Why tokenization spells a new era for financial instruments

juin 3, 2019

Venture capital funds’ startup portfolios can be an exceptionally valuable asset if turned into a digital native form.


Tokenization can achieve exactly that – a transformation into a new digital form for an underlying real-life asset that offers a unique set of benefits for potential investors.


But what is tokenization and why is it a great way to take advantage of the full potential of a new class of digital assets – tokenized VC funds’ portfolios?


Tokenization basics

Tokenization, simply put, is the act of splitting valuable information and real-life or virtual assets, such as payment information, patient records, or, in our case, startup portfolios, into many virtual pieces and replacing them with so-called “tokens.” The tokens, a virtual representation of such information or assets, can be stored on the blockchain and potentially bought or sold.


Tokenization is different from the more traditional encryption, when information is turned into a jumble of numbers that are meaningless without a decryption key. Some argue tokenization is a much safer way of storing valuable information because if hackers get hold of tokens, they will be useless to them because no decryption key exists in tokenization.

Although relatively new, tokenization is gradually emerging as an innovative way of forming a new wave of digital financial instruments.


The value of these new tokenized assets is projected to reach $24 trillion by 2027, according to some estimates.


It is an opportunity that investors simply cannot afford to miss.


Tokenization use cases

Given the size of the opportunity, many are trying to tap into this multi-trillion-dollar market. There are several use cases of tokenization that have become popular across different industries over the years.


The most popular type of token is used for payments. Bitcoin and other cryptocurrencies fall under this category. Because tokens are stored on the blockchain, many have often equated Bitcoin and other payment tokens with blockchain. The distributed ledger technology is only a means of creating and storing cryptocurrencies but they are not the same thing.


Blockchain can, in fact, have many uses cases beyond the field of financial services. It can be used to store and maintain patient records, for insurance claims and in voting among so many other practical applications.


Another widely popular type of token is a utility token. Such tokens provide access to a product or a service and are often distributed following various token generation events (TGEs). They are a virtual voucher or coupon, different from the so-called security tokens.  The latter represent digital financial instruments backed by real-life or virtual financial assets, such as art or real estate. They are regulated like traditional securities because they are linked to underlying assets virtual parts of which are owned by the token holders. There is also a new type of token derived from tokenizing venture capital funds’ startup portfolios.


Utility tokens have been used in initial coin offerings, or ICOs while security tokens are distributed through the so-called security token offerings, STOs. The presence of an underlying asset is what mostly differentiates the two offerings. While many ICOs have become infamous due to their inherent volatility and fluctuation in digital currencies, STOs are paving the way towards a new financial future where financial instruments are backed by art, real estate, stocks or bonds. This means that STOs are not just a new way of raising capital but a securities offering often carried out on a platform similar to a traditional stock exchange. Think about ICOs and the Wild West of digital assets. Then STOs is what this environment becomes when the sheriff in the form of a regulator, such as the SEC and the CSSF, is in town. It is transparent and by the book with all the participants knowing at all times what is happening to their investments.


Solving a market problem: tokenized venture capital

Art and real estate are great investment opportunities that tokenization is opening up to an even broader pool of investors. But there are even better and more innovative types of alternative investments made available through tokenization – venture capital funds’ startup portfolios.


Today investing into emerging innovative private companies is limited to the select few who can write a multi-million-dollar check. Companies that could be the next Pinterest, Airbnb or Twitter will continue to innovate, grow and eventually become public. But this path is paved by VC funds’ substantial cash infusions that last for years, sometimes 10 or more.


This creates two problems: for outside investors this creates a nearly insurmountable barrier of entry and for VCs – a pressing issue of lack of liquidity after they tap into their finite coffers.


Tokenization of VC funds’ startup portfolios can solve both problems. On the one hand, when startup portfolios are split into many pieces, the barrier of entry drops significantly allowing a broader pool of institutional and retail investors to tap into this opportunity. On the other, VCs get access to the much needed liquidity when they sell parts of their tokenized portfolios on designated platforms such as VNX Exchange. This money could be then reinvested into more startups which fosters innovation and economic growth, as well as gives the newly minted entrepreneurs the freedom to explore their brave new ideas. They could disrupt technology as we know it today.


This concept lies on the forefront of new developments in alternative investments but despite its newness, it offers better safety and security than some traditional financial instruments. Tokens bought and sold on VNX Exchange are stored on the blockchain which offers immutability and safety of transactions, as well as a cost-efficient, fully compliant and transparent platform for all qualified investors.


These characteristics will drive mainstream adoption of blockchain in the financial world and beyond.


Tokenized venture capital may be an innovative way to make investments but it surely here to stay. With the $24 trillion market for tokenized assets and a global appetite for technologies funded by VC firms, tokenized venture capital is precisely the reason why tokenization was invented.