One of the biggest challenges emerging markets face is volatility. Fueled by political and economic instability, dependency on a limited number of industries, and constraints on market accessibility, these matters are exacerbated by a bad or nonexistent regulatory framework. While it doesn’t appear that many of these elements will change anytime soon, there are financial and technological implementations that can be introduced to provide stability. Tokenization — a relatively novel, blockchain-based, cryptographic ratification of assets — can be the vehicle that empowers this vision to be realized.
What emerging markets are missing: Participation and liquidity
Essential to a successful, mature market is more movement of assets. In other words, markets need liquidity, which is partly derived from participation. If not enough people are participating, the odds are low that a security will be liquid. As a result, the market remains more stagnant, investors see higher risk, and economies then become dependent on a few strong industries to compensate, while both foreign and domestic actors are unable to generate wealth from within by other market means. In the end, more participation would lead to higher liquidity, but political-economic systems can impede progress.
Many emerging markets, although not all, also operate under political regimes that hinder financial participation, with swaths of the population unable to access a bank or an investing account remotely, limiting social mobility and liquidity as well as increasing the wealth gap.
In some oligarchies, which comprise a sizable portion of emerging markets, the lack of accessibility to finance can be purposeful, with the intent to limit political advancement and maintain political oppression.
In other cases, socioeconomic mobility is not technically restrained, but domestic issues limit opportunities for the more impoverished in one way or another. Blockchain technology has spurred the potential for a real financial revolution, though, with more potential participation and opportunity.
Blockchain: The democratizer for finance
The underlying concept for blockchain’s development stems from a familiar system and feeling that people in emerging markets face: centralized power and not much to do about it. The idea was to take the centralized power out of the hands of the wealthy Wall Street few, whose own whims had global market implications.
Rather than route the markets through legacy financial institutions, blockchain would route them through the people, thereby cutting out the intermediary and empowering individual people. Ultimately, empowering the people with blockchain-based finance should, theoretically, lead to more accessibility and, subsequently, participation, especially for the unbanked or financially strained.
Although the underlying blockchain technology has the power to decentralize finance, it is the digital capsules that run on it called “tokens” that are the real culprit in boosting market participation. Practically speaking, tokens can represent any sort of tradable asset, whether digital or tangible. In a 2018 report, Deloitte strongly voiced its confidence in the true potential of tokenization:
“The act of tokenizing assets threatens to disrupt many industries, in particular the financial industry, and those who are not prepared risk being left behind. […] We foresee that tokenization could make the financial industry more accessible, cheaper, faster and easier, thereby possibly unlocking trillions of euros in currently illiquid assets, and vastly increasing the volumes of trades.”
These ideas have manifested into a variety of different applications, from securities to assets as unique as art pieces, that have benefitted from the unique capacities of tokenization.
Building the foundations for participation with tokenization
Combined with cost-effective blockchain technology, tokenization offers a whole new type of flexibility that is sorely lacking in the traditional mainstream financial ecosystem. As a result, assets from traditional financial instruments like securities to unique physical items like art pieces have been tokenized.
Many in emerging-market nations are unable to afford to invest in standard assets because of the high cost. But because tokens are divisible, their assets become shareable among a group of people, allowing investors to get in on the ground with lower investments.
Rather than one person buying a property — a typically illiquid asset with a $500,000 price tag — a very large group of retail investors could collectively purchase the home as an asset via tokenization. Each investor would be free to trade their tokens easily without legal issue. What this means is that not only can retail investors previously shut out due to the high cost of assets be exposed to the market, but liquidity would also be dramatically boosted. This could translate into more fundraising opportunities, too, for small and medium businesses within emerging markets that are struggling to find investment through traditional avenues.
Moreover, the flexibility effect would be amplified by the absence of legacy intermediaries on a trustless blockchain system, which would, therefore, result in cheaper operational costs that trickle down to the investor. The system trustlessness would extend to the issue of regulations as well, where stringent — or an absence of — policies could be overcome via smart contracts that execute transactions based on real-world information, without human interference.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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 acts as a managing member of, the American Economic Growth Fund, an EB-5 investment platform focused on sourcing overseas capital for U.S.-based real estate projects. To date, the fund owns two regional centers, hosts over 100 investors and sponsors over $1.2 billion in total project cost.