Tokenization, at its most basic level, involves creating a digital record of real-world ownership — the token — via a blockchain ledger. In the world of private equity, tokenization has the potential to make opaque transactions and agreements more transparent and open.
At the moment, private equity tokenization is in its infancy, with BlackRock as one of the most notable players advancing tokenized funds. The near future, however, may well see many more traditional investments come online, so it pays to know what it’s all about. For a deeper dive into how this trend intersects with secondary markets, check out this analysis of tokenization’s growing role — and whether it lives up to the hype.
Blockchain technology involves sharing a ledger of transactions in “blocks” of information across multiple data centers at once. All of these are chained together as a single ledger — hence the name, blockchain.
Any change must be approved across the whole chain. While the blockchain is most often associated with cryptocurrency, it has a number of other uses, such as private equity tokenization.
Tied into this are smart contracts, programmable code written directly into the blockchain. Smart contracts are built to trigger when certain pre-defined conditions, such as a sale, are met. These contracts then execute themselves automatically, obviating the need for third parties to be involved and ensuring immediate compliance.
This allows the creation of a token that represents a holding in a company, including private equity. It can be fractional or total, allowing for flexibility. The tokens are stored digitally via the blockchain, with the token indicating ownership rights. They can be traded and/or transferred via dedicated online platforms.
It’s easy to see the appeal of this for some private equity traders. While many investors prize privacy over all, others welcome the insurance of greater transparency, which proponents argue tokenization provides.
In addition to being more transparent, smart contracts also have the benefit of speed. Trades that once took days to work through can be done almost instantaneously with all compliance boxes ticked. Not only that, but the possibility of fractionalizing private equity investments via a token opens up new markets for investors.
As private equity investments are not publicly traded, it can be hard for them to realize their liquidity. Accredited investors are already tapping into pre-IPO secondaries to unlock liquidity — with or without tokenized models. Tokenization allows for the sale of holdings within larger funds, especially useful for assets that are otherwise difficult to sell or trade. It also allows investment with a global reach, rather than being limited to local markets.
Tokens are currently offered and traded on a range of platforms, such as ADDX and Securitize. Most platforms build in compliance checks to make sure that any offerings they facilitate are in line with securities laws.
Investment funds are the most common type of private equity to be tokenized, as it gives sorely needed liquidity to assets that are otherwise hard to sell or trade. Probably the biggest example of tokenized private equity is BlackRock, via its BUIDL offering, which allows investors to buy shares in its fund.
The path to widespread tokenization faces several major hurdles.
First up, the speed of development in fintech is not matched by regulators or existing old infrastructure. That means often operating in grey areas, which many private equity investors prefer to avoid. The SEC is looking to define rules on tokenization, but to date, true clarity has yet to materialize.
As tokenization takes off, the number of trading platforms has also skyrocketed. But until the market stabilizes and winners emerge, questions remain as to the reliability of some of them, especially with regard to investor protections. This makes it key to do due diligence on the platforms you are considering using.
Here’s a guide to evaluating private market platforms — whether traditional or tokenized — and what to look for before you invest.
Augment* maintains a strong focus on true ownership of privately held, pre-IPO firms, rather than synthetic tokens that represent parts of a larger holding. Our platform ensures greater security and transparency by matching buyers and sellers in the private secondary market, all without leaning on emerging technology with less clear compliance guidelines.
We aim to help accredited investors access opportunities previously unavailable to them — all without layering in unnecessary and risky complexity.
That said, while the technology is still nascent, it is clearly here to stay. Whether the potential benefits of private equity tokenization outweigh the very real risks will depend on each individual investor’s distinct time horizon, risk tolerance, and financial goals.
*Securities transactions are executed on Augment Capital, LLC's ATS and offered through Augment Capital, LLC (member FINRA/SIPC).
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.
FOR ACCREDITED INVESTORS ONLY: Under federal securities laws, private market investments on this platform are available exclusively to Accredited Investors. Verification of status required before investing. Private investments involve significant risks including illiquidity, potential loss of principal, and limited disclosure requirements. "Augment" refers to Augment Markets, Inc. and its affiliates. Augment Markets, Inc. is a technology company offering software and data services, in addition to financial products and services through its wholly-owned but separately managed subsidiary, Augment Capital, LLC. Securities are offered by Augment Capital, LLC, member of FINRA / SIPC.
