What Does it Mean to “Tokenize” Something, and Why Tokenization Might Save Us

Tokenization can be defined in many ways, but for purposes of this discussion I’ll define it as the process of making something liquid that previously was illiquid. Said another way, tokenization takes assets that are usually not very easily converted into cash and…makes them very easily convertible into cash.

Instantly.

Cheaply.

In a nutshell, tokenization creates liquid markets in assets for which no such markets previously existed and thereby makes those assets instantly tradable.

There are many, many benefits to tokenization. For one, it can potentially prevent a great many bankruptcies. It’s under-appreciated by many that most business bankruptcies occur not because the company’s liabilities exceed its assets but simply because it runs out of cash. Quick, easy and cheap tokenization of business assets can make running out of cash significantly less likely.

For instance, imagine if businesses could easily monetize their accounts receivable (AR) via tokenization. AR financing companies—those that will loan businesses money and take a collateral interest in its accounts receivable as security—already exist, but they are difficult to access and their fees are often extraordinarily high, especially for small businesses. One reason they can (and must) charge so much is simply because their cash may be tied up in the loan for a considerable length of time, time during which the business could be run into the ground (thereby costing them their entire investment).

But what if they could loan the business (lets call it Business A) money and receive in return a blockchain token representing both their loan to the business and their claim to the accounts receivable of that company? And what if they could then easily transfer all or fractions of that token (loan and security interest) to any other interested investors with the press of a few buttons on their computer. And what if active markets developed for these types of loan tokens, so that they were constantly being revalued by the markets in real time?

In that case, the lender would have confidence that they could offload the token to other investors should they ever want or need more liquidity (cash) themselves.

Let’s suppose that Business A uses the loan proceeds widely and has a massive recovery, with its profits and net worth soaring. Well, in that case the token would dramatically increase in value on the exchanges. The original lender could just continue to hold the loan until maturity, but it could also choose to cash it in at a significant premium (gain) by selling it to other investors. Why might it want to do so? Perhaps it thinks it could make even more money by cashing that token in and using the proceeds to fund a loan to another distressed borrower that it believes it can likewise save and thereby profit from.

Or, perhaps, Business A uses the loan proceeds poorly and its financial condition deteriorates further. The original lender would in that case at least have the option of selling the token at a significant discount (loss) to another investor who is willing to assume the risk. That’s not ideal, but at least the original lender could cut its losses rather than (as now) having to wait until the end of the loan term to see whether Business A survives and how much, if any, of its loan gets repaid.

It’s important to recognize that this ability to easily, quickly and cheaply convert illiquid assets, like accounts receivable, into liquid cash today makes those assets *more valuable* to their owners. Liquidity creates wealth! And it makes borrowing against those assets far, far less costly. When previously illiquid assets are made liquid, they both increase in value and serve as better collateral.

The key insight here is that it’s not just accounts receivable that can be tokenized. Rather nearly *any* previously illiquid asset is fair game! We’re talking about everything from your legal claims against third parties (e.g., plaintiffs can issue tokens to fund their lawsuits, giving buyers a portion of any winnings), equity in your home, art pieces (digital or otherwise), intellectual property rights (copyrights, patents, etc.), jewelry, diamonds, gaming assets (weapons, skins, character identities, etc.), insurance claims (e.g., many people in Puerto Rico are still waiting three years later for their Hurricane Maria claims to be paid!), tax refunds claims, etc.

The significance of mass tokenization cannot be overstated. It will happen, and in the process it will create and unleash insane amounts of wealth, even for the average Joe. The technology already exists and is everyday being refined. Some of it has already rolled out. Securities laws and other regulations will initially prove a hindrance to adoption, but they won’t stop the big boys from playing, and eventually they will either be updated to accommodate even the Average Joe or else the Average Joe will simply route around by them (as he presently does restrictions on online gaming).

The world sits on the precipice of an insolvency crisis as a result of unsustainable levels of debt combined with permanent societal shifts resulting from the pandemic. This new liquidity provided by mass tokenization may prove to be the salvation of many. The big question is…can adoption occur quickly enough to make a big difference for the economy as a whole?

With sufficient government aid for these project is (which governments will have little choice but to provide), it’s possible. However, given how imminent the crisis appears to be, I’m doubtful that it will. Even so, at a minimum, the liquidity made available by “tokenizing all the things” will fuel a post-crash renaissance unlike any the world has ever seen.

There’s great reason to be hopeful. Even highly optimistic. Stay awake. Pay attention. Learn. We got this.