One of the biggest challenges for emerging markets is volatility. Due to the political and economic instability, the dependence on a limited number of industries and the limited market accessibility, these problems are exacerbated by poor or non-existent regulatory frameworks. While many of these elements don’t seem to be changing as quickly, there are financial and technological implementations that can be put in place to ensure stability. Tokenization, a relatively novel blockchain-based ratification of cryptographic assets, could be the means by which this vision can become a reality.
What is missing in emerging markets: participation and liquidity
More wealth movement is essential to a mature and successful market. In other words, markets require liquidity, some of which is derived from participation. If not enough people attend, there is little chance that a security will be liquid. As a result, the market remains more stagnant, investors see heightened risk and economies become dependent on a few strong industries to compensate, while domestic and foreign players cannot generate wealth from within using other market means. Finally, Greater participation would lead to greater liquidity, but politico-economic systems can hinder progress.
Many, but not all, emerging economies also operate under political conditions that make financial participation difficult, with parts of the population unable to remotely access a bank or investment account, which limits social mobility and liquidity and the prosperity gap increases.
In some oligarchies, which make up a significant portion of the emerging economies, lack of access to finance can serve a purpose to constrain political progress and perpetuate political repression.
In other cases, socio-economic mobility is not technically restricted, but domestic problems limit opportunities for the impoverished in one way or another. However, blockchain technology has sparked the potential for a real financial revolution with more participation and potential opportunities.
Blockchain: the democratizer of finance
The underlying concept for blockchain development is based on a familiar system and feeling that people in emerging countries face: centralized power and little to do. The idea was to withdraw centralized power from the few rich on Wall Street whose own whims had an impact on the global marketplace.
Instead of running markets through old financial institutions, blockchain would run them through people, eliminating the middleman and empowering individual people. Ultimately, empowering people with blockchain-based finance should theoretically lead to better accessibility and then greater participation, especially for non-banks or financially troubled people.
Although the underlying blockchain technology has the ability to decentralize finances, they are known as digital capsules “Token” the ones who are the real culprits in increasing market share. In practice, tokens can represent any type of tradable asset, be it digital or tangible. In a 2018 report Deloitte has firmly expressed its confidence in the true potential of tokenization:
“Asset tokenization threatens to transform many industries, especially the financial sector, and those who are not prepared are at risk of being left behind. […] We believe that tokenization could make the financial industry more accessible, cheaper, faster and easier, and potentially unlock trillions of euros in currently illiquid assets and significantly increase the volume of transactions. “
These ideas have manifested themselves in a wide variety of different applications, from securities to assets as unique as works of art that have benefited from the unique opportunities offered by tokenization.
Building the foundation for the commitment to tokenization
Combined with profitable blockchain technology, tokenization offers a whole new kind of flexibility that is lacking in the traditional financial ecosystem. As a result, assets have been transferred from traditional financial instruments such as securities to unique physical items such as works of art.
Many emerging markets cannot afford to invest in standard investments due to the high costs. However, because tokens are divisible, their wealth can be divided among a group of people, allowing investors with lower investments to enter the field.
Instead of one person buying a property, a normally illiquid asset priced at $ 500,000, a very large group of retail investors could collectively buy the house as an asset through tokenization. Every investor can exchange their tokens easily and without legal problems. This means that not only may retail investors be excluded beforehand due to the high cost of assets exposed to the market, but liquidity would also increase dramatically. This could also lead to more opportunities for SMEs in emerging markets that have difficulty finding investment through traditional routes.
In addition, the flexibility effect would be amplified by the lack of older intermediaries in a trustworthy blockchain system, which would lead to lower operating costs that would fall on the investor. The lack of trust in the system would also extend to the issue of regulations, where strict guidelines or the lack of them could be overcome by smart contracts that execute transactions based on real information without human intervention.
The views, thoughts, and opinions expressed herein belong solely to the author 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 developing commercial real estate, EB-5 equity investments and blockchain-based investments. The fund was previously established and currently serves as an executive member of the American Economic Growth Fund, an EB-5 investment platform focused on raising foreign capital for US-based real estate projects. It owns two regional centers, homes to more than 100 investors and sponsors totaling more than $ 1.2 billion.