Blockchain 2019: How crypto will convert cash, property into digital assets

While they're still nascent, new start-ups are launching that allow users to convert cash, property and digital assets into cryptocurrency that can be tracked and kept in a blockchain immutable record. But there are also some tall road blocks.

In 2019, the most innovative work involving distributed ledger technology (DLT) – blockchain – will focus on the tokenization of assets, or the ability to represent digital or physical assets and fiat currencies as tokens that can be sold or traded on a network.

DLT has the ability to take anything, from a piece of artwork to gems and real estate, and represent them as cryptographically hashed assets on a peer-to-peer, open electronic network that has no central authority, such as a bank, governing their trade or sale.

The cryptocurrency market capitalization is estimated to be $211 billion, according to a new report from auditing and business services firm KPMG.

Cryptocurrencies have gained significant attention for their ability to solve problems in the global financial system, such as feeless cross-border payments, and it has diversified to include different types of assets such as stablecoin. (Stablecoin, KPMG said, is any cryptocurrency that’s backed by a stable asset, such a gold or traditional fiat currencies.)

KPMG crypto predictions KPMG

KPMG pointed to a wave of start-ups and established financial services firms, such as Fidelity Investments, launching various crypto products and services for the emerging tokenized economy. The firm suggested a that economy will likely be one of the more significant innovations enabled by cryptoassets like bitcoin, Litecoin and Ether.

“Cryptoassets may change the financial services landscape significantly with the emergence of the tokenized economy,” KPGM argued. “While it is still early stages and it is hard to predict how the next 10 years will play out, the tokenized economy will likely be one of the more impactful innovations enabled by crypto.”

Representing digital or physical assets as tokens on a DLT-based network enables  participants to reinvent processes and develop new business models – uncharted territory from both a business and technology perspective, according to a new report from Forrester Research.

Forrester's 2019 predictions for CIOs placed blockchain among other emerging technologies, such as artificial intelligence (AI) and augmented reality (AR), that will only be embraced by enterprises if they solve real-world problems. Otherwise, vendor hype could spark a backlash that hurts overall adoption.

While best known as the foundational technology behind bitcoin and other cryptocurrencies, blockchain is essentially a database built on a distributed, peer-to-peer topology where data can be stored globally on thousands of servers – and anyone on the network can see everyone else's entries in real-time. Therefore, it's virtually impossible for one entity to gain control of or game the network because other users would become immediately aware of the attempt.

Despite continued claims to the contrary, DLT hasn't yet had a revolutionary impact on any industry or process, according to Forrester, which argues the blockchain industry should take a realistic approach to marketing its capabilities and be upfront about the challenges in deploying it.

For example, blockchain is a team sport; if you don't have players other than yourself, it doesn't work, according to Martha Bennett, a Forrester principal analyst and lead author of the report. (Forrester prefers the term DLT over blockchain because it believes it's a more "neutral and accurate," description.)

Bennett, who takes a conservative view of DLT, sees blockchain today as analogous to the internet in the early 1990s when people recognized its potential but could not  predict the businesses it would spawn, such as Facebook, Instagram or WattsApp. Tech pundits might have envisioned an Amazon in the early days of the internet, but they had no idea how it would dominate the online sales marketplace, she said.

"The technology is still emerging and early stage, but there's a tremendous amount of innovation in the ecosystem," Bennett said.

Digitizing cars, real estate – and even artwork?

Already gaining momentum are new ownership and service models being created by tokenization – the digitizing of assets that can be sold or traded on DLT.

For example, blockchains that tokenize real estate are fast emerging; they allow  traditional investors and consumers to buy shares of a property and receive a return on rents or mortgages. The money paid for the shares allows property owners to make additional investments.

Polymath, Securitize and Harbor are among the industry's leading blockchain networks that enable assets – such as commercial buildings – to be tokenized and turned into tradable securities.

One start-up, Jointer.io is focused exclusively on real estate tokenization, but unlike other services, it doesn't offer one property as shares that can be purchased. It offers a number of buildings in an index, and participants can buy tokens from that index. The result is less risk and more profit, according to Jude Regev, founder and CEO of Jointer.

property owner blockchain jointer Jointer.io

Jointer's webpage enabling property owners to digitize their real estate holdings.

The problem with buying shares of a single property, Regev argued, is you have to trust the owner's word that he or she has the equity they claim. For example, if a building owner owes a mortgage lender 80% of the value of the property, the actual equity an investor owns is far smaller than the total value of the building. Investors might also not know whether a property has a lien on it or some other financial obligation.

"And, how are you going to force an owner to pay a dividend every time they take a distribution for themselves? The [digital token] is not really linked to the bank account collecting the rent," Regev said. "You need to trust the owner to transfer the money from the bank account into some reserve controlled by smart contracts."

Jointer real estate blockchain Jointer.io

Jointer.io's property index

"People scam other people," he continued. "It's just a matter of time before somebody is going to scam someone using security tokens. Someone is going to sell a property that doesn't exist or maybe is vacant..., or sell the same equity in a property twice. At some point, the [Securities and Exchange Commission] will jump in."

So instead of offering a single building, Jointer is creating indices from groups of properties – apartment building collectives or commercial real estate holdings. Investors can then choose indices based on regions, such as New York or San Francisco or Houston.

"The idea is you're no longer tied to a specific property, so you don't care if the property is above the market [value] or below it, if the owner is selling all the equity or doesn't have any equity.... You go by the index of the similar properties," Regev said. "All the properties – the income strength of them – which is managed by institutional interests, will be moved to a main reserve controlled by smart contracts."

The shares of those properties – represented by coins – can then be used by participants as securities for attaining loans or simply as a financial asset on which they receive a return. Large investors, for example, get a return on 90% of the asset, with the other 10% going to Jointer, Regev said. Smaller investors receive returns based on smaller portions of the asset.

Property owners – the ones placing their real estate equity in the pool – get the service for free. For the public, Jointer offers to lend funds to real estate blockchain projects while the return is based on multi-family building indexes.

Turning cold cash into digital tokens

Another example of an emerging market is the tokenization of fiat currencies, or traditional forms of money represented by digital tokens such as bitcoin, Litecoin or Ethereum's Ether.

Coinbase, CEX.IOChallengy and CoinMama are among the leaders in the digital currency exchange marketplace.

Digital wallets, or accounts that allow participants to purchase tokens with real money, are fast emerging as a new market that removes the middleman – a central bank or other governing authority – from the transfer of funds between participants and beyond geographic borders.

Four years ago, Overstock.com created Medici Ventures, a venture capital arm for DLT investments. The Salt Lake City-based subsidiary focuses its investments on six key emerging areas of blockchain technology adoption: capital markets; identity management; property; voting; underlying technologies, and money and banking.

One of the companies in which Medici owns a 35% share is Bitsy.com, which just launched a full-fledged beta of an app aimed at making digital currency exchange easier for consumers – and therefor easier to use to buy with bitcoin on Overstock.com. The app allows consumers to use the new crypto-wallet service.

"We felt like none of the other [digital exchanges] were good," said Jonathan Johnson, president of Medici Ventures. "When Bitsy came to us with their business plan, we said, 'Wait a second, this is the answer to that question.' This is the easiest on-ramp and off-ramp to crypto."

bitsy blockchain Bitsy

Bitsy's smartphone user interface.

The main advantage of Bitsy's exchange is users own both the public and private hash keys that enable the sale of digital tokens.

"With conventional bitcoin wallets, users do not have actual possession or control of the bitcoins they buy: their wallet-provider owns the Bitcoin and provides a contractual claim to the consumer, who must then trust that corporation. This defeats the whole purpose of crypto," said Patrick Byrne, Overstock.com founder and CEO. "Bitsy wallets, on the other hand, allow users to possess and have complete control of their cryptocurrency without the risk of lost keys. This sets a new standard for digital wallets."

Over the past year, purchases made on Overstock.com using bitcoin have doubled to about 0.2%, Johnson said. While that's still a small percentage of overall sales, it is steadily growing.

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