Doomsday Predictions For Crypto Abound, But Tokenization Of Otherwise Illiquid Alternative Assets Via Blockchain May Just Be Starting
Could the FTX cryptocurrency exchange disaster – and without question, this is a gigantic, burning trainwreck of a corporate collapse – be the final nail in the crypto coffin?
At first blush, that certainly seems to be the sentiment across many segments of the wealth management space.
Financial advisors who were previously being pushed on offering cryptocurrency investment solutions by their clients, especially younger clients or younger members of client families, can supposedly now breathe a sigh of relief.
Gone are the burdens of diving deep on a complex new asset class. Crypto can be consigned to the dustbin of economic history, just another meaningless fad up there with tulip bulbs and beanie babies.
But financial advisors and wealth management firms who buy into that mistaken premise are missing the real opportunity that the FTX collapse and a massively accelerating crypto flight to quality presents: Fundamentally transforming the retail alternatives space and addressing most of the biggest headaches financial advisors face with retail alts.
Remember Dot-Bombs And Surplus Housing?
These days, it’s commonplace to hear many of the same pundits who were championing crypto as the asset of the future now decrying the entire asset class as an unsustainable bubble. And as is frequently the case, the blanket pessimists have it wrong.
For every critic of crypto today, you can find people who, in the first half of 2009, were saying the nation’s housing inventory surplus can only be solved if we begin to actively dismantle excess housing and bulldoze it to the ground.
If you go even further back in relatively recent history, you can find industry experts who will tell you, post the dotcom bubble bust in the spring of 2000, that the internet was “just a fad.”
Flight To Quality – And Alts
Comments about whether Sam Bankman-Fried, formerly of FTX fame, is actually a sociopathic narcissist can be entertaining, but also distract from the big picture.
The reality is that shakeouts in asset classes can be a very good thing, however painful it can feel in the moment.
Why? Because shakeouts drive a flight to quality, and the more intense the shakeout, the greater the urgency of that flight. Time, energy and investment that previously were diffused across too many targets become much more focused and disciplined.
And this is what is happening with crypto, hastened on an accelerated basis by developments such as the FTX collapse. Yes, there are going to be many forms of crypto that are permanently dead. And that is almost certainly a positive thing over the long run.
But crypto that is based on the digital tokenization of tangible assets with significant intrinsic value presents the opportunity to fundamentally transform the retail alts space.
Driving New Liquidity Events For Locked Up Dollars
First, consider the fact that there are hundreds of billions of retail investor dollars that are locked into illiquid alternative investment projects across the country that have never gone “full cycle.”
From commercial and residential real estate, to leveraged loans from middle market companies collateralized with tangible assets, to limited partnerships in energy generation plants, the examples are myriad, but the broad-brush strokes are the same.
Alternative asset product sponsors succeeded in raising capital for these projects through wealth management firms and their financial advisors among retail investors. The projects generated quarterly distribution checks for the shareholders, but for various reasons were never able to achieve a liquidity event in the form of a sale.
In the best-case scenario, financial advisors are left with clients who feel they were aligned with an investment that didn’t quite work out, a natural drag on the relationship. And the worst-case scenario? Legal and regulatory actions that cost money and tarnish reputations.
Game Changer For Traditional Alternative Assets
Here’s how digital tokenization can be a game changer: First, the manager of an illiquid alternative asset that has never gone full cycle creates fully compliant blockchain tokens of the asset.
From there, the asset is distributed to investors via wealth management firms and their financial advisors. This results in unfettered access for investors to an asset class previously available only to institutions or original investors in the product.
Next, investors hold the tokens in a digital wallet and are free to trade the tokens after a holding period of 12 months on a digital assets exchange, which unlocks the full value of the investment for the investor.
Put more simply, an illiquid, alternative asset project that may never reach a traditional full cycle liquidity event can leverage digital tokenization to provide liquidity to investors through intelligent, compliant application of blockchain technology.
The Shape Of Things To Come
Is crypto dead? Based on the overhang of illiquid alt projects that have failed to go full cycle – and are backed by tangible assets – the answer is that the rise of crypto may have just begun.
Indeed, if we disentangle all the doomsday-mongering from what’s actually happening in the market, the shape of things to come with crypto could be transformative over the long term for retail alts and wealth management.
Reema Tandon is Co-Founder and COO of Yoonify, a blockchain wealthtech company focused on digital tokenization of alternative assets to drive new liquidity events