Crypto enthusiasts have realized that blockchain technology is beyond the frenzy that comes during the bull market or the sadness the bear market possesses. Blockchain technology’s usefulness is underemphasized. The technology has been used successfully in agriculture, finance, auction, gaming, trading, the health industry, etc. Tokenization of assets is one of the underrated applications of blockchain technology.
What is stock tokenization?
Tokenization refers to dividing assets into smaller parts with the help of blockchain technology. One of the essential parts of blockchain technology is that it can be divided into tiny units, which removes the ownership barrier to assets. By tokenizing stocks, a unit of digital tokens can be issued to represent equity shares in a company. Stock tokenization can allow crypto enthusiasts to purchase their favorite stocks using cryptocurrency. It also allows companies to raise funds in the form of digital assets.
Why is regulation important for digital assets?
One of the arguments for blockchain technology is that it allows companies and individuals to participate in its ecosystem without any barriers to participation. While this is great, it is also crucial that the market is given to companies that are only ready to deliver what they have promised. Bad actors have hijacked this feature that allows them to run crypto companies without being checked, leading to billions in losses of investors’ money which drives interest in digital assets low, reducing the participation of large corporations.
Initial coin offerings (ICO) helped companies raise capital in 2017 using Ethereum. Investors were excited to help raise money for their favorite project. Projects raising money promised their investors about building gold-backed assets, US dollar-backed currencies, trading companies, and crypto gaming companies.
It was an excellent time for investors as they trusted their hard-earned Ethereum tokens in those projects only to expect their return on investment in the coming months. But to their amazement, the opposite was the case. Investors discovered that the only good thing about those projects was their beautifully designed whitepapers. Most of those tokens had lost more than 90 percent of their value within four months. By the quarter of 2018, less than 10% of those projects even existed. The 2017-2018 disaster brought about the talk about regulation because investors would have avoided losses if the government had regulated those ICO campaigns.
How regulation will drive more institutional investment
Institutions will be the primary driving force for growth in the crypto market. Institutional investment increased in the latter part of 2020, which led to an interest in crypto investment. Most major cryptocurrencies tripled in price. Regulations of the crypto market will increase trust, and investors will feel safer around investing in crypto assets.
Lessons from the ICO boom and LUNA collapse
Something similar to the 2017 ICO boom also happened in 2021, which was the crash of the UST. The algorithm stable coin, UST, is backed by its sister token, LUNA, and relies on its algorithm to maintain its $1 peg, which means 1 UST is equal to $1 worth of LUNA. The UST requires the utility to maintain its peg. UST got its utility from Anchor Protocol, a DeFi application that offers 19.5% APY.
Before the collapse of the LUNA ecosystem, over $2 billion worth of UST was unstaked, which caused a massive crash of the token. The crash continued, and investors began to panic. Some believed that a malicious user attached the ecosystem, but the fact remains that LUNA price crashed from over $100 to less than 1 cent, which caused a massive panic as other cryptos started losing their value. Bitcoin, Ethereum, Litecoin, and Ripple were among the cryptocurrencies which crashed, leading to an official bear market.
US secretary of state calls for more government regulation
In light of these saddening events, US secretary Janet Yellen has called for stablecoins to be regulated during the annual testimony of the Senate Banking Committee. The government cannot stop the rise of stablecoins and other cryptos because people know the importance of these technologies and are ready to invest. Still, this excitement might lead to massive losses and a lack of trust if the market is not regulated.
Yallen believes that creating a consistent framework for the stablecoin market will help increase interest and reduce the risk associated with stablecoin. According to her, the regulatory framework for stablecoin regulations is expected to be completed in 2022. With this development, regulating tokenized stocks should also be considered because it gives crypto investors various investment options.
Regulation will increase interest in cryptos
The regulation of tokenized stocks will bring innovation and ensure that investors are protected when they try to buy shares of their various crypto companies. One example of a company that has joined the stock tokenization race is SOMA.finance. SOMA.finance is a globally compliant multi-asset DEX and token insurance platform that can list crypto assets and tokenized equities such as ETFs, STOs, and NFTs. The platform is through Tritaurian Capital and has both SEC and FINRA approval to offer tokenized securities to the blockchain. SOMA.finance will initially launch with 20-30 tokenized equities, ETFs, and crypto-assets.
In light of the recent turbulence in the crypto market, the government must increase the pace at which they provide more regulations to help innovative companies thrive and bring more investors who will be able to buy tokenized stocks without any barrier.