The value of luxury assets is growing faster than ever. In fact some assets are even more competitive than the stock market for now. But what if you want just a piece of that luxury asset? Let’s explore the topic and our solution.
- Why is fractional investment in real assets becoming a viable alternative?
- Key issues and environment of fractional investment you should know.
- What does the SEC regulation say about investments and blockchain?
- How blockchain approach is changing investing?
- Use blockchain only as technology instead of creating a classic dApp
- Can we integrate NFT in the future?
- Follow the basic trading rules
- What investment platform have we eventually got?
Why is fractional investment in real assets becoming a viable alternative?
Increased demand for alternative assets pushed the development of alternative platforms. They attract users who treat cars, wine, and watches as an opportunity to diversify their portfolio. For instance, among others luxury watches have proven a very good investment in the past 24 months.
But still few people are ready to buy such expensive assets, e.g. $40k - $50k for an item. Thus it led to creating fractional investment platforms. Here you can own 1% of watch, car etc. instead of buying out one $100K asset.
At Paralect we developed a similar platform based on blockchain tech.
Key issues and environment of fractional investment you should know.
If we are talking about fractional ownership of real assets it also means law regulation of securities. But should we call it securities or there is something more out of scope of our vision? Let’s deal with this and other questions, and the project's environment in general.
First of all real asset trading platform has to resolve the following issues:
- Define the process of asset shares creation;
- Define the process of share ownership;
- Allow public participation within established legal regulations;
- Define the trading rules.
At the same time, existing fractional trading platforms have these disadvantages:
- Restrictions on share sales — specific tradings windows, shares freezing periods etc.;
- You can't offer your own Asset as a private User — the trading platform acquires the items itself;
- Sometimes it is offered like crowdfunding instead of real trading;
- High commissions because of Escrow services;
- Securitization — because of this, the share trading process becomes slow because you need to change shareholders within the sub-company for each real asset.
What does the SEC regulation say about investments and blockchain?
Primary task is to avoid full SEC-regulation and each time turn assets into sub-companies. In this case we would turn real asset investing into a dynamic and live process.
Here we have several inputs that give us a wiggle room within SEC-regulation.
Fact №1.
“Depending on the facts and circumstances of each individual ICO (initial coin offer), the virtual coins or tokens that are offered or sold may be securities (but may not be).
Fact №2.
“No DeFi participants within the SEC’s jurisdiction have registered with SEC, though we continue to encourage participants in DeFi to engage with the staff.”
Fact №3 or opportunity to avoid SEC.
“In the US, the prevailing test for determining whether an investment constitutes security is the Howey Test, which asks if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” To avoid demanding SEC registration platforms often use an exemption under the Securities Act of 1933.”
How blockchain approach is changing investing?
The phenomenon of fractional ownership of NFTs prompted us to pay attention to blockchain technology in principle. But we didn't want to completely go into the topic of cryptocurrencies and work with NFTs directly. In this case we decided to use blockchain for ledger functions and generate tokens as representation of each asset.
Besides this, we created the following principles of share management and asset ownership to form the base functionality of the entire system:
- Each time a new Asset is listed we create an Asset Record in a Smart Contract, save unique data in blockchain and generate specific Tokens;
- Our Tokens are "Asset-backed" type tokens. Real-world assets will be tied to a particular blockchain Token. The token holder holds interest in real assets;
- We follow the "Asset tokenization" process.
- Users do not invest into digital assets or cryptocurrency because Tokens are only a representation of real asset in blockchain and its value is determined by real asset value;
- With smart-contracts we link the ownership directly into the blockchain. In this case it is impossible to tamper with or alter the blockchain data;
- Customers don’t need to maintain\use a blockchain wallet in the mobile application.
Use blockchain only as technology instead of creating a classic dApp
Our platform takes care of all interaction with the blockchain. Users just see a familiar interface for investments. The user doesn't interact with cryptocurrency, crypto wallets at all. At the same time the technical foundation provides decentralization, transparency, immutability and privacy.
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Can we integrate NFT in the future?
Now we can say that in relation to NFT there is no clear understanding of how legitimate it is to regulate them with the SEC:
- “NFTs have not been the subject of interpretative guidance by the SEC. The SEC has not initiated an enforcement action against the creator of an NFT or the operator of a platform that facilitates the offer and sale of NFTs. The issue of when an NFT is a security is unclear.”
- “The SEC may have more difficulty proving that a purchaser of fractionalized NFTs has a reasonable expectation of profits based on the “efforts of others. For example, if an NFT is merely fractionalized and sold without marketing statements suggesting that such fractionalized interests will increase in value, the SEC may not be able to prove that a purchaser’s expectation of profits is “reasonable” within the meaning of Howey.”
Follow the basic trading rules
There are such principles for trading process:
- Manage BIDs and ASKs ourselves and claim that we sell representations of assets in the form of tokens;
- The user buys the right to own the part/percentage of asset in the form of some amount of tokens;
- There should be a contract between the asset owner and investor, because the platform doesn’t own the asset;
- As an investor User makes Pre-orders (BIDs), proposals to buy a stake of asset ownership;
- Percentage of ownership is defined by the number of tokens which are released on the blockchain;
- Users don't risk their money until successful BID\ASK is matched.
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What investment platform have we eventually got?
In the future blockchain technologies can transform common investing forever. But now we already created a platform with:
- No trading restrictions: No specific tradings windows, shares freezing periods etc.;
- Transparency: We bring real trading platform instead of crowdfunding and launching sub-companies;
- Low fees: No expensive Escrow services and only profitable transaction taxed by fee;
- Availability for private sellers: You can offer your own asset as a private User directly;
- Buyout option: Opportunity to become the new rightful owner of the asset.
Despite the market attitude against cryptocurrencies, those who understand blockchain technology remain bullish on the long-term perspective. And it is not surprising that recent times we can see the impact asset tokenization has on investing.
Particularly blockchain provided us an opportunity to create a platform for investing. We can see that in spite of its naysayers, blockchain continues to march forward.
Written by Alexey Yanushkevich.