Expert interviews

Expert interviews

Don’t let tokenization of assets be a dumping ground

by Blocks99

11 months ago

On top of his role as a FinTech entrepreneur, Daniel Liebau teaches at several international universities. He shared his thoughts about how tokenization of assets will transform financial services.

Dan is the founder of Lightbulb Capital. He was involved in the very beginnings of electronic securities trading, working for a software company that built trading technology. He then occupied positions at UBS Investment Bank, Close Brothers, Barclays Capital and HSBC’s Global Banking & Markets business. About five years ago, he launched Lightbulb Capital, a corporate finance boutique with an innovation education arm, focusing on FinTech and blockchain. Dan is an affiliate faculty member at Singapore Management University, visiting professor at the IE Business School in Madrid and lecturer at the Rotterdam School of Management. He spoke with us in September 2019.

Blocks99

You have a fascinating background, as someone who sits at the intersection of technology and finance, entrepreneurship and academia. How did you get interested in blockchain technology and how do you see its impact on the financial services industry in general?

Daniel Liebau

I first got introduced to the blockchain by someone who had explored the space early on, David Lee, who is now a professor at SUSS in Singapore. Because I’m curious by nature, I couldn’t stop reading, experimenting and immersing myself in the ecosystem to learn about different aspects. This learning continues today. I see myself as a student and researcher of emerging technologies and their use in financial services rather than as an expert. That’s why I enjoy the PhD program at RSM in Rotterdam so much, I guess.

Blockchains reduce the cost of verification and networking, as Catalini and Gans detailed in their 2018 paper. Tokenization is the new base layer for business model innovation. Providing access to distributed payment, borrowing and investment services, for example, can enable financial inclusion. Exciting. Focusing on new business models, rather than just using new technology to reduce the cost-to-income ratio, is the way forward.

Blocks99

We have heard a lot about tokenization of assets. In what ways can tokenization of real-world assets transform the finance industry?

Daniel Liebau

Current thinking on tokenization seems to span a wide variety of different assets. I have seen projects successfully tokenize their startup equity, for example. I think there are exciting opportunities for listed equities, too. Other projects aim to tokenize real estate. There are now the first fixed-income securities being put on the blockchain. Some people even work on tokenization of assets like fine art – as in the Maecenas project – rare wine and whiskey or revenue streams from intellectual property rights.

In addition, we should not forget that so-called utility tokens are also tokenization of a ‘to-be-built’ service. Finally, bitcoin has the potential to be a new store of value and eventually tokenized new money. What all of these different initiatives share is the enablement of fractional ownership that was very complicated to implement before blockchain technology was available. Fractional ownership would enable us to make financial services more accessible and help with inclusion. There are other potential benefits, too. For example, the freeing up of capital thanks to immediate settlement – all the cash that is trapped for two to three days today could be put to use elsewhere. The list goes on, but I think we only have limited time today.

Blocks99

We believe that the benefits tokenization brings to different types of asset classes are not equal. So, in your opinion, which classes will benefit most from tokenization of assets? 

Daniel Liebau

In this context, it’s probably best to think about the different players involved in the process. I continue to believe that tokenized utility is one of the best use cases, as it enables individuals to access services they could hardly get to before. Again, I’m thinking about financial inclusion. I do like the tokenization of alternative assets like private equity funds or fine art, too. There is significant potential to support small-to-medium-sized enterprises. Tokenization of their debt or equity might enable them to access capital easier than today – this would be amazing. Real estate is also a compelling use case. For all of them, one thing holds: the assets to be tokenized have to be of high quality. Otherwise, tokenization platforms become a dumping ground for assets that are hard to sell by other means. Focus on high-quality assets is very important – we have seen what happens if we do not pay attention to quality in ICO land. So I would be all for supporting projects that ensure quality assurance or valuation services for tokenized assets.

Blocks99

What are the main challenges? What do we have to overcome for tokenization of assets to become mainstream? 

Daniel Liebau

I already mentioned that the quality of assets is an important topic. There is, for sure, a regulatory challenge in front of us. Most securities regulation today does not immediately allow anyone but accredited or professional investors to buy security tokens. So the number of buyers is constrained for investor protection reasons. During a recent podcast, I also briefly spoke about user experience. Unless storing and transferring digital assets can be handled by the average person on the street, I struggle to see how mass adoption can happen. So I continue to believe that intermediaries can play an important role. Also, in the case of company equity, most countries do not store the company registry on a blockchain. So linking the countrywide registry with records on the blockchain is crucial and not at all trivial. In general, the linking of the digital and real worlds is a big challenge. It is good that projects like Riddle & Code are working on this already. There is also the issue that one cannot sue anyone or call anyone if something goes wrong. I’d imagine many large firms do not feel comfortable with that idea.

Blocks99

Liquidity is considered a primary benefit of tokenization of assets. But ironically, liquidity is a challenge at the moment. How do you think we can solve the liquidity problem of tokenization and what needs to be done from the regulatory and commercial side to expedite this process?

Daniel Liebau

Excellent question. My biggest concern for security tokens today remains, “Who is going to buy them?” Many founders do not have a satisfactory answer to this. I think we would be misled if we believed that something that does not sell “on paper” would magically sell on the blockchain. So I come back to the quality of the asset. If it is an excellent asset, there will be interest. Rushing into a scenario where security tokens can be sold to retail investors swiftly would, in my humble opinion, only trigger another bubble. I hope we learn from mistakes. Thankfully, securities are regulated. Pump and dump, market manipulation, front running, etc. are all not only fraudulent, as in the ICO case, but also not allowed in most financial markets around the world.

Blocks99

Do you share the belief that all assets could be tokenized and put on the blockchain in the future?

Daniel Liebau

I’m not sure if absolutely everything needs to be on the blockchain. I do believe that blockchain is a technology very much akin to the Internet. So much more will be based on it than what we can conceive today.

Blocks99

What would the timeline be?

Daniel Liebau

I don’t have a crystal ball. But as guiding principles, I would suggest thinking about the following two statements: number one, people overestimate the impact of novel technology in the short term and underestimate the impact of innovative technology in the medium-to-long term. And number two, the pace of change in our world ahead is accelerating. Linear extrapolation doesn’t work. Most technology-related change is exponential today.

Blocks99

In a survey by the WEF, respondents estimated that by 2027, 10% of global GDP would be stored on the blockchain. What do you think about this? 

Daniel Liebau

I have not looked into this in detail and cannot comment on exact dates. But I would hope that in the future we can reap the benefits of blockchain-based assets on a global level.

Blocks99

What are you reading right now? Which topics are you teaching and researching? 

Daniel Liebau

Love the question. Every six months, my company releases a list of books that I have read and found interesting enough to give them some credit on LinkedIn. So I don’t want to spoil the next issue of the list. I recommend reading Yermack’s latest paper, titled “How Do Private Digital Currencies Affect Government Policy?”.

On the teaching side, I’ve got my introductory class on the blockchain, cryptocurrencies and digital assets. With Singapore Management University, we are now launching a course on how to implement blockchain in different industries. After all the blue-sky thinking, I think a focus on project execution is due. I am also glad that we’re launching a FinTech class at Rotterdam School of Management with the same emphasis: implementation.

When it comes to research, I cannot disclose too much, but what I can say is that 2020 will be an exhilarating year for me personally, as we will release some of the research work that is currently ongoing.

Blocks99

Thank you very much for your time, Dan. 

Daniel Liebau

It was a pleasure to chat with you today.

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