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Not where, but how to invest

03 May 2019

 Salomons Judgement

Blockchain technology can open closed private markets to investors. Pieces of real estate, infrastructure or private equity transfer directly from owner to owner without intermediate layers or fund structures.

Once a year I lock myself up in a hotel with a group of international investors to discuss markets. Just like last year, the conclusion was that the public markets don’t account for the much-needed returns. Some people think they are too expensive, others worry about the cycle or say that policy makers disrupt everything. Some investors still know where to find the interesting assets, but if positivism is mainly about volatility and gold, then you know what’s going on.

The presentations were not disappointing. The most stimulating one was not about where to invest, but how to invest. Technological innovation can ensure more liquidity and cheaper access to markets. Blockchain technology, for example, makes it possible to cut investments and trade them in pieces, without intermediate layers and fund structures.

Let’s take shares as an example. For transactions, an investor now depends on a stock exchange, a broker, a clearing house and a depositary. These costs can add up nicely. Suppose we can trade shares in fractions (tokens in blockchain terminology)? And that we can reduce the number of intermediaries (and therefore the costs) by means of smart contracts – programmed contracts of which the agreements are recorded in computer code on the blockchain?

Tokenised financial assets

Utopia? Not at all! A mobile phone and blockchain technology suffice in order to get cheap access to fractions of assets. There are not many applications yet, but I bet you will hear words like ‘tokenised financial assets’ and ‘smart contracts’ more often. Why does that make me happy? Because of the possibilities. Anyone who manages to unlock private markets by means of tokenisation for small institutional investors and wealthy private individuals literally holds gold.

When I lock myself up again next year in a hotel with this group of international investors, I am curious whether blockchain technology will have already been able to open previously closed markets. One thing is certain: under the influence of technology, public markets are already becoming cheaper and more accessible, allowing more and more people to build up capital.

The author

Roelof Salomons

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