When the terms “token” and “tokenization” first started cropping up in the news, I had to look up what they meant. I’m glad I had that background when I saw that tokenization will be coming to an investment near you, probably next year.
Without getting too wonky on the topic, the SEC (the governing body of the investment industry) has given a go-ahead for tokenization of investments using blockchain technology.
Blockchain is a digital ledger that records transactions in a way that ensures the data is transparent and unchangeable. Each transaction forms a “block” linked to previous ones on multiple computers, forming a digital chain that can’t be changed once recorded. Maintaining the block chain on multiple computers in many locations prevents tampering with the blockchain.
Tokenization generally refers to the process of turning assets – such as bank deposits, stocks, bonds, funds and even real estate – into crypto assets and recording them on a blockchain. Crypto assets are different than crypto currencies, so don’t freak out. The term crypto comes from the encryption that occurs as any asset is recorded on a blockchain, not from Bitcoin or other crypto-currencies. Encryption protects your privacy as the blockchain technology protects your assets.
These blockchain-based assets, or “tokens,” can be held in crypto wallets and traded on the blockchain, just like cryptocurrencies have been for years. Crypto assets can also be left at the brokerage firms as I expect most will be.
Jamie Dimon, CEO of JP Morgan, the largest US bank, says his bank is moving into blockchain technology in a big way. He feels that blockchain technology is better, faster, safer, and cheaper than traditional methods. Dimon recently bragged that they moved tokens worth $17 Trillion in one day for institutional clients through their blockchain, often using “stablecoins” which are backed by cash and US Treasury Bills, so values don’t fluctuate. (Disclosure: Shadowridge clients using the Future Technologies investment model own shares of JP Morgan.)
The actual SEC action was to issue a “no Action Letter” saying that they will not stop the Depository Trust and Clearing Corporation (DTCC) from implementing blockchain accounting. DTCC is a clearing house for all securities transactions. All brokerage firms route their trades through DTCC so this will likely be used for your investments in the future. However, your investments are already held electronically, so this is just a more secure way to do that. I’m guessing your statements will look the same and you will never notice the change. It just means that the technology behind this incredibly complex industry is becoming a bit more efficient, and efficiency saves money.
Times, they are a-changin’.
