Tokenisation as a method of dividing up assets, such as trade receivables, for financing by multiple sources has evolved significantly over the years. This innovative financial practice has its roots in traditional finance, but it has been greatly enhanced by advancements in blockchain technology and digital assets. Here is a historical overview of the development of tokenization:
Early Financial Instruments (Pre-Blockchain Era):
The concept of dividing up assets for financing is not new and can be traced back to the creation of various financial instruments such as bonds, stocks, and derivatives.
Traditional financial markets relied on centralized intermediaries like banks and stock exchanges to facilitate the trading and financing of these assets.
According to Wikipedia the value of the world’s market capitalisation to percentage of GDP has grown from 27.2% in 1975 to 134.7% in 2020.
Emergence of Securitisation (20th Century):
In the 20th century, securitisation became a popular method for dividing up assets, particularly loans and mortgages. According to the Securities Industry and Financial Markets Association (SIFMA), the U.S. mortgage-backed securities market up to August 2023 had an issuance value of $625.5 billion .
Securitisation involves bundling loans together and then issuing securities backed by those loans. These securities could then be traded in the secondary market.
However, securities are not without risk: securitization of subprime mortgages in the USA played a significant role in the 2007/2008 financial crisis. These mortgage-backed securities, divided into complex tranches, led to massive defaults and losses. This crisis demonstrated how tokenisation, when not properly regulated and supervised, can lead to systemic risks and financial instability.
Digitalization of Financial Assets (Late 20th Century):
The advent of electronic trading platforms and the digitization of financial assets made it easier to trade and finance various assets, including trade receivables.
However, these processes still relied on traditional centralized intermediaries.
Blockchain Technology (2000s):
The development of blockchain technology, notably the emergence of Bitcoin in 2009, introduced the concept of decentralized and trustless ledgers.
Blockchain technology provided the foundation for tokenization by enabling the creation of unique digital tokens to represent ownership or rights to real-world assets.
Initial Coin Offerings (ICOs) and Tokenisation (2010s):
In the early 2010s, ICOs gained popularity as a way to raise funds by issuing tokens on blockchain networks. These tokens represented various assets, from cryptocurrencies to utility tokens.
Tokenisation started expanding beyond cryptocurrencies, and the idea of representing physical assets like real estate and trade receivables in tokenized form gained traction.
ICO Frauds and Scams (2017-2018):
The ICO boom of 2017 also saw numerous fraudulent token offerings. According to a report by Satis Group, 81% of ICOs conducted in 2017 were identified as scams.
ICO scams highlighted the importance of regulatory oversight and due diligence in tokenisation.
Regulatory Challenges (2010s-Present):
As tokenisation became more mainstream, regulatory bodies worldwide began addressing the legal and regulatory frameworks for tokenized assets.
Various countries introduced regulations to govern tokenized securities and assets, aiming to provide investor protection and ensure compliance with existing financial laws. Such regulations include MiCA in the EU and The Financial Services and Market Act 2023 in the UK.
Decentralized Finance (DeFi) (2010s-Present):
The DeFi movement, which gained momentum in the mid-2010s, leverages blockchain technology to create decentralized financial systems.
DeFi platforms enable users to tokenize and trade various assets, including trade receivables, without the need for traditional intermediaries like banks.
Tokenisation Ecosystem (Present):
Today, there is a growing ecosystem of platforms and technologies dedicated to tokenisation, making it easier to divide and finance assets.
Tokenisation is being applied across a wide range of industries, including real estate, supply chain and art, in addition to traditional financial assets.
Future Developments (Future):
The future of tokenisation is likely to see further integration with emerging technologies such as artificial intelligence and the Internet of Things (IoT).
As regulatory clarity improves and the technology matures, tokenisation is expected to play an increasingly significant role in the global financial landscape.
In conclusion
The history of tokenization as a financing method reveals both its promise and perils. While it offers efficiency and accessibility, the 2007/2008 financial crisis and ICO scams serve as stark reminders of the importance of regulation, transparency, and responsible adoption in the world of tokenized assets. As the technology matures and regulatory frameworks solidify, tokenization is poised to play a pivotal role in the future of finance.
