And why it has minimal impact on tokenized assets
Just when you’re expecting the lazy days of summer, the signs are everywhere that we’re in a “crypto winter.” That’s the term that’s being used to describe the tanking prices and collapse of some of the biggest cryptocurrencies and lenders in the industry.
We’re here to tell you to take heart. We don’t know how long prices will remain low in this bearish trend, but we do know that there’s more than meets the eye in the crypto space.
At SolidBlock, we tokenize real-world assets on the blockchain. The underlying difference between cryptocurrencies and tokenized real estate, two products that use the same technology for different purposes, is that tokenized real estate is backed by real-world assets that have traditional valuations. They are a digital representation of ownership of an underlying asset. While the tokens are virtual, the property they represent is tangible and is driven by the asset’s NAV (Net Asset Value).
In short, what powers the value of tokenized real estate, also known as digital securities, is different from what powers the value of cryptocurrencies. All securities, digital and otherwise, are strictly regulated by the Securities and Exchange Commission (SEC) and require detailed disclosures to inform investors of potential risks. This is not the case with cryptocurrencies that do not yet have a clear regulatory definition or reporting requirements. Read more here.
The collapse of Celsius and other centralized crypto lending platforms has affected the industry as a whole. Coinbase, the largest cryptocurrency exchange, shared plans to cut 18% of its workforce, while OpenSea is also knuckling down with a 20% reduction in staff.
OpenSea CEO Devin Finzer cited “an unprecedented combination of crypto winter and broad macroeconomic instability” as the reasons behind the move. He also added, “The changes we’re making today put us in a position to maintain multiple years of runway under various crypto winter scenarios (5 years at the current volume), and give us high confidence that we will only have to go through this process once.”
Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, recently had this to say: “A widespread collapse of crypto-asset valuations has cascaded through the crypto ecosystem and generated a number of high-profile firm failures. The totemic indicator of the crypto winter is that Bitcoin, the signature crypto asset, has lost 70% of its value since November.”
Speaking on July 12, Sir Jon suggested four lessons that can be drawn from this situation.
- Technology does not change the underlying risks in economics and finance;
- Regulators should continue and accelerate their work to put in place effective regulation of the use of crypto technologies in finance;
- This regulation should be constructed on the iron principle of ‘same risk, same regulatory outcome;’
- Crypto technologies offer the prospect of substantive innovation and improvement in finance.
When talking about “same risk, same regulator outcome,” Sir Jon elaborated to suggest that the starting point for regulators should be to apply the same regulation to the risks inherent in the provision of a financial service no matter how it is provided.
“To be successful and sustainable innovation has to happen within a framework in which risks are managed: people don’t fly for long in unsafe airplanes,” he wryly commented.
“But differences in technology may mean that existing regulations may not work in this new context or, indeed, may not effectively manage the risk,” he continued. “Implicit in our regulatory standards and frameworks are the levels of risk mitigation we have judged necessary. Where we cannot apply regulation in exactly the same way, we must ensure we achieve the same level of risk mitigation—in other words, the ‘same regulatory outcome.’”
Further, if and when for certain crypto-related activities, there is no way to mitigate and manage the risks as is managed in other parts of the financial system, these activities should not proceed.
As his comments indicate, Sir Jon is not interested in stopping or banning the use of cryptocurrencies or stablecoins. He instead suggests a way forward so that, like digital securities and tokenized assets, cryptocurrencies will be regulated. The tough times in crypto weed out the weak links and reveal stronger creative and innovative solutions.
What is clear is that decentralized financial (DeFi) protocols continue to thrive, despite recent volatility. And decentralized lending platforms, for example, TruFi, are holding strong. Here’s what they offer:
- Permissionless and open access to financial transactions;
- An independently operated decentralized mechanism with shared interoperable data points;
- A non-custodial product that is programmable with smart contracts; and
- An immutable system that is cryptographically verifiable.
This brings us back to SolidBlock and tokenized assets. DeFi is a token-based economic and governance system built on asset tokenization and decentralization. As blockchain fuels change in the way real estate is transacted, the tokenization of real-world assets on SolidBlock’s platform empowers asset owners to transact differently—buy, sell, raise capital, and collateralize—and to manage their tokenized property on a secure, immutable, transparent system.
The winter has given us an incentive to work towards a crypto spring. DeFi will win the day over the current slow, and burdened centralized system.
Founded in 2018 and headquartered in Israel, SolidBlock is a leader in Tokenization as a Service (TaaS) for real estate. TokenSuite™ by SolidBlock empowers asset owners to trade, raise capital, and collateralize their tokenized property on a secure, immutable, and transparent system.