In a recent publication, industry expert Jesus Rodriguez described his views on the implementation of security tokens. An asset class which he believes can propel the emerging security token industry is tokenized debt— and with plenty of good reasons.
Tokenized Debt as an Initial Implementation of Security Tokens
Jesus Rodriquez is well known in the emerging security token industry, likely due to his background in finance, Distributed Ledger Technology (DLT), and Artificial Intelligence.
Most recently, he wrote about the one aspect that he believes is a great fit to pioneer such a transition: tokenized debt.
“Whereas the pragmatist in me recognizes that we are still years away from having an infrastructure that allow us to re-imagine digital securities, there are immediate use cases that can catalyze the movement. From those use cases, I believe tokenized debt or cash flow offers a unique plethora of possibilities to unlock the potential of security tokens.”
Currently, security tokens entail ownerships claims concerning REITs, equity, investment funds, and other assets which are considered financial securities.
Especially when compared to equity, which he says “the current generation of security tokens has centered around”, debt securities is an asset class which brings the security token industry to mainstream investors. Here’s how.
The Benefits of Tokenized Debt Explained
Rodriguez says there are numerous benefits when it comes to tokenized debt:
Regular Dividends: Tokenized debt features the payment of dividends on a regular basis. Such a feature is very attractive to investors, since the receipt of dividends requires no active trading.
Market Size: In public markets, bond and debt security entail $100 trillion, and have a daily trading volume of $100 billion. As Rodriguez points out, these numbers easily exceed the global stock markets.
Universality: Debt is ultimately a universal concept where most countries operate comparable representations of debt, which could lead to global debt vehicles.
Composability: Debt can be easily composed. Real estate leases can easily become a security token that represents a collateralized debt obligation (CDO). The on-chain representation of such assets also contributes to added transparency.
Fractionalization: The ability to fractionalize debt vehicles opens the asset class to a brand new— and larger— category of investors.
OTC Trading: Most debt vehicles across the globe are traded in an over the counter (OTC) manner. Blockchain-based security tokens can digitize and streamline the existing processes.
Futures: Debt could be the perfect vehicle to bring futures and derivatives into security tokens. Debt features a fairly trivial model when compared to the typical futures models. It’s also easily understood by most investors.
Some of this benefits were illustrated by Rodriguez through the following matrix.
The real question, says Rodriguez, is figuring out how to implement tokenized debt. There are currently no native protocols when it comes to debt securities.
That’s why he says a debt security protocol could integrate numerous protocols which abstract the many different dynamics of tokenized debt. His initial proposal can be seen in the diagram below.
What do you think of Rodriguez’s proposal concerning the use case of tokenized debt? Will this become a vehicle to implement the tokenization of securities? Let us know what you think in the comments below.
Meet Tim. Tim is a co-founder of The Tokenist. Originally from Kalamazoo, Michigan, Tim is a mechanical engineer by training and has been investing his whole life. He started his career with GE in engineering and operations management where he held various leadership roles before leaving to pursue an MBA (he is a proud former co-chair of the Milton Friedman Group at Chicago Booth). After business school, Tim spent several years with Baird Capital where he made private equity investments in consumer and industrial companies. He left Baird to found Protective Technologies Capital in 2018, where he continues to make private equity investments in family businesses looking for help with succession planning. Tim lives in Chicago, where he enjoys watching Michigan football and basketball and traveling with his wife Kristen. Like Sia, he also likes telling jokes. However, his wife adamantly insists that he not share his “dad jokes” publicly so he reluctantly sticks to writing about finance and technology.