How Tokenization and Programmable Assets Could Reshape Capital Markets

The following is an excerpt of "From Tokenization to Asset Automation: How Programmable Assets Could Reshape Capital Markets" by Louis Froelich and Abby Tasch.

The full article is available here.

A trend with the potential to reshape capital markets is asset automation. By this, we mean the coding of operational and business rules and processes directly into financial assets.

Let’s start with an example. Take a share of stock in a booming, private company. Board approval is required for the share to be transferred. And say someone attempts to transfer his or her share without approval. This occurs often, and when it eventually needs to be unwound, it involves lawyers, transfer agents, financial advisors and, usually, an upset shareholder. But what if the share itself was encoded so that it couldn’t be transferred in the first place?

This is becoming possible via tokenization. Tokenization allows for a financial asset to be programmed with computer code. In this article, we provide a brief overview of tokenization. We question the liquidity tokenization is said to unlock and suggest that the increase in asset “velocity,” as explained below, may be worth a deeper look. We flag legal issues that can arise, particularly when a client’s tokenization efforts change the fundamental nature of the asset.  Finally, we discuss artificial intelligence, and how tokenizing can make assets AI compatible.  

There are many questions on if, how or when this merging of code and asset may occur. But we would predict over time, given the time and cost efficiencies it can provide, as well as compliance improvements, that it will rewire capital markets. 

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