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The Future of Funding: Is Tokenisation The Key To Inclusive Private Equity?

Blockchain technology

By Rafael S.Lajeunesse, co-founder and CEO ReachX

A quiet revolution is gaining momentum: it’s called tokenisation and it promises to reshape how we think about and engage with private equity. For an industry often criticised for its high barriers to entry, the implications of this shift could be profound. Could tokenisation be the golden key that unlocks private equity for the masses? Let’s dive in.

Breaking Down the Barriers

Rafael S.Lajeunesse, co-founder and CEO ReachXTraditionally, private equity has been the playground of the wealthy. The reasons are straightforward: hefty minimum investments and long lock-up periods make it difficult for average investors to participate. Enter tokenisation, a process that uses blockchain technology to convert ownership of assets into digital tokens. This can potentially democratise access to investments that were previously out of reach.

One of the most compelling aspects of tokenisation is its ability to split large assets into smaller, more affordable pieces. Consider a piece of real estate in a prime location or a priceless piece of art. By tokenising these assets, they can be divided into digital shares that many individuals can purchase, similar to buying stocks.

Impact

The real estate market provides a clear example of tokenisation’s transformative potential. Companies like RealT and Harbor have begun to tokenise real estate investments, allowing people to buy shares in properties for as little as a few hundred dollars.

This is a game changer for those who previously couldn’t afford to invest in real estate due to the high entry costs.

In the art world, platforms like Maecenas allow investors to purchase fractional shares in masterpieces. Recently, they offered shares in a Picasso painting, democratising access to a market that typically involves millions of dollars.

Enhancing Liquidity

Another significant advantage and appeal of tokenisation is enhanced liquidity. Private equity is notorious for its illiquidity, as investors often need to commit their capital for years. Tokens, however, can be bought and sold on secondary markets much like stocks. This liquidity not only makes the investment more attractive but also less risky, as investors can exit their positions if their financial situation changes.

Case Studies

Let’s take a look at one high-profile corporate deal where tokenisation played its part in enhancing liquidity. Arca, an asset management firm, launched ArCoin in 2020, a tokenised U.S. Treasury fund. This fund was registered with the SEC and utilised blockchain technology to offer investors a new way to access treasury securities. ArCoin represents shares in the Arca U.S. Treasury Fund. But how did this deal enhance liquidity?

There are several ways:

  • By enabling fractional ownership.
  • Allowing for 24/7 trading.
  • Reducing transaction costs.
  • Providing global accessibility.
  • Ensuring transparency and security.

 

These factors collectively increase the ease and frequency with which the asset can be bought and sold, ultimately enhancing liquidity. The use of blockchain technology in ArCoin exemplifies the broader potential of tokenisation to transform traditional financial markets by making them more efficient, transparent, and accessible.

Another prominent example to point to is a high-profile deal in the private equity market that utilised tokenisation to enhance liquidity, the case of 22X Fund, a private fund offering for accredited investors in the United States 22X Fund collectively tokenised a portion of their equity and offered it to investors via the blockchain. The fund was one of the first attempts to use tokenisation to provide liquidity in the traditionally illiquid private equity market. Again, this deal enhanced liquidity in the following ways:

  • By enabling fractional ownership.
  • Allowing for secondary market trading.
  • Increasing accessibility.
  • Reducing costs and improving efficiency.
  • Providing transparency and building trust

 

Streamlining Processes

Tokenisation also streamlines the investment process. Transactions on the blockchain can occur in seconds and at a fraction of the cost of traditional transactions, which often involve hefty fees and a complex web of intermediaries. By simplifying the process, tokenisation can reduce costs and increase efficiency, making private equity more accessible and appealing.

Regulatory Roadblocks

Despite its potential, tokenisation faces significant hurdles, particularly on the regulatory front. Securities laws in many countries are still catching up with the fast pace of blockchain technology. For tokenisation to truly go mainstream, it will need clear, supportive regulation that protects investors without stifling innovation.

The U.S. Securities and Exchange Commission (SEC) has begun to address this issue, granting regulatory approval to several tokenised securities. However, the regulatory environment remains a patchwork, with much work needed to establish a cohesive framework.

The Road Ahead

As we look to the future, the path for tokenisation in private equity is promising but fraught with challenges. For one, there needs to be a cultural shift within the investment community. Traditional investors and institutions may be hesitant to adopt new technologies, preferring the tried and tested methods of the past. Overcoming this inertia will require education, demonstration of value, and most importantly, success stories.

Ultimately, the technology itself must prove that it can handle the scale and complexity of global financial markets. Security will be a paramount concern, as the blockchain’s resilience to hacks and fraud continues to be tested.

Conclusion: A More Inclusive Future?

So, is tokenisation the key to more inclusive private equity? The potential is certainly there. By lowering barriers to entry, enhancing liquidity, and streamlining processes, tokenisation could open up private equity to a broader audience. However, the journey will be a marathon, not a sprint. It will require collaboration among technologists, regulators, and the investment community to ensure that the revolution in funding not only takes place but does so in a way that is secure, efficient, and, above all, inclusive.

In essence, tokenisation is not just a financial innovation; it’s a financial evolution. As we stand on the brink of this change, the only question left is, are we ready to embrace it? If we are, the world of private equity as we know it could be on the verge of a dramatic and inclusive transformation

Rafael S.Lajeunesse Bio

Rafael is CEO of ReachX and is responsible for driving the company’s vision to be the trusted platform for institutional investors and corporates. ReachX is a digital investment bank that offers tech solutions, access to capital and talent to growth companies and institutional investors. Prior to founding ReachX, Rafael worked in consulting with Fortune 500 companies with McKinsey and as an investor with J.P Morgan & co.

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