Tokenizing Alternative Investments

Tokenizing Alternative Investments: Blade Labs’ vision to redefine the Investment Horizons

 

In the dynamic digital finance landscape, alternative investments carve out a distinct niche, eluding the traditional investment options of stocks, bonds, and cash. These investments encompass a broad spectrum that includes hedge funds, derivatives, and private markets that consist of private equity, venture capital, infrastructure, real estate, commodities and natural resources. Expanding beyond these categories, alternative investments extend to tangible assets like fine art, wine and antiques, each offering unique opportunities and challenges in this fast-evolving financial landscape.

 

Brief overview of some of Alternative Investments

Hedge Funds
Hedge funds pool resources from accredited investors, offering flexibility for unique investment strategies and potential high returns. However, the lack of transparency is a huge challenge for this asset class as they are often organized offshore, lack public disclosure, and release selective information to attract investors.

Tokenization of hedge funds therefore could provide greater transparency with the use of Distributed Ledger Technology (DLT) to tokenize this asset class. Moreover, smart contracts embed investor rights, legal responsibilities and ownership records directly into tokens, further enhancing transparency.

Private Equity (PE)
Private equity involves investments in businesses that are not publicly listed, focusing on long-term business improvement. PE investments are typically illiquid and traded during the acquisition and exit phases.

However, there are some challenges that this asset class faces. For example, it is primarily accessible to institutions and high-net-worth individuals due to high minimum investment requirements and lengthy holding periods. Moreover, selling PE interests on the secondary market could be more efficient in terms of time and cost, requiring significant resources or exposure to liquid assets for holding until maturity.

However, tokenization can provide easy solutions to address these challenges. Tokenization broadens access to PE by reducing the minimum investment quantum. It enables investors to access private companies before they go public, overcoming the traditional challenge of limited opportunities and high costs. Tokenization facilitates more cost-effective secondary transactions by allowing investors to buy and sell tokens on certified exchanges, streamlining the process and reducing the involvement of intermediaries.

Real Estate

Real estate can be categorized into commercial and residential properties and has been a substantial source of wealth for decades. Recognized as a reliable hedge against inflation, real estate stands to gain from enduring trends like urbanization and urban renewal. Furthermore, it offers diversification potential within a portfolio comprising traditional assets like stocks and bonds.

Tokenization facilitates increased liquidity and enables fractional ownership of real estate. The use of blockchain makes it easy and legal to transfer real estate tokens. Not to mention the transparent infrastructure and reduced transaction cost owing to DLT offers a complete auditable record of ownership and makes buyers more accountable.

Natural Resources
As an asset class, natural resources encompass a wide range, including anything obtained or extracted in its raw state. This classification can be further delineated into renewable and non-renewable natural resources.

Tokenization enables fractional ownership of natural resources, opening the door for a broader range of investors to participate with smaller amounts. Presently, investors access natural resources through listed options, company shares, or Exchange Traded Funds (ETFs). However, these options often involve mixed portfolios. Tokenization offers the potential to gain exposure to a specific natural resource project or asset, providing a more targeted investment approach.

 

Blade Labs’ vision for tokenization of Alternative Investments

Blade stands at the forefront of innovation in the alternative investments landscape, delivering tailor-made solutions to enterprises and businesses seeking to tokenize and provide seamless access to their digital assets. Blade is helping pave the way for a transformative era in investment strategies by offering an end-to-end infrastructure encompassing conceptualization, minting, and distributing tokenized alternative assets.

In Q4 2023, Blade recently provided its go-to-market services  to Diamond Standard, an enterprise creating a standardized value for diamonds, making them a tradable and liquid asset class. By executing a targeted awareness campaign at the launch of Diamond Standard’s commodity token, $CARAT, Blade facilitated the seamless distribution of thousands of tokenized diamonds to tens of thousands of Blade Wallet accounts in under 24 hours via a scan of a QR code or click of a link. Within hours, thousands of users were aware and interacting with $CARAT tokens.

So, what does the future of tokenization of alternative investments look like? A paper released a few months back by Chartered Alternative Investment Analyst (CAIA) titled “The Tokenization of Alternative Assets” reported that “appetite for alternative investments has grown considerably in recent years” with global assets under management (AUM) value of approximately USD 13.4 trillion. Additionally, the paper also stated that, in comparison, traditional assets make up more than USD 102 trillion. Notably, from 2005 to 2011, the AUM of alternative assets experienced a robust growth rate of 14.2%, far surpassing the modest 1.9% growth observed in traditional assets during the same period.

(Graphics Source: https://caia.org/sites/default/files/2021-02/CAIA_Tokenisation_of_Alternatives.pdf)

 

A recent report by Bain and Company illustrated the transformative potential of tokenization of alternative investments. The report underscored its prospect of unlocking a staggering $400 billion in annual revenue. This potential windfall is rooted in a calculated estimation based on a survey that affluent investors’ allocation to alternatives could surge significantly from 5% to  20%.

 

(Graphics Source: https://www.bain.com/insights/how-tokenization-can-fuel-a-400-billion-opportunity-in-distributing-alternative-investments-to-individuals/)

 

Additionally, earlier this year, another survey conducted by EY Parthenon indicated a pronounced inclination of a significant majority of high-net-worth (HNW) and institutional investors towards tokenized alternative assets. Impressively, 62% of HNW and 86% of institutional investors ranked tokenized alternative assets as their primary choice, surpassing traditional options such as equities, fixed income, cash, and money market funds.

Moreover, the study also sheds light on some data to indicate private equity and real estate are the frontrunners in investor preferences. 59% of HNW investors and 63% of institutional investors identify private equity as their first or second top alternative. In comparison, 49% of HNW and 56% of institutional investors accord a similar ranking to real estate amongst tokenized alternatives.

(Graphics source: https://www.ey.com/en_us/financial-services/tokenization-in-asset-management)

It is worth mentioning that the paper by CAIA stated that while alternative investments currently contribute only about 16% to the total AUM and represent roughly half of the revenues generated by the global asset management industry, the landscape is poised for a transformative shift.  The paper attributed this trajectory to an escalating demand from investors for enhanced performance, uncorrelated returns, reduced illiquidity premiums, and increased diversification access. As investors seek to bridge the gap between asset performance and ongoing liabilities, the expansion of alternative investments is expected to remain substantial.

The significance of these reports makes a compelling case for tokenization, which could reshape the landscape of alternative investments and usher in a new era of financial possibilities.

The growing convergence between fintech companies and financial institutions undeniably speeds up the embrace of technological innovations and the integration of digitalization. The incorporation and application of blockchain technology have given the required momentum to reshape asset issuance, trading, clearing and settlement through tokenization. As we look forward, the evolution of product mixes, asset management capabilities, and enhancements in client experience is expected to align with the emerging landscape, leveraging technological advancements and a heightened integration of blockchain technology. This adaptation can potentially play a crucial role in the tokenization of alternative investments.

With its innovative approach and pioneering partnerships, Blade  provides end-to-end technology solutions, from token design to facilitating seamless access to tokenized assets via its go-to-market services. Blade has established an efficient, cost-effective, and expeditious tokenization process by seamlessly merging advanced technology with tangible assets. This innovative approach dismantles the traditional barriers of illiquidity and high entry costs, providing retail investors with entry points into once-inaccessible markets. As a key catalyst in expanding investment horizons, Blade’s work marks a significant leap in the democratization of high-value asset investment, affirming its position as a leader in the evolving tokenization landscape.

 

Kasturi Sharma
Senior Content Writer
Blade Labs

Source list

  1. https://caia.org/tokenisation
  2. https://www.bain.com/insights/how-tokenization-can-fuel-a-400-billion-opportunity-in-distributing-alternative-investments-to-individuals/
  3. https://www.ey.com/en_us/financial-services/tokenization-in-asset-management

 

 

 

 

 

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