of this sector that the necessary regulatory steps are adhered to and each independent regulator is consulted with at an early stage and listened to every step of the way. Unfortunately, to do this correctly it is a time-consuming process. At this point, we need to strike the right balance between structuring tokens correctly for a handful of regulators as opposed to trying to please all regulators across all jurisdictions at once.
Most people will probably have heard of blockchain, or even DLT, but very few actually know what it can do, how it works or what it means for their day to day lives. Educating potential users has been lacking and it is certainly required if we are to develop this market. At Mozaic, education forms a key part of our client onboarding procedure. Not only for the platform itself, but for each asset class the client decides to enter thereafter.
Conversations we have been having with potential partners in precious metals, real estate and forestry in recent months indicate that the market is catching up with technologists and early pioneers are on the brink of piloting the world’s first major tokenization programmes.
Our platform is being built with the client at its centre. Everything that we are doing is to make the client experience, both buyer and seller, seamless, efficient, transparent, secure and user friendly. The liquidity that our platform will bring to various assets and the opportunities that we envisage our platform opening up for investors to participate in are truly ground-breaking and market changing.
It is my hope that by the end of 2020 we will have a selection of tokenized assets available on our platform that we believe the world will be very excited to explore.