Tokenizing Assets: The death of FIAT?
Updated: Apr 4, 2020
For many generations, centralized currencies issued by governments have fuelled our economy, acting as a trusted value of exchange. If an alien from a different civilization visits earth, and sees how pieces of rectangular paper and circular metal are traded for real goods, they would be baffled. The reality is, cash has become the most liquid asset on earth, since all other assets have their value calculated by the current trading value of said asset relative to the FIAT of their choice, usually the US dollar. For example, if you want to know the value of your stock, crypto, or real estate assets, you will generally see it’s value represented in US dollars, Euros, or another government-issued currency.
With the introduction of digital currencies, such as Bitcoin, and decentralized exchanges, we now have new options to act as a baseline/benchmark of value that isn’t controlled by a central bank. These new digital assets are also deflationary by nature due to the limited issuance of the assets. There can only be a total of 21 million bitcoins in existence, for example, which is a very contrasting feature when compared to FIAT currencies, which can be printed in any number, at any time.
At multiple points in history, we can see hyperinflation (collapsing value of FIAT currency), for example Germany after World War 1, Venezuelan Bolívar, Zimbabwean Dollar, and currently at the time of writing this article, the Turkish Lira (which lost over 33% of it’s value relative to the US dollar in a few days). Decentralized currencies, while not perfect, mitigate the risk of mismanagement of central banks, and other political factors that affect the value of currencies such as international sanctions, wars, or lack of access to one’s own funds such as what Greece has experienced in 2015. Cryptocurrencies are removing political barriers, acting as a global currency that can be distributed and traded across our entire world peer-to-peer, thus removing the reliance on any one government or entity.
In this point in time, there are many companies that are aiming to tokenize real assets, such as Polymath, who created the ST20 security token standard, which is a token that represents the ownership of an underlying asset. We already see something vaguely similar today in the stock market, where historically papers, or now digital records, can represent the ownership of public corporations, that can be easily traded on stock exchanges. The shares may also come with voting power, with some governance that needs to be built on top of those assets. With Polymath and others, we now have the technology to issue ownership of virtually any asset class, in a tokenized format, that can be transferred peer-to-peer, or traded on both centralized and decentralized exchanges 24/7. This opens up new opportunities to add liquidity to completely new asset classes, such as Fine Art, Rare Wines, Partial Real Estate, Intellectual Property, or anything else you can think of that has some sort of value.
There are sill some questions I have that are yet to be answered, for example: Imagine there is a painting worth $100,000,000 sitting in a museum This painting is then tokenized, with 100 tokens issued that represent 1/100 ownership of this painting, valued at $1,000,000 each at the time of issue. Now, assuming all 100 tokens are distributed, and are trading at $1,100,000 on exchanges. This makes the total value of the painting $110,000,000. Now, the museum wants to sell the physical paining to another museum for $90,000,000. Should the museum (where the physical painting is sitting) be able to sell the physical asset, or would they require the majority of the token holders to vote and allow this. Assuming that the museum holds over 51% of the tokens issued, they would be able to do this without requiring the remaining token holders to vote. If the sale goes through, would the tokens that were trading at $1,100,000 go down to $900,000, or how would the relationship look like between the exchange of actual physical assets and the value of the tokens that represent their ownership. We will not know the answer to this until there are real examples, and I am very much looking forward to seeing how this all plays out.
How does this relate to the death of FIAT you ask? We'll get there! We already covered the role of FIAT and their issues, as well as a basic understanding of both digital currencies and tokenizing assets. I will now introduce the role of wallets in digital currencies, and propose a new way of thinking what it means to have a liquid source of value to transact on a daily basis. Today, our physical wallets hold cash, or credit cards, for instant transactions. We also have digital wallets that hold crypto-currencies such as bitcoin, and any other compatible tokens that might represent the ownership of a crypto-kitty, asset, or access to an ecosystem (commonly known as a utility token). If we want to transact with our digital wallets, we are able to know the value of our tokens as currently trading on various exchanges, and transfer a proportionate amount of tokens that is equal to the value of the product or service that we want. FIAT has historically been the benchmark of value, and is most likely what the merchant expects to receive in exchange for the product, since the merchant most likely buys the product with FIAT, pays their staff in FIAT, and pays off their debts in FIAT. Until we see a generational and technological change of how global finance operates, this is unlikely to change any time soon. However, if we know the value of our assets set by exchanges, we are able to sell the proportionate amount of our tokenized assets on exchanges for FIAT, and transfer it to the merchant. This way, an individual who does not hold FIAT in their digital wallet can easily transact with the FIAT world. There are even interesting solutions with companies that are issuing Mastercard/Visa cards that uses existing payment infrastructure to use your Bitcoin/Ether/etc. to buy anything, just like a normal credit card. They work by instantly sell the crypto for FIAT, and paying the merchant with it.
Because we know that FIAT is inflationary by nature, and has a decreasing value as time goes on, we can choose to hold 100% of our liquid value in non-FIAT assets, while also having the ability to interact with traditional businesses that accept credit cards.
Now, imagine I want to transact with somebody else who, much like myself, does not like to hold any traditional currencies. Here is how this transaction might look like in the future:
I have a digital wallet that I program to be invested in the following asset classes:
25% Toronto Real Estate
50% Mona Lisa Painting
I would like to transact with Nicole who has programmed her wallet to following assets:
50% Apple Stock
50% Coca Cola Brand IP
If I want to buy something from Nicole worth $100, my wallet will sell $25 worth of Bitcoin, $25 worth of tokenized Toronto real estate holdings, and $50 worth of tokenized Mona Lisa, and on a decentralized exchange will instantly buy $50 worth of Apple Stock, and $50 worth of CocaCola Brand Intellectual Property, to send to Nicole. This way, we are able to transact with having a baseline currency (US dollar in this case, but might be Bitcoin or anything else in the future), and transferring value without transferring the actual underlying assets.
What might also be an interesting thought, is that instead of businesses paying their employees in cash, they may pay their employees in tokenizing assets representing the ownership of the company they are working for. This way, the workers are economically incentivized to be a positive contributor to facilitating the growth of the value of their companies, as this will increase the value of their holdings as well.
As you can see, in the future, holding or even transacting in a centralized currency issued by a government might be irrelevant, as every individual is given the power to chose what asset class they believe will increase over time, and can have their wallet set to those preferences. It can be as distributed as they want, for example one wants to have a very distributed wallet with 0.5% of their value distributed over 200 different assets, this would be theoretically possible.
This is why I believe that the tokenization of assets, and advancements of wallet technologies, may ultimately lead to the death of FIAT as we know it. We will always need a benchmark of value to transact, but I believe that this benchmark will become a digital currency, Bitcoin or not, as it can be global and immune to the decisions of a single party or government.
This article represents my future-looking ideas that would need an advancement of tokenization technology, wallet technology, and also a socio-economic-political shift in our world. Current blockchain solutions have scalability problems, and this idea of pre-programmed wallets require a solution to the scalability issues, since large amounts of assets would need to be sold and purchased instantly.
This may never happen, but it’s interesting to know that the technology exists to facilitate something like this.
I will be posting some more future-looking ideas such as governance of political entities, theoretical structures of globally-distributed collective societies, how region-specific problems may differ from one locale to another, and how culture integrates with localized blockchain solutions. If you enjoyed this article, stay tuned!