While the range of potential uses for blockchains is dizzying, ICOs are without a doubt the highest profile example of the last year. Even if this were the only possible use for the technology, it would cause an unprecedented disruptive effect on financial markets.
ICOs are, however, an expression of an even bigger underlying trend — that of tokenization. While ICOs are a new form of organization for projects seeking to build on top of public blockchains, tokenization promises to bring the ownership of just about anything you can imagine onto blockchains as tradeable assets.
Swarm Fund Setting Out to Tokenize the World
Swarm Fund launched an ICO last year on the premise of tapping into this huge potential market.
Investors can use cryptocurrency via the Swarm investment platform to purchase shares in assets as diverse as farmland, silicon valley startups, or foreclosure properties. This provides an avenue for cryptocurrency investors to access real-world investments without the frightening prospect of having to deal directly with traditional financial institutions and regulators.
Swarm’s stated goal is to “double the private equity industry from $2.5 trillion to $5 trillion in the next five years.” They are now taking a major step towards realizing this goal with the launch of a token representing ownership in investment platform Robinhood.
Robinhood has to date received over $176 million in venture capital, giving the company a current valuation of over $5 billion. Swarm’s token will open ownership in Robinhood to a wide new range of potential investors.
Syndicate managers in the Swarm network reach out to former employees, brokers, and sometimes directly with companies to purchase equity in private companies. This opportunity is then tokenized and passed on to a broad base of investors via Swarm. Robinhood is one of the first companies to be selected for this process, and this could herald the beginning of a major shift in the structure of financial markets.
Wall Street Going the Way of the Post Office
Robinhood is probably on track to have a fairly large IPO — this has been the trajectory of many tech startups that have gained similar traction.
IPOs are highly anticipated events on Wall Street, because opening up trading of a company to the general public often results in a surge of interest and an increased flow of of money into a company. Regardless of whether the public perception is positive or negative, opportunities for traders to profit abound.
In a way, Swarm is rendering IPOs (and maybe Wall Street itself) obsolete. The general public no longer has to wait for regulators to approve an IPO — Swarm does all of the footwork and opens up ownership to those who would otherwise not have it.
One of the most fascinating aspects of this phenomena is that it is happening entirely without Robinhood’s permission. This may mean that the days of a company being able to choose when it goes public are over, and it is one of the most concrete examples of how the decentralizing influence of blockchain is extending out of the sphere of cryptocurrencies and into the “real” world.
The potential here is clear. A survey found that 83% of corporate CFOs estimated that going public would cost a company more than $1 million. This whole process is massively streamlined by the use of the blockchain, and the benefit is distributed both to investors and companies seeking to raise funds.
In theory, Robinhood could sell equity directly to investors via Swarm if they chose.
The Case for Self-Regulation
A lot of the value provided by Swarm is gained by side-stepping cumbersome regulations. For example, publicly-traded companies are required by law to implement more rigorous financial reporting mechanisms which can require internal restructuring and new staff.
Of course, these expensive requirements are intended to protect consumers — for example, to mitigate the risk of misreporting earnings to manipulate share price.
However, as the saying goes, with great power comes great responsibility. The great thing about this development is that it could mean that being babysat by governments will become a choice for those who want that kind of protection, rather than a requirement imposed on everyone, whether they like it or not.
Swarm is far from a rebel, however. Regulatory compliance has been front and center in their business model from the beginning. This is one of the reasons that the Robinhood equity tokens Swarm is issuing will only be available to accredited investors, although there are plans in the works to make them available to retail investors.
One of the challenges with the tokenization model is gaining the trust of users.
Asset-backed tokens are only worth the legal agreements that tie them to the underlying assets. Swarm’s approach looks to be pretty well thought-out, as they have formed entities in at least seven different jurisdictions to leverage the various legal advantages available in different countries.
The importance of establishing this ownership is why the reputation of firms dealing with asset tokenization is especially important, and why early movers like Swarm have an advantage. Trust can only be built with time, and new entrants to the market are most likely to look for the most established players in the market.
What the Future Holds
The successful launch of a Robinhood token is likely to be the first of many, as market share expands and shifts from traditional equity markets towards newcomers like Swarm.
Swarm already has plans to tokenize Ripple and Coinbase, in spite of opposition. Legally, the same agreements that companies use to gain early funding and support are ultimately the key to their tokenization.
This could very much be a positive development because by forcing centralized companies like Ripple and Coinbase to be more decentralized (at least in terms of ownership), these companies can be held to a higher degree of accountability.
It means that something like Coinbase having horrible customer service, for example, could immediately result in consequences for Coinbase employees and investors, thus providing a powerful incentive to be more accountable to the public.
Whatever the overall impact on the crypto ecosystem, the trend of tokenization being led by Swarm will probably continue to intensify due to its sheer economic potential. By leveraging blockchain technology to realize gains in terms of increased liquidity and improved access for investors, Swarm is simultaneously creating new value and capturing value from traditional financial markets.
The biggest value proposition of this model, however, is the same factor that has been driving the explosive growth of the ICO phenomena; the fact that blockchain-based markets are able to draw from a pool of investors that transcends national boundaries.
This means that the market Swarm is helping build doesn’t just have the potential to disrupt Wall Street — it has the potential to become much bigger than Wall Street.