Tokenization, though in its infancy, is one of the most promising applications of blockchain technology.
Tokenization creates a digital representation of an actual asset such as a currency, commodity, equity or other financial instrument, where each blockchain token represents a fractional ownership interest in that asset.
The tokens may be transferred on a blockchain shifting ownership of the underlying asset as the token moves from one person to the next – much like a dollar bill exchanging hands. Unlike cryptocurrencies, many tokens are not subject to risk of theft or loss via hacking or loss of encryption key because transfers are recorded by a registered transfer agent responsible for maintenance of the token ownership ledger.
Why Security Tokens?
There has been an emerging trend in the blockchain industry to use blockchain technology to create tokens which represent direct interests in financial assets. These financial assets can include equity, debt, currencies, commodities, real estate and funds and derivatives of these assets.
These tokens are frequently referred to as “security tokens” because they are themselves generally treated as “securities” under US federal securities laws. In its simplest form, an equity or debt security or a fund of equity or debt securities (the US legal classification of which is well understood), when evidenced by a digital token, remains a security subject to the legal regime governing securities in non-tokenized form. In contrast, other financial assets such as commodities, currencies, real estate and certain interests in energy producing assets are not “securities” under US federal securities laws, however, most plans to tokenize these assets result in the creation of “securities” under US law.
Tokenization unlocks liquidity in Carbon-based energy
The world may be shifting toward renewable energy, but the pace isn’t fast enough to offset the impacts of worldwide economic expansion and a growing population. Currently 84% of global primary energy comes from carbon-based energy sources and is worth over $8 trillion.
Because of the long-life of energy producing assets and the anticipated fluctuation of oil prices, costs of operation and quantity of oil produced, valuing assets can be difficult.
Additionally, as there is no ready market for interests, holders are often in the position of holding the interests for the life of the related oil well. While some investors may desire to hold an energy producing asset throughout its life, experience in all other asset classes indicates that asset holders prefer to have the opportunity to sell in a liquid market so that they may freely do so for an infinite variety of reasons. Similarly, potential investors who want to hold interests in energy production assets want the ability to allocate funds to the asset class, and select assets within the class, and will value such assets with a premium if there is sufficient liquidity to sell when desired.
The relative absence of a liquid two-way market for energy producing assets has the effect of depressing valuations and keeping these financial assets in the hands of investors who may prefer liquidity and out of the hands of investors who wish to benefit from the economic characteristics of investments in these assets. From an operational perspective, asset expenditure is locked into the life cycle of the project. Tokenization will provide a system to unlock billions of dollars creating a new level liquidity for the industry providing a mechanism to speed up the transition in energy.
The Future Renewable Energy Tokenization
Global spending on renewable energy infrastructure exceeded $2.5 trillion during the period from 2010 to 2019, with over 25 countries investing over $1 billion in 2018. This amount is expected to continue to grow during the coming decades, and industry groups are calling for US private sector investment in renewable energy and enabling grid technologies to reach $1 trillion by 2030.
While renewable energy may now be economically competitive with fossil fuels in limited use, the aggregate amount of renewable energy constitutes less than 20% of total domestic energy production. Significant investment in renewable energy infrastructure and developments in technology will be needed before renewable energy is capable of overtaking oil and gas as the primary source of domestic energy. Notwithstanding political speech to the contrary, this shift will take a generation or more to occur.
Major banking institutions, public pensions and sovereign wealth funds have signaled long-term interest in supporting the development of renewable energy infrastructure. Given the scale of investment required for larger solar and wind development projects, limited opportunities for direct ownership in renewable energy projects by retail investors exists. However, public support for cleaner energy and the increasing interest in ESG and Impact focused investing makes it highly likely that retail investors will seek new opportunities for direct investment in renewable energy projects.
The ZiyenCoin Tokenized Fund creates an investment mechanism to invest directly into wind and solar projects.
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