Mark Wiseman is a Canadian investment manager and business executive serving as a senior adviser to Lazard Ltd., Boston Consulting Group and Hillhouse Capital, and the chair of Alberta Investment Management Corp.
The dual threats of inflation and further financial downturns are real and require immediate action from policy makers – and they arise at a time when a litany of disruptive global events have darkened the economic outlook.
In order to be effective, both monetary and fiscal policy must be surgical, centralized, based on data and implemented with accountability. We must also be cautious when the likes of Conservative leadership candidate Pierre Poilievre advocate to “opt out” of inflation and create economic value with bitcoin or other cryptocurrencies. The political appeal of such voices ignores both economic reality and the larger opportunity in this digital space: tokenization.
Having been an investor for more than two decades, including many years spent managing the pension investments of millions of Canadians, I care about the principle of intrinsic value: pricing assets based on their underlying attributes and, in turn, generating a reasonable risk-adjusted return from those assets.
Unlike traditional investment alternatives, cryptocurrencies have been – and are – extremely volatile, with their value tied to speculative activity as opposed to intrinsic worth.
While one can envision how central-bank digital currencies or stablecoins could change our financial system and create significant efficiency value down the road, the real benefit that exists today is in the blockchain and distributed-ledger technology behind cryptocurrencies.
Tokenization is a tool created by such technology and has the potential to immediately create and redistribute value for everyday Canadians. It allows owners of assets with intrinsic value – ranging from real estate, to securities, to commodities, to fine art (or the digital equivalent) – to tokenize their assets into a form that is usable on a blockchain application. In practical terms, it enables asset owners to sell fractional ownership of their asset akin to a publicly traded company issuing equity, but in a much more accessible way.
Tokenization leverages smart contract functionality (the same technology that supports many cryptocurrencies) that has the potential to unlock immense value and liquidity for many investors, big and small. This is the aspect of the blockchain and distributed ledgers that our political leaders and regulators should be focused on.
The tool is incredibly attractive because it can provide investors with easier ways to purchase, hold and trade assets that have real underlying value, including digital assets such as the NBA’s incredibly successful TopShot – a platform that allows fans to trade collectible NFTs of past plays (think of them as digital trading cards).
Cryptocurrencies, which have no clear intrinsic value, are an impressive demonstration of the power of blockchain. But like the early BlackBerry products, it turns out that the software that underlies many cryptocurrencies, such as bitcoin, is far more valuable than the initial application.
Tokenizing and selling part ownership of one’s assets can improve liquidity and increase the transparency of the value of their assets, allowing them to borrow against them more easily. Valuing an artwork is notoriously difficult, but if a sculpture is tokenized and a liquid market in those tokens develops, price discovery for the object as a whole becomes far easier. After the tokenization of a skyscraper, a token holder would be able to secure financing against their tokenized portion of the building, as opposed to having to mortgage the entire structure to gain funding.
Were Canada to become a leader in tokenization, retail investors would be able to access assets beyond the public equities and bonds to which they are now mostly limited. Institutional investors – many of whom have already begun to significantly increase their investments in private companies, real estate, infrastructure and other alternative investments – are desperate to find havens for their capital, particularly given the recent fluctuations in equity markets.
Tokenization would allow them to invest in assets that would otherwise be unavailable, creating potential value for both buyers and sellers. With fewer barriers to selling fractional ownership of large infrastructure projects, this class of investor can drastically expand the type of large projects into which they can invest.
Undoubtedly, regulation will be an important consideration. Publicly traded companies have a significant amount of disclosure regulations they must adhere to, which may cause many asset owners to shy away from listing their assets on public exchanges. Regulation will have to ensure adequate information is available about the underlying asset, so that investors purchasing tokens can understand what they’re buying, without being overly burdensome to the point that it dissuades asset owners from participating.
If we want to lead as a country in the blockchain and distributed-ledger technology sector, it is tokenization toward which we should be focusing our efforts – not on the misguided idea that bitcoin can solve the inflationary pressures brought about by an excess of demand over supply in the economy.
In fact, the support for cryptocurrencies by such voices as Mr. Poilievre, driven by criticism of our central bank, shows exactly why we need such independent institutions. Politicians are kept at arm’s length from them for good reason – just look at what happened to the Turkish economy when President Recep Tayyip Erdogan ignored and eroded the authority of the country’s central bank in favour of a misguided, politicized monetary strategy.
Instead of political theatre on the steps of a venerable institution, Mr. Poilievre and other cryptocurrency supporters ought to be more responsible and advocate to make Canada the leader in tokenization. That requires investing in the necessary training, technology and governance structures for this revolutionary technology, and building a system of laws and regulations to support it.
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