One of the biggest challenges emerging markets face is volatility. Fueled by political and economic instability, dependence on a limited number of industries, and market accessibility constraints, these problems are exacerbated by a poor or nonexistent regulatory framework. While many of these things don’t appear to be changing anytime soon, there are financial and technological implementations that can be introduced to ensure stability. Tokenization – a relatively new, blockchain-based crypto-asset ratification of assets, may be the vehicle that makes this vision come true.
What emerging markets lack: participation and liquidity
More asset movements are essential for a mature and prosperous market. In other words, the markets need liquidity, which comes in part from participation. If the number of participants is insufficient, the chances are low that a security is liquid. As a result, the market remains more stagnant, investors see a higher risk and economies then become dependent on a few strong industries to compensate, while foreign and domestic players are unable to generate wealth from within through other means of the market. Ultimately, greater participation would lead to higher liquidity, but politico-economic systems can hamper progress.
Many, but not all, emerging markets also operate under political regimes that hamper financial participation, with sections of the population unable to remotely access a bank or investment account, limiting social mobility and liquidity and increases the wealth gap.
Related: Financial inclusion, cryptocurrency and the developing world
In some oligarchies, which include a significant share of emerging markets, the lack of accessibility to finance may be intentional, with the intention of limiting political advancement and maintaining political oppression.
In other cases, socio-economic mobility is not technically limited, but national issues limit opportunities for the poorest in one way or another. Blockchain technology, however, has spurred the potential for a true financial revolution, with more participation and potential opportunities.
Related: Crypto is the revolution leading developing countries to financial inclusion
Blockchain: the democratizer of finance
The underlying concept of blockchain development stems from a familiar system and sentiment that people in emerging markets face: centralized power and not much to do about it. The idea was to remove centralized power from the hands of a wealthy few on Wall Street, whose own whims had implications for the world market.
Rather than channeling markets through existing financial institutions, blockchain would route them through people, thereby removing middlemen and empowering individuals. Ultimately, empowering people with blockchain-based funding should, in theory, lead to greater accessibility and, subsequently, participation, especially for the unbanked or in financial difficulty.
While the underlying blockchain technology has the power to decentralize finance, it is the digital capsules that work on it, known as ‘tokens’, that are the real culprit for the increase in market participation. In practice, tokens can represent any sort of exchangeable asset, whether digital or tangible. In a 2018 report, Deloitte firmly expressed confidence in the true potential of tokenization:
“The act of tokenization of assets threatens to disrupt many sectors, especially the financial sector, and those who are not prepared risk being left behind. […] We predict that tokenization could make the financial sector more accessible, cheaper, faster and easier, unlocking billions of euros of currently illiquid assets and dramatically increasing the volume of transactions.
These ideas have manifested themselves in a variety of different applications, from securities to assets as unique as works of art, which have benefited from the unique capabilities of tokenization.
Laying the foundations for participation with tokenization
Combined with profitable blockchain technology, tokenization offers a whole new kind of flexibility that is sorely lacking in the traditional mainstream financial ecosystem. As a result, the assets of traditional financial instruments like securities with unique physical objects such as works of art have been symbolized.
Many emerging countries cannot afford to invest in standard assets due to the high cost. But since tokens are divisible, their assets can be shared among a group of people, allowing investors to enter the field with less investment.
Rather than just one person buying a property – a generally illiquid asset with a price of $ 500,000 – a very large group of retail investors could collectively buy the house as an asset via tokenization. Each investor would be free to exchange their tokens easily without legal problems. This means that not only would retail investors be able to withdraw from the market due to the high cost of assets, but liquidity would also be significantly increased. It could also translate into more fundraising opportunities for small and medium-sized businesses in emerging markets that are struggling to find investments through traditional channels.
In addition, the flexibility effect would be amplified by the absence of legacy intermediaries on a blockchain system without trust, which would therefore lead to cheaper operational costs which would be passed on to the investor. The lack of trust in the system would also extend to the issue of regulations, where strict policies – or a lack of – policies could be overcome through smart contracts that execute transactions based on real-world information, without human intervention.
The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of TBEN.
Derek boirun is the founder, CEO and director of Realio. Derek is an entrepreneur with institutional experience in commercial real estate development, EB-5 capital investments, and blockchain-based investing. He previously founded and currently serves as a Managing Member of the American Economic Growth Fund, an EB-5 investment platform focused on raising capital overseas for US-based real estate projects. To date, the fund has two regional centers, hosts more than 100 investors and sponsors over $ 1.2 billion in total project cost.