Eric Jackson of CNBC’s Power Lunch recently had an interview with Stephen McKeon, a finance professor, who wrote an article about asset-backed tokenization on the blockchain. They touched on one aspect of asset-backed tokenization here that suggests blockchain technology can be used to speed up trades of assets.
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Stephen McKeon is a professor of finance at the University of Oregon, and I first got to know him through a Medium post he wrote last August on asset-backed tokenization. A couple weeks ago, he was on CNBC’s“Power Lunch.” I had a lot more questions in my own mind after that segment so (Eric Jackson) reached out to him and he kindly agreed to chat.
(A podcast version of this discussion is also available here.)
Jackson: Even in the case of individual public stocks, one thing that still happens today is I buy a stock through my prime brokerage account today but it doesn’t clear until 1, 2 or 3 days from now.
McKeon: That’s right. Trade settlement is going to be near immediate. The other thing that a lot of people are talking about are these kind of decentralized exchanges, which are sort of in their infancy. One of the issues with the exchanges is you basically relinquish control, you give your private keys to them in order to trade on the platform. And so these exchanges are potentially going to solve that issue.
Jackson: In this scenario, we keep our own private keys.
McKeon: That’s right. So you would not be relinquishing control of your private keys. You would retain possession of your assets and then the platform facilitates trading without actually taking custody of the assets.
Jackson: I would imagine that the New York Stock Exchanges of the world, or anyone else that has a vested interest in the status quo, would fight against this type of scenario that you’ve discussed.
McKeon: The NYSE fighting the rise of tokenized securities reminds me of the taxi industry fighting the rise of Uber. I’m not sure it would be any more successful. You have to ask how would they fight it? Maybe you could slow it down a little bit through some regulatory vector; that’s a strategy that was employed by the taxi industry. Eventually the new entrants figure out how to comply with the rules, so that’s not a permanent barrier. I don’t think they’re going to fight it. I think they’ll eventually adopt it, and I think initially maybe you could have a sort of blended solution where some of these legacy systems remain in place and blockchain is like another layer on top of it. My guess is that they’re going to be investing in it. I’d be shocked if they’re not already doing so.
There are certainly governance risks on the horizon for this vision. What I mentioned in the post is this concept that, if you have one owner of a building, they typically have an economic incentive to maintain the property. Now say you have a million owners, and they each have one dollar of ownership; nobody individually has the incentive to maintain the building because the cost of doing so would exceed the value of their ownership. So you need some sort of system for collective action where the property continues to be maintained. The hard part is what do those look like? Is it a straight vote of token holders?
There’s this adage “two wolves and a sheep vote on what’s for dinner,” so you have to have some method to avoid expropriation of non-controlling owners. These are new issues for tokens, but they’re not new issues generally. Economists have been thinking about corporate governance for a long time, and maybe it involves some sort of a board, maybe it involves a multiple-branch system. I think the other major governance piece is disclosure. There’s no question that one of the things the SEC requires is disclosure, so thinking about how that’s going to work… maybe it’s going to look like the blockchain loop platform for the Blockchain Capital tokens, there’s a lot of activity around those ideas right now.
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