Tokenisation of Securities: Real World Applications — Investor Autonomy (Part 1)

For a small investor, going down the traditional investments route could prove to be an expensive experience with limited upside potential. For new investors looking to enter the traditional finance space, it can be an intimidating process that often ends up with middlemen taking a large percentage and slowing down the process.

The token economy is disrupting this. It’s taking an outdated process and adding speed, liquidity, and ease of access. Perhaps more importantly, it’s adding autonomy. Tokenisation puts the power back into the hands of the investor. It cuts down the lengthy investment process, removes the expensive middlemen, and offers greater access to investment opportunities for both novice and experienced investors.

It’s a revolution.

What Are the Current Barriers to Entry to Investments for the Average Person?

Historically, the world of investments has been perceived as the preserve of the elite. A closed shop with high barriers to entry for the average person, who often consider investments as the plaything of the rich, well-connected, or those already in the financial sector. In reality, this is not always the case — it’s a misconception that makes the investing world seem impenetrable to new investors.

The overwhelming feeling amongst the general population in the UK is that engaging in the investment market is expensive and time-consuming, compounded by a need to file the right paperwork, at the right time, with the right middlemen. In fact, Finder’s investment statistics suggest that 52% of women and 37% of men in the UK have never held an investment. This is Money goes further to suggest that people “don’t have the time or interest or knowledge to [invest] successfully. For most people, investing through mutual funds is a much better way to get the diversification and professional expertise that they need.”

With traditional investments, costs can quickly stack up. New investors may not fully understand the expense ratio, and when they are hit with the annual administrative fees, management fees, 12b-1 fees, operating costs, and any other expenses that are necessary to maintain the fund, it can be an unpleasant and expensive surprise.

On top of the annual expenses, there is also tax to consider. Investments are subject to the capital gains tax. When shares of a mutual fund are sold for a profit, or the underlying investments in a fund are sold, and a distribution is paid out to investors at the end of the year, the tax is applied. This, of course, will also apply to profits gained from security token investments. But without the additional annual expenses thrown in as well, the overall expenses incurred as a result are far fewer than existing traditional investment methods.

It is also the case that many funds often stipulate a minimum investment, often with a high threshold, in order to cover the fund’s legal and administrative costs. These high barriers to entry, most notably the fees payable, can often shut out a large percentage of new investors.

While various investment companies do offer low-cost access to funds, which are readily available to buy via financial advisors or online, they are still subject to annual management fees and running costs. It is in this respect that security tokens can offer a shorter-term investment alternative that is more agreeable to people looking to invest small amounts of capital, without being locked in for a significant amount of time, and without being subjected to huge fees. Tokenise CTO, Ben Tubey, explains his views on why traditional investment may not suit emerging investors:

Currently, in order to invest in projects, the barriers to entry consist of either using an intermediary, like a broker or a dealer, or one of several platforms that allow you to sign up directly and they make the placement into the market on your behalf. However, these models tend to suit the experienced investor far more than the average person.”

Traditional investment has very little scope for autonomy unless you’re a very experienced investor who knows and understands how the market works. For the average investor, the reliance on a middleman to facilitate the transaction slows down the process and increases costs.

However, as a novice investor, if you don’t rely on a middleman to guide your investment, you could find that you lack the connections and expertise to make well-informed, successful investments. It is likely that the average investor will be juggling their investment opportunities with a job, so taking the time to fully research the market can be difficult.

It can be a difficult balance to strike, trying to weigh the benefits and drawbacks of using a third party to manage your investment. By using a middleman you gain access to their knowledge and connections, but there is no doubt that it adds time and expense to the process. The use of a middleman can make people feel uninvolved in the process, and therefore reticent to become involved in the first place.

How Can Investment Become More Accessible?

The token economy could completely revolutionise the world of investment — making it a more transparent, liquid, and accessible market. Not only would it provide a more suitable environment for small investors, but it could also return autonomy back to big and small investors alike. Placing the power back in their hands and allowing them to make their own decisions about which digital assets to invest in, and how to manage those funds.

At Tokenise we believe investments should be for everyone. We want to reduce the friction and the pain-points in the process for small investors, regardless of their connections, location, or wealth. In Part 2 we will explore how the token economy can open up investment to the wider world, and how Tokenise aims to facilitate this.

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Tokenise is leading a new era in token offerings by creating a platform for tokenised securities.