Thomas Cowan, VP of tokenization at regional winner Galaxy Digital, explains why the digital asset company tokenized a 300-year-old Stradivarius violin.
Global Finance: There’s a lot of talk lately about tokenizing physical assets like gold, real estate, and art. What are the advantages? When you tokenize a collectible like a 1708 Stradivarius violin, as your company did recently, don’t you still have to go through the same demanding documentation process as you would if you sold it through an auction house?
Thomas Cowan: One difference is that once you’ve completed that due diligence and you’ve put the asset on-chain—as a NFT that is mapped to the violin—all that information remains encapsulated in the NFT: the violin’s history, its former owners, etc.
GF: And that makes it more easily traded?
Cowan: The next person won’t have to do nearly as much diligence, because they will have the history already on-chain. You end up saving a lot of costs on the due diligence side, because the source of truth and the source of record are fully on-chain, already there.
Another advantage is transparency. Minting a publicly recorded NFT on the Ethereum blockchain [as happened with the Stradivarius] ensures a verifiable, fraud-proof record of ownership and provenance.
GF: By tokenizing a 300-year-old violin that once belonged to Catherine the Great, what financing opportunities do you open up?
Cowan: Owners can unlock liquidity without necessitating a sale if they convert the asset into a digital token. The violin can then be utilized as collateral. This can fundamentally transform the way these assets interact with financial markets.
GF: Can tokenization make global finance safer?
Cowan: Think back to the situation before the 2008 financial crisis, when you could buy into a mortgage-backed security pool, but you didn’t know the performance of the underlying loans. Well, with tokenization, you see every single underlying loan. If I’m buying a senior tranche of a debt pool, I know exactly what that risk looks like because I can see every single loan.
GF: What were the key challenges in making this project happen?
Cowan: The legal aspects were a hurdle. With a traditional IPO or a bond issuance, you have the legal documents, which are pretty standard across the industry. It turns out there are no standard legal documents out there for violin tokenizations. So, we had to really start from scratch.
GF: What are some other areas ripe for tokenization?
Cowan: I think we’ll really begin to see an increased interest in on-chain debt, especially structured products and private credit, over the next year or two. Tokenization technology can create a lot of efficiencies there.
GF: What about real estate and equities?
Cowan: I think real estate is still relatively far out. You’ve got property laws that differ based on country, state, and municipality, for instance. Also, much of the history with real estate is still paper based.
As for equities, a few months ago, I would have said we have a long way to go. But because of how quickly regulatory clarity is coming [especially in the US] and how quickly the Securities and Exchange Commission is moving [with regard to crypto and blockchain technology-enabling regulation], the industry may move faster on tokenizing equities.
GF: What obstacles remain before tokenization of financial products becomes widespread?
Cowan: We still have regulatory challenges, and of course identity and know your customer (KYC) and anti-money laundering (AML) challenges. Those are not going away.
GF: Overall, what does tokenization mean for global finance generally? Will it really change the landscape? Cowan: Over the past decade, we’ve been moving forward without regulatory clarity. But when we are given rules of the road, we’re going to see a lot of capital, especially from institutions, flood into the industry because they’ve seen the value of the technology. We’ll get cost reduction, but also a much more inclusive economy.
