How Blockchain Might Actually Prove Useful

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I am not a fan of bitcoin and the myriad other cryptocurrencies. No, I’m sorry if you bought the hype, but these things have no intrinsic value and they are not currencies. Not now and not in the future, at least not in their current form. Governments are not crazy about competition especially in something as basic as money. It ain’t happenin’. No, bitcoin is not a new asset class. It isn’t an investment at all. It is pure, rank speculation, your return based solely on your ability to find a buyer who will pay you more than you did. Good luck with that.

I am, however, intrigued by the underlying technology, blockchain. Distributed ledgers are certainly not new, dating back at least to the time of the Templars and the first, fledgling banking systems. Digital distributed ledgers are new but the concept is very, very old.

The most likely blockchain applications are for the transfer of assets in digital form. I am absolutely certain that blockchain will be a big part of the art, music and publishing industries although figuring out how to make money on that isn’t easy. I’m also certain blockchain will be increasingly important in the secure transfer of real assets, specifically real estate.

Real estate entities – individual buildings, funds – are already starting to issue tokens representing fractional ownership of debt or equity.

Buildings are getting their own tokens, representing a fraction of debt or equity. Real-estate investment funds are starting to issue tokens instead of shares as well. Such coins let investors get out of their investments by selling their shares any time through exchanges instead of holding on to them for years.

In a sense, the token is just a digital substitute for shares or other forms of fractional ownership (partnerships, etc.). The idea here is that the issuance of tokens will provide for a level of liquidity not generally available in real estate. Of course, that was the purpose of REITs as well so this isn’t really new except maybe in the sense of issuing tokens for a single building.

But whether this takes off or not will depend on the liquidity of the market for the tokens. I have a hard time imagining that a robust, liquid market will develop for tokens issued for one building; you are still going to have to find a buyer although blockchain will make the transfer much easier. Tokens issued for a fund will face the same problem. Where will they trade and what will be the depth of that market? Wherever they trade I would expect large bid/ask spreads for a long time. This is probably a step up from the non-traded REIT market but not by a lot.

We are generally skeptics of new things around here. I generally shy away from anything that gets labeled as a “financial innovation”. All that usually means is that someone, usually on Wall Street, has come up with a clever way to part you from your money. But we aren’t Luddites either. Blockchain seems likely to find a place in the financial architecture. I don’t think it is necessarily revolutionary, a word thrown around a lot by the evangelists pushing the technology. But it will likely prove useful in ways obvious and not so obvious.

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