Alternative
assets
such
as
natural
resources,
art
and
private
equity
have
become
popular
investments
because
of
their
potential
for
higher
returns
and
lower
volatility
than
traditional
assets.
However,
the
benefits
of
alternative
asset
classes
like
these
also
come
with
a
number
of
limitations,
including
high
minimum
investment
requirements,
liquidity
constraints
and
a
lack
of
transparency.
Tokenization,
the
process
of
converting
traditional
assets
into
digital
tokens
through
blockchain
technology,
may
overcome
some
of
these
limitations,
and
its
success
could
transform
the
alternatives
sector.
Cristiano
Ventricelli
is
vice
president
–
digital
economy
at
Moody’s
Ratings
Note:
The
views
expressed
in
this
column
are
those
of
the
author
and
do
not
necessarily
reflect
those
of
CoinDesk,
Inc.
or
its
owners
and
affiliates.
Blockchain’s
transparent
and
immutable
ledger
allows
token
holders
to
access
real-time
information
about
their
investments,
fostering
greater
transparency
in
traditionally
opaque
markets.
This
visibility
is
a
game-changer
for
monitoring
cash
flows
and
performance
of
credit
portfolios,
although
tokenization
does
not
alter
the
underlying
characteristics
of
the
instruments.
Whether
on-chain
or
off-chain,
assets’
underlying
risks,
and
the
importance
of
due
diligence,
remain
the
same.
One
of
the
most
promising
aspects
of
tokenization
is
its
potential
to
broaden
access
to
high-value
alternative
investments.
By
fractionalizing
ownership,
tokenization
lowers
the
barriers
to
entry,
enabling
a
wider
range
of
investors
to
participate
in
opportunities
previously
limited
to
institutional
and
ultra-high-net-worth
investors.
By
making
once-illiquid
assets
more
tradable
and
therefore
more
liquid,
tokenization
could
reshape
market
dynamics,
creating
secondary
markets
powered
by
blockchain.
Cost
reduction
is
another
significant
advantage.
Tokenization
can
streamline
issuance,
reducing
costs
for
both
investors
and
asset
managers.
The
efficiencies
gained
may
translate
into
higher
returns
for
investors
as
asset
managers
pass
on
some
of
the
potential
savings.
For
distributors,
reduced
administrative
burdens
and
overhead
would
allow
them
to
focus
on
deepening
client
relationships
and
innovating
new
products.
The
integration
of
artificial
intelligence
in
financial
operations
may
further
amplify
these
benefits,
enhancing
efficiency
and
accuracy.
Transparency
in
private
markets
can
be
improved
by
tokenization,
but
only
to
a
certain
extent.
While
blockchain
technology
enhances
visibility,
total
transparency
is
unlikely.
Because
private
market
asset
managers
have
more
information
about
their
investments
than
is
available
publicly,
they
can
use
this
information
asymmetry
to
take
advantage
of
market
opportunities
and
earn
higher
yields.
This
inherent
characteristic
of
private
markets
will
likely
persist,
even
with
the
advancements
brought
by
tokenization.
Tokenized
alternative
assets
are
already
being
actively
traded.
Traditional
financial
institutions
have
begun
offering
tokenized
versions
of
private
equity
and
private
credit
investments
through
feeder
funds
on
private
and
public
blockchains.
These
tokenized
funds
come
with
significantly
lower
minimum
investment
thresholds
than
their
traditional
counterparts,
opening
new
avenues
for
a
broader
set
of
investors.
See
also:
Why
Asset
Tokenization
Is
Inevitable
|
Opinion
In
decentralized
finance
(DeFi),
platforms
are
using
smart
contracts
to
facilitate
private
credit
transactions,
highlighting
the
growing
intersection
between
blockchain
technology
and
alternative
investments.
However,
investing
in
tokenized
private
assets
introduces
novel
risks.
Regulatory
and
legal
uncertainties
remain
significant
barriers,
with
many
aspects
of
tokenization
still
in
a
legal
gray
area.
Investors
must
navigate
these
uncertainties,
and
the
yields
on
tokenized
transactions
will
likely
be
higher
than
those
in
traditional
markets
to
compensate
for
the
additional
risks.
Technical
challenges
also
persist,
particularly
the
need
for
seamless
integration
between
on-chain
and
off-chain
operations.
The
absence
of
a
reliable
digital
cash
option
and
interoperability
issues
among
various
blockchain
platforms
further
impede
the
development
of
a
robust
secondary
market.
Regulatory
clarity,
technological
advancements,
and
industrywide
cooperation
are
key
to
navigating
these
hurdles.
If
these
problems
are
addressed,
tokenization
has
the
potential
to
bring
accessibility,
transparency
and
efficiency
to
alternative
asset
markets,
unlocking
value
for
a
broader
range
of
investors.
