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Updated: Nov 10, 2023


Gold nuggets. Raise capital.
Leverage natural resouces, like gold for national development capital.

Tokenizing natural resources, such as gold deposits, oil and even land is a concept that has gained traction as technology continues to reshape the global economy. The idea of converting these tangible national assets into digital tokens on blockchain networks offers many nations an avenue to collateralize it’s natural resources to raise much needed capital for nation building. Through tokenization, it can offer fractional ownership in its natural resources, like gold deposits, to investors worldwide. Previously, only investors with direct access to the country's financial markets could participate. Now, investors from around the world can easily invest, democratizing access to this valuable resource.

“The term “tokenization” refers to the process of linking reference assets to crypto tokens via design features that link the token’s price to the value of the token’s reference asset. In the strictest sense, tokenization would allow for a crypto token holder to have a legally enforceable ownership claim over the token’s reference asset”.

In practice, this need not be true. The success of any tokenization really depends on the ability of an investor to redeem tokens at will.

“In general, a tokenization involves five design features: 1) a blockchain, 2) a reference asset, 3) a mechanism to assess the value of the reference asset, 4) a means to store and/or provide custody for the reference asset, and 5) a mechanism to facilitate redemptions of the token and/or the reference asset”.

- Carapella, Francesca, Grace Chuan, Jacob Gerszten, Chelsea Hunter, and Nathan Swem (2023). “Tokenization: Overview and Financial Stability Implications”.

An efficient, easy and inexpensive mechanism to facilitate redemptions would be critical for the marketibility of the token. From the perspective of investors, the tokens would be an attractive investment only if they are able to redeem the value of those tokens at will.

Consider a small, resource-rich developing nation with untapped gold deposits but with limited development capital. The conventional approach to leveraging this resource would be to mine the gold and sell it on the open market. However, this comes with it’s own set of challenges like costly exploration activities and constructing the infrastructure necessary for gold mining. There are also significant environmental consequences such as habitat destruction and deforestation.

Enter blockchain technology and the concept of tokenization. Unmined gold deposits can act as the reference asset for the purposes of tokenization. By tokenizing its future gold production and offering tokens against the gold to international investors, resource rich countries can secure the funding needed for nation building. But, what about not mining the gold at all? Having no plans to mine the gold means that the tokens will not represent an immediate claim to the physical gold. So, why not provide a secure and effective means to redeem the tokens for cash or an alternative asset?

Let’s face it. Investment is all about returns and liquidity. The higher the returns and the more liquid the asset, the more valuable it is. Liquidity refers to the ease with which assets can be bought or sold. In financial markets, assets with high liquidity are more attractive to investors because they can quickly convert their investments into cash without causing substantial price fluctuations.

In the absence of physical gold or the prospect of mined gold in the near future, investor expectations may be satisfied by redefining the redemption mechanism. From the investor perspective, governments should, ideally, provide cash reserves or government guarantees to facilitate redemptions. Whilst this might provide a high degree of assurance to token holders, it can be financially burdensome for the nation. There are however alternative, less burdensome, redemption mechanisms that can be deployed.

Secondary market trading of the tokens is one such option. This means ensuring that the tokens are listed on as many crypto exchanges, in as many jurisdictions, as possible. By promoting active trading of the tokens on the exchanges, investors will be able to liquidate the tokens for cash or other crypto assets instantly. The attraction of blockchain technology is that it provides high liquidity, which is part of the reason crypto assets like Bitcoin, Ethereum and XRP are popular. The other part is that the token should have the potential to provide returns from future cash flows or it has utility that is in high demand or will potentially be in high demand in the future.

In the case of tokens representing gold deposits that are as-yet-unmined, it would have to offer potential positive future cash flows. One way of creating value would be to declare how the nation would use the funds raised from tokenization. Using it for projects or investments that are expected to generate returns and create value for token holders would be the way to go. An example would be to use the funds raised to build infrastructure like a modern container port, tolled highways or state-of-the-art telecommunications systems for the nation. Such projects will generate cash flows from port operations, toll collection and call charges and subscriptions.

Token buyback programs could create the necessary demand for tokens for the purposes of listing on crypto exchanges. The nation could provide an exit option to token holders by committing to periodic token buyback programs using a portion of its revenue from other sources. The buyback price should be predetermined and transparent. Alternatively, the nation could commit to paying out regular dividends based on the nation's overall economic performance or investment returns. This approach provides a source of income to token holders while they hold their tokens.

The choice of a redemption mechanism should align with the nation's economic goals, investor expectations, and regulatory requirements. The redemption mechanism must be clearly set out. The trick will be to maintain trust and confidence in the token, particularly when physical redemption of the underlying asset is not immediately possible or planned.

The bottom line is that newly issued tokens with limited trading history will require liquidity incentive programs and partnerships with cryptocurrency exchanges to encourage market makers and liquidity providers to participate in the initiative. It is, however, a challenge that could prove to be worth its weight in gold.

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