Crypto is the prefix of the moment, encompassing an entirely new frontier in the world of finance and asset management. Founded in alternative currencies like Bitcoin, the mechanisms around decentralization and tokenization -- blockchain, cryptocurrency, and Initial Coin Offerings -- are revolutionizing the global FinTech landscape. With billions of dollars in the balance, here’s what you need to know about how crypto is reshaping ever-evolving frontier of finance:
Decentralized verification is the name of the game. Three core drivers are integral to the greater crypto ecosystem. These are private key cryptography (tokenization), a distributed network with a shared ledger (blockchain), and an incentive for network members to authenticate and service transactions within the ecosystem itself (mining). The system-wide, peer-to-peer validation structure is designed to apply security, efficiency, and decentralized verification to the transfer of assets, wherever trading or financial transactions occur. The concept of decentralization, core across blockchain technology and the basis of many cryptocurrencies, turns the entire financial industry on its head, essentially diminishing the need for institutionalization, i.e. traditional banks and financial service operators.
Tokenization is changing our financial markets. The tokenization process transforms the storage and management of information and assets into secure digital footprints. Via these digital markers, asset owners can not only control and trade their assets within the crypto ecosystem, but prove history of ownership and divide assets into their smallest parts. Executing transactions through the tokenization process is a flow that can be applied to everything from banking to more complex processes like traditional asset management. Increased speed, security and efficiency are just a few of the immediate benefits of tokenized assets.
Smart contracts are reducing the number (and associated costs of) middlemen. Code-based contracts can sit on top of any blockchain, providing asset owners the ability to exchange money, property, shares, or anything else of value. The process defines a unique set of agreed upon rules that execute only when specified actions take place. These smart contracts power in a transparent, conflict-free mechanism to execute asset transfers, all the while reducing the role of intermediaries like traditional banks and brokers, along with their associated costs.
The crypto ecosystem is democratizing participation in the global financial marketplace. There are a few ways that the crypto ecosystem is reshaping and displacing global markets. Several developing countries, where fiat and commodity-based currencies have spiraled out of control, have seen consumers turn to alternative currencies and crypto markets to transact day-to-day business -- Venezuela is only one example. What’s more, these systems are dismantling barriers to entry for previously restricted market participants. Populations that have been historically excluded from commercial markets because of credit history or bank account access, only require an internet connection to participate in today’s crypto marketplace.
ICOs and SAFTs are creating uncharted equity models for investors and entrepreneurs. For the uninitiated, the Initial Coin Offering (ICO) process can seem akin to equity funding rounds for startups or an IPO launch. While ICOs have served as funding vehicles for countless blockchain projects, they are characterized as being global, equity-free (apart from discounts on digital currencies before they hit exchanges), and unregulated (aside from crowdsourced due diligence, an industry by product of self-regulation). Regulatory bodies and crypto-insiders alike continue to grapple with the formal framework around token presales and ICOs. Simple Agreement for Future Tokens (SAFTs) have also emerged into the space as investment contracts for blockchain products. SAFT sales are distinct from ICOs, with no coins are offered, sold or exchanged during the time of sale -- investors are thus buying into proposed technology with the promise of future tokens that don't yet have value.