5 Challenges Facing Tokenized Securities

Although the tokenization of physical securities hasn’t quite taken off yet, there has been some movement in the space. But why aren’t more businesses tokenizing securities? And what challenges do they face once they do?

Major challenges facing tokenized securities include instability, broad-reaching redeemability, and difficulties with government legalities. Read on as we dive into the challenges currently facing tokenized securities.

1. Instability

Tokenized securities are technically a form of cryptocurrency, and as such, they face similar types of instability. The reality is, the vast majority of people simply don’t understand how these technologies work. Rather than being seen as a technological advancement, they are seen as something fun and temporary. As such, it is difficult for them to truly integrate into society, which leads to a lot of instability.

Humans have always focused on the tangible, so when you begin talking about the intangible, it is no surprise their eyes glaze over. That being said, the world and currency itself are inherently unstable, but tokenized securities are more unstable, which keeps people from pursuing them because of the high risk. This creates a true circular problem, which we aren’t exactly sure how it will be overcome.

2. Fear of the Intangible

As we mentioned above, humans love tangible things. They like things they can see, hear, feel, and touch, even if it is a bad investment. Although not all tokenized securities are good investments, in general they are simply digital versions of already existing securities, and though they are faster, safer, and generally just better than traditional securities, people can’t see them, and therefore they don’t want them.

This problem, luckily, may resolve itself as the world is becoming increasingly digital, and people, more than ever before, are beginning to understand intangible objects. But there is still some way to go.

3. Broad Reaching Redeemability

Some of the fear of the intangible is valid, specifically when discussing the difficulty that comes with trying to redeem tokenized securities.

As it was with Bitcoin in the beginning, whenever a technology is new, it can be hard to sell/redeem simply because people don’t know enough about it. With tokenized securities, it goes even further, as if you purchase a tokenized house and later want to sell your portion, not only will you have difficulty finding someone willing to buy, but you may also struggle to explain to them exactly how tokenization works.

Again, this is a problem that is decreasing as education increases, and as the space grows, but it is still a huge problem as so many institutions are not set up to redeem, hold, or even buy these sorts of assets. This means anyone who wishes to invest has to be prepared to do so in the long term—without the promise of the ability to redeem if they hit hard times.

When you add in the currently rocky economy on top of this, it paints a clear picture of why more people aren’t all-in on the tokenization economy.

4. Government Legalities

Truly, we don’t think there is any article we write about anything having to do with cryptocurrency that doesn’t touch on the issue of government legalities. Unfortunately (or fortunately), the tokenization of securities almost always applies to assets which are closely overseen by the local government. Examples include real estate, stocks, precious metals, and expensive art. While art isn’t as closely overseen as the others, governments still like to know where their money is going and actively work to prevent money laundering.

Because tokenization could allow individuals to exchange these assets without the usual government oversight, many governments have gone out of their way to prevent or slow the approval process for tokenized assets. Of course, if someone truly wants to tokenize their own art, they can do so, but the fear mongering perpetrated by governments has far-reaching and long-lasting consequences, which can make it difficult to find buyers for your tokenized assets.

Not only that, but as we mentioned above, people like when their investments can be redeemed on an institutional level, and without government approval, this often can’t happen, only serving to further perpetuate the problem.

5. Technical Challenges

One of the major challenges for all blockchain technology is unfortunately the fact that, with so many operators in the space, not all take the same care and caution when designing security for their blockchain. This leads to vulnerabilities that hackers can exploit to steal, damage, and even collapse entire blockchains. And whenever there is a major hack, people always step back from investing due to fear.

Of course, there are many amazing projects out there as well already tokenizing assets, but it’s hard to say when the next hack will hit and how blockchain creators can protect themselves effectively.

While we wish we could say we hope this will get better with time, the reality is, with more blockchain projects, more hackers will arise, and more hacks will happen. As such, the burden falls on the creators—to ensure they take the time to create robust security for their platforms, something which can hinder start-ups, which often face large and insurmountable budget constraints.

This isn’t to say that the next big, tokenized security isn’t coming to fruition as you read this article; it just means that people will continue to be cautious and harmed as the space develops.

Just keep in mind that banks around the world had similar problems back in the day, leading to governments insuring assets and imposing special regulations on banks. This may be the future for tokenized securities as well, but as we mentioned above, these aren’t as easy to protect as brick-and-mortar institutions, so don’t get your hope up just yet.

Overall, these five challenges are merely the tip of the iceberg when it comes to widespread adoption of tokenized securities. We hope for the best, of course, but it is hard to say how this space will develop, as many of these are very serious vulnerabilities that will be difficult to overcome.