Digital assets, like Bitcoin, will do to money what the internet did to information.
Or so it goes. I believe this is true, with the exception of assets that need to be enforced through property rights. There are two conditions necessary for a digital asset to adequately represent ownership over something physical:
There is no credible way to guarantee ownership of the token with ownership of the asset. We’re forced to rely on intermediaries to enforce these guarantees imperfectly - the closest we’ll get to a guarantee is having a new type of government entity publicly and authoritatively attest ownership claims with some threat of non-compliance.
Our world is built on assets backed by imperfect guarantees of value that are enforced and given credibility by big institutions that are incentivized to keep the system honest, like the Federal Reserve or JP Morgan Chase.
It’s important to acknowledge our tenuous and imperfect system for enforcing ownership and value in the current financial system. We don’t truly own the money in our bank account - it’s technically just a row in a database.
But if we’re proposing a competing solution, we must deliver a guarantee like the one we receive when we deposit our dollars at an ATM with the expectation that we’ll be able to withdraw those dollar at any point in the future.
Without the guarantee of ownership for an asset backed token, there is the risk that a buyer will eschew secondary digital markets and go directly to the primary source instead. For an asset backed token to have value, the primary market for that token must credibly honor the value of the token in the secondary market. Parallel markets can not exist.
Obviously, purely digital assets don’t have this problem: the asset only has value within a single originating system, like Bitcoin, or US Dollars on planet Earth.
To successfully tokenize a physical asset, the following steps must occur: