When will every debt instrument in the world be tokenized? Are institutional investors willing to deal with tokenized assets? How were assets chosen for a US$260 million real estate tokenization deal?
In his interview for ValueTokenized, Patrick O’Meara, CEO of Inveniam Capital, shared multiple insights into the state of the tokenization industry from the perspective of a traditional finance professional, explained the incentives behind the biggest-ever real estate tokenization deal, and gave his predictions on credit markets, which are rapidly being shaped by blockchain technology.
Here are some of the highlights from that interview.
That was Inveniam’s “core thesis” when it began work on revolutionizing credit markets back in 2015. According to O’Meara, credit markets all over the globe are mispriced, especially for medium-sized clients (defined in the United States as loans ranging from $20 million to $100 million). Currently, when major banks are involved, Small and Medium-sized Enterprises (SMEs) are often forced to pay much more for the money they borrow.
Tokenization can offer alternatives for non-bank lending.
It’s only liquid when there are buyers, O’Meara claims; you don’t have to be a financial expert to relate to this thesis. How, then, do you connect with buyers?
An efficient economy relies on data, as it can later be used by Big Data, machine learning algorithms, and AI to match buyers to sellers. That’s what O’Meara and his team focused on: using smart contracts to create an envelope of data around the asset.
Invenium focuses on data-rich assets that have low latency and trade infrequently. When these assets do trade, O’Meara says their long history of good performance should not be considered a penalty. It should be considered an asset.
In the Spring of 2019, Inveniam Capital piloted the largest real estate tokenization deal on the market by far, worth $240 million. Responding to a question about the criteria behind the choice of real estate assets for the deal, O’Meara stressed that tokenization can by no means provide an attractive investment opportunity by itself. The token has to represent a high-quality asset.
The WeWork building in downtown Miami was chosen for its upside potential (anticipated growth of the area), solid cash flow, and lack of development risk due to its complete renovation. Therefore, the property would be attractive to institutional investors, regardless of tokenization.
Another investment offered is to fund a water pipeline spanning hundreds of miles for the oil and gas industry in western North Dakota, a major resource of shale oil in the United States. O’Meara considers the opportunity to fund such a project with crypto to be absolutely phenomenal. We agree.
Still, O’Meara seems to be a realist. While he believes that every debt instrument in the world will be tokenized in 10 years (more on that below), he does not share the “soon to the moon” sentiments of many enthusiasts.
In the interview, O’Meara shared Inveniam’s previous experience with tokenizing a $38 million bank loan: out of the 11 major bank bids, the final four refused to deal with tokenization, which left the firm with no choice but to physically settle the trade.
That’s why in their latest offering, two options were provided to investors:
In these early days of tokenized assets, investors need the option of defaulting to traditional settlement methods.
Explaining the choice of Dutch auction for this deal, O’Meara noted that they wanted to remove any sense of unfairness for those institutions “dipping their toes in tokenization and crypto.” The Dutch auction makes sure everybody gets the same price.
And crypto can help avoid it. O’Meara reasoned that it can help real businesses and manufacturers — like a farmer in Uganda or Venezuela, countries with extreme currency manipulation — to borrow money in stablecoins and not worry about hyperinflation or other currency risks. Crypto can help the global lending economy to become efficient.
O’Meara believes that this will never happen, as the so-called ‘smart’ contract is “pretty dumb,” meaning that the amount of information you can put into it before the next block is put on is limited. In his opinion, smart contracts function well as a mechanism for maintaining the owner registry and for indexing data.
Historically, people have kept legal documents and put them into pictures (PDFs) in order to prevent fraudulent manipulation. But a hash and a cipher as another kind of notary function can ensure the documents haven’t been manipulated, eliminating the need for pictures. Manipulating and storing all the data on a blockchain is easy, with smart contracts indexing it. O’Meara believes smart contracts can help legal instruments to work better, but won’t replace them.
Which do you believe will happen? When?
Watch the original interview on YouTube
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Being a serial entrepreneur with more than 14 years of experience in digital marketing, Tony started his first business at 19. Since 2017 he has been working in the blockchain space full-time, having raised more than US $60,000,000 for his clients
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