Using Blockchain Technology To Value Illiquid Assets And Foster Trust

The major financial catastrophes of the 21st century — the dotcom bubble, the Enron fiasco, Bernie Madoff’s ponzi scheme, the housing crisis — all share one common thread: errant valuations.

In the dotcom bubble, lofty equity valuations were completely ignored as investors piled into stocks with no real earnings power, let alone potential. Enron’s accounting team, along with its independent auditor, repeatedly fudged financial documents to prop up the company's balance sheet. Bernie Madoff reported far-fetched and ultimately fraudulent investment returns. And the housing bubble's burst was entirely due to unrealistic home valuations coupled with dishonest rating practices. The particulars might vary here and there, but the resultant panic that ensued from each came about once the discrepancies in the numbers started to show.

The other common thread? These meltdowns and scandals might have been prevented. If human's were more trustworthy, if regulators were more scrupulous, if there were some unbiased source of validation monitoring these cases, these events might have been caught before they reached crises proportions.

Now, nearly a decade out from the last of those major catastrophes, a solution to the problem of faulty valuation might be in the works.

Blockchain Solution

Startups bent on finding that solution have put a lot of faith in blockchain-powered platforms to valuation problems inherent in certain financial assets. One of the key aspects underpinning this faith is the decentralization core to blockchain technology. By dispersing the power and control of a network to totality of the network’s participants, blockchain ensures that one party can't fudge the numbers to suit his or her needs. This dispersion of authority could allow for independent valuation of financial assets based upon consensus, turning the current equity market ecosystem of brokers, analysts and managers on its head.

One such blockchain startup seeking to invert the financial worls is BANKEX, whose blockchain platform aims to allow a wide variety of assets to be tokenized — real estate, hedge funds, even works of art. By turning these entities into tokenized products, BANKEX can create a decentralized global market whereby these more illiquid assets are bought and sold at will.

The platform also implements Internet of Things (IoT) and Artificial Intelligence (AI) technology to provide real-time updates on asset condition and valuation. Through BANKEX, both institutional and individual investors can access legitimate valuations on assets that in the past have caused financial turmoil. The FinTech startup, with its Proof of Asset (PoA) protocol governing transactions on the blockchain, has already achieved its targeted soft cap of $25 million on the first day of its token sale.

Building Liquidity

Beyond allowing for unbiased valuation, blockchain technology can also provide liquidity and transparency to assets that are traditionally relatively illiquid. As it stands, bonds, over-the-counter (OTC) stocks, and private equity (PE) funds can be traded, but depending on the individual assets, could take weeks to settle. By tokenizing these assets, they can trade in a decentralized marketplace much like stocks on an exchange.

Blockchain platforms can manage this by utilizing smart contracts, which self-execute once the stated set of conditions is met. On a decentralized asset marketplace, this removes the likelihood of fraud. The platforms’ protocols prevent any illegitimate asset from being offered, meaning only tokenized, verified assets can trade. Smart contracts will ensure that sellers don’t offer a product and then backout once funds are received. On the other hand, buyers cannot refuse to pay once they’ve received a tokenized asset.

You can see an illustration of how smart contracts are executed the second their asset is received in the chart below.

Trust Through Tech

This combination of the decentralization and tokenization of assets produces a key element missing in the traditional financial environment — trust. Individual investors don’t trust banks. Banks don’t even trust each other. What’s more, the government agencies that are supposed to regulate the system are trusted the least.

In contrast, blockchain technology actually fosters trust. Because no single party runs a decentralized marketplace, buyers and sellers don’t have to worry about price manipulations or over-the-top commissions paid to a central authority. And, since blockchains are fully transparent and auditable, the entire blockchain community will be aware if any type of fraud is even attempted. Buyers and sellers can compare prices to make sure they’re fair, and with an IoT and AI driven valuation process, parties on both sides of the trade don’t have to worry about misleading ratings. These factors alone completely alter the way transactions are currently executed. Combined, they might be able to manage the impossible and bring trust to a financial system in desperate need.