Digital assets are poised to revolutionize the way people operate and exchange value in the world. Adoption of distributed ledger technology, which is the platform digital assets are built upon, has provided the infrastructure for this new asset-class to bring much-needed innovations to the world of finance and beyond.
In their simplest form, digital assets are units of value or ownership stored on a distributed ledger. Stock shares, equity, property, and nearly any other unit of value imaginable can be stored and represented on these ledgers. They also enable fractionalization, so you can own a small percentage of a larger item.
The number of applications for digital assets is vast and steadily expanding, yet few people truly understand how this exciting and innovative technology will impact their lives. In this article, we look at three areas where digital assets will make a direct noticeable change to people’s lives and our financial system.
Democratizing Access To Investments For All
Traditionally, private capital markets have been exclusive, disorganized, and disconnected from the majority of investors. The best-performing investments from the past decade have also come through private capital markets, but have only been available to accredited investors. These are wealthy individuals typically classified as having a net worth of at least $1 million, not including the value of a primary home, or households where the combined income has been $300K or more for a few consecutive years. In the United States, this only accounts for 9.86% of all households. The other 90.14% are classified as retail investors and are, by law, not allowed to participate in these deals — which we see as a form of financial exclusion.
Even if you are an accredited investor, the process of making informed decisions in private markets can be difficult. Unlike publicly-traded asset markets (i.e. stock markets), you likely won’t find a neat and organized list of all investable companies with all the details necessary to make a proper evaluation.
Looking at the larger global market, the percentage of investors that can legally participate in private equity fundraising is much smaller. Most private markets tend to be most accessible to domestic investors and less so, or even completely inaccessible for international investors. For example, if you are a citizen of the US and want to invest in a specific company based in the UK or Germany, it’s highly impractical to via private markets. Even public markets have limited options. The only common exceptions are if the company is large enough to list publicly on a US stock exchange or if you are willing to select that company’s stock along with a basket of other shares via a national ETF such as NYSEARCA: EWU or NYSEARCA: EWG.
Digital assets and digital ledger technology will break down these barriers and create a truly global system where anyone can invest in any company anywhere on the planet 24/7/365 for very low cost– all with the click of a few buttons.
This marks a massive tangible leap forward for financial inclusion and an end to slow and complicated private market investment processes. We already see this with digital currency exchanges, so why shouldn’t this level of accessibility be the standard for all other forms of investment?
Unlocking The Value Of Illiquid Assets
Illiquid assets are any assets that can’t be bought, sold, or transferred easily. Most assets in the world are currently illiquid. A classic example would be real estate. Buying or selling a piece of real estate involves a lengthy, complicated, and expensive process that typically requires many external parties, like realtors, lawyers, and title companies to complete.
Aside from being difficult to transfer, all the inherent value of the asset, along with your capital investment, is locked-up in an all-or-nothing ownership model. While it might feel good to see the value of your investment going up, that increase only lives on paper. You don’t actually get to enjoy that up-side or utilize that gain toward another investment until you sell or refinance the property.
Digital securities are poised to disrupt this restrictive model by enabling fractionalization. With fractionalization, there is no longer a need for lengthy paperwork, complex fee structures, or all-or-nothing ownership. Investors will be able to break the larger asset into smaller components and sell off as many of those pieces as they desire — thus unlocking value previously trapped within the asset and freeing up your capital to be reinvested elsewhere.
This isn’t a completely new concept, we’re all familiar with this idea as it relates to stock markets and publicly traded companies. That said, the overwhelming majority of assets in the world follow the old model, with all their value locked-in until a sale frees up the trapped value.
Soon, as the trend towards digital assets continues to build momentum, you will have the option to enjoy any upside to your investment almost immediately or raise capital against an asset when you really need it. Imagine being able to quickly cash-out your gain in an investment so you could apply it to a new opportunity that just came across you desk or a professional sports team having a tough economic year was able to raise capital by selling small fractions of their franchise to devoted fans who would be delighted to own a portion of the team they love.
This feature not only improves mobility for investors but can also have a massive positive impact on society. Let’s use the example of a residential apartment building struggling financially. Currently, they have three options: A) sell the property and take a potential loss B) refinance the building, likely on poor terms or C) raise the rent for the tenants, who may not be able to afford the increase and be forced to move.
Fractionalization through digital assets would create an option D) where the building owner can easily sell a fraction of the building’s equity to investors who have the funds and see the long-term value. This would create a win-win-win situation where the owner’s immediate financial need is solved, the new investor gets a stake in a promising property, and the building residents remain able to stay in their current homes.
While this is just one of many scenarios, it clearly shows the ability of digital assets to not only support investors with capital mobility, but it’s potential to create real positive impact for entire communities.
Cutting Out Middlemen & Value Extractors
One of the few things most people universally agree upon is that they don’t like paying excess fees — yet our current financial system is rife with them. Let’s imagine you want to wire money from your Canadian bank account to your US bank account. To start, there is a fee to have a checking account in the first place. The exchange rate you’re quoted isn’t the actual exchange rate, but one padded with multiple convenience fees. Then, there is a wire transfer fee to actually send the money. A fee to receive the wire on the other end, and the potential for additional unexpected and unexplained fees if the bank uses any intermediary financial institutions to facilitate the transaction. All of those fees just to move your money.
Trading is no different. Charles Schwab, Fidelity, and TD Ameritrade all charge $49.95 or more to execute a single fund trade. Broker-assisted trades from these companies come with a fee of $25 or higher. Some firms even charge a redemption fee if you sell a mutual fund within 60 to 90 days after opening.
This is madness. A clear example of a legacy financial system seemingly designed to reward unnecessary middlemen and institutions aimed at extracting value rather than providing it. Up until now, we were forced to endure this as banks and other large financial institutions were the gatekeepers. They set the rules we all had to play by, and very few appealing alternative solutions existed — but now, with the advent of digital securities, the winds of change are blowing.
Distributed ledger technology enables transactions to be executed quickly, cheaply, and directly. With digital assets, you circumvent traditional gatekeepers and other unnecessary middlemen looking to extract value from your transaction without providing any real benefit. Additionally, this is a truly global technology, meaning it can be accessed anytime from anywhere with zero foreign transaction fees. One anonymous person was even able to instantly transfer $468.5 million worth of digital assets for only $374.98. Sending that same amount using one of today’s lowest-fee traditional solutions would have an estimated fee of over $1.6 million and multiple days of wait time for the funds to land. Obviously, this is an extreme example and investors are typically happy to pay some reasonable fees to ensure the safety of their trades, but it does showcase what’s possible when utilizing this new technology. This same protocol can be applied to transferring mutual funds, stocks, real estate deeds, and numerous other stores of value — cutting costs, time, and unnecessary middlemen along the way.
While we only looked at three examples, the potential use-cases for digital assets are nearly infinite. Digital assets are faster, safer, and far less expensive than traditional solutions. The technology offers greater transparency and it’s distributed immutable nature ensures ultimate protection against tampering and corruption.
While most of the buzz surrounding digital assets remains focused on its high-end financial applications, of which there are many, perhaps its biggest benefit remains largely unsung. The real gift to the world rests in its capacity to promote financial inclusion, leveling the playing field and allowing everyone, everywhere access to the new digital economy.
As support and adoption continue to grow it’s a truly exciting time to witness how digital assets and the technology they’re built on may improve our lives, and hopefully, help repair our world.
DISCLAIMER: All views expressed are expressed for general interest only, are the opinions of the author, and are not meant to reflect the opinions or positions of Exponential, its shareholders, employees, directors or holdings. Nothing contained in this article is meant to be investment advice.
Note: This article was originally published March 9, 2020 on Exponential's Medium page
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