Frances Coppola, a CoinDesk columnist, is a freelance writer and speaker on banking, finance and economics.  

Let me tell you about a lovely dream. In some utopian future, all assets will be represented as tokens on blockchains. Everyone will issue their own tokens, backed by their own assets. And because those tokens are backed by assets and their ownership is transparently recorded on an immutable decentralized blockchain, everyone will accept everyone else’s token as money. There will be no need for trusted central institutions to issue money. In the new world of tokens and blockchains, private asset-backed money will be ubiquitous, and everyone will be their own bank. 

Currently, the principal use of asset-backed tokens is to make illiquid things liquid. Say you have a stash of something valuable but difficult to transport. Twelve-foot steel girders, for example. You put up an advertisement on Craigslist saying, “Steel girders for sale, buyer collects” and you wait. For a long time. 

The problem is this transaction suffers from “coincidence of wants.” Storing girders takes up space, as you know (because your garage is full of them). And there isn’t much of an investment market for girders. So the only people who are likely to want to buy your girders are people who have an immediate use for them and – importantly – can transport them. You might get lucky – there could be a local builder who needs some steel girders for a project. But if buyers have to come some distance, they might not bother. After all, you probably aren’t the only person in the country offering steel girders for sale at a hefty discount. 

But suppose, instead of selling your girders, you decide to monetize your stash. Steel girders are rather good things to monetize because they don’t decay, they aren’t appetizing for rats and mice, they can survive some fires and floods, and they are “fungible,” which means one girder is indistinguishable from another. So you create a token – a stablecoin – linked to girders: one token represents one girder. To market the token, you set up a fancy website, publish a white paper using stuff you found on the internet and issue a bunch of press releases saying GirderCoin is the money of the future and early adopters will be billionaires. Don’t miss out, buy some now! 

Humans have been monetizing assets in this way since time immemorial. Representations of valuable objects are far easier to trade than the objects themselves, and they have at times been used as money. They also make it possible for delicate objects to be kept in controlled storage: Cans of vintage sardines, for example, which require climate-controlled conditions and careful management if they are to age properly. 

But trading representations of objects rather than the objects themselves creates an opportunity for fraud. If GirderCoin takes off – and many coins of this type do take off, at least for a short while – you will rake in a lot of money without physically delivering your girders. Of course, your girders now belong to other people and their ownership is permanently and transparently recorded on a blockchain. But “possession is nine-tenths of the law,” as they say. So when a local builder turns up at your door saying, “Hey, man, I need some girders,” you do a deal, don’t you? You sell some of the girders to the builder for cash. GirderCoin still exists – in fact, it’s doing rather well – but it is no longer backed one-for-one by real girders. It is now “fractionally reserved.” Banks, of course, have been doing this for centuries.  

But you now have a problem. If a GirderCoin holder actually tries to collect their girders, you haven’t got them. Fortunately, as previously mentioned, steel girders are fungible: Token ownership confers the right to claim “a” girder, but not any specific girder. And you’ve sensibly put a clause in GirderCoin’s terms and conditions saying that anyone who wants to collect their girders must give three days’ notice. So if anyone does try to claim their girders, you have three days to obtain them. Unless you are lucky enough to find a handy advert on Craigslist, you will have to buy them at full price from a steel supplier. It might be more convenient, though less honest, simply to disappear. 

Recording changes of ownership of a real asset on a blockchain doesn’t eliminate fraud. If you buy a token backed by a real asset you don’t physically hold, how do you know that real asset exists? The blockchain will tell you who owns the real asset but it won’t tell you where it is. What is on the blockchain, and what is present in reality, could be very different.

Asset-backed token issuers typically try to instill confidence by promising periodic audits. You, GirderCoin issuer, might promise that your girder stock will be audited every six months. SardineCoin's issuer promises exactly this. But there’s still a trust problem, isn’t there? Who will conduct this audit and why should anyone believe their findings – especially as they are being paid to say everything is fine? Maintaining permanent open house for GirderCoin holders so they can inspect the girder stocks whenever they want might mitigate the trust problem, though only if they know the total number of girders, not just their own holding – and, of course, as the garage is full to the roof with girders, counting them might be a bit of a problem. So you get your friend who is an accountant to certify you have the right number of girders and you put the certificate on your website to convince punters you are honest. Seriously, this is what token issuers do. 

There are other things you could do to reassure coin holders that you are not fractionally-reserving their girders. You could set up GirderCam – 24-hour surveillance of your girder store – and make it publicly available on the internet. People do this for kittens, after all. Or you could affix a GPS tracker to every girder, so that its movements can be tracked. Micro-chipping steel girders sounds a bit advanced, but with the Internet of Things, all things are possible ... at a price. Though microchipping sardines in their cans, or wine in its bottle, seems too complicated even for the Internet of Things. There is always the risk the custodian eats the sardines and drinks the wine, then disappears leaving a garage full of empty sardine cans and wine bottles, all reassuringly microchipped.

Convincing punters you are not out to rip them off is expensive. For a small retail girder seller, it’s all a bit much. After all, this was supposed to be an easy way of making money. 

If you are honest, your exit strategy from all this expense is to look for a buyer. Economies of scale being what they are, large commercial outfits are much better able to bear these expenses than people selling stuff out of their garages. And they want to corner the market if they can. Closing down little cottage industries like yours is in their interests. So when a large commercial outfit offers to buy up all GirderCoins and absorb them into its GirderFund, you will accept with considerable relief. GirderFund will make GirderCoin holders an offer they can’t refuse, move the girders to their own storage and you will put your car in your garage for the first time in years – after dismantling all the surveillance gear, of course. After all, you don’t want the whole world looking at your car in its garage while you are enjoying a well-earned holiday in the sun.

The dream of tokenizing all assets, enabling people to issue their own coins and have them accepted as money, founders on the problem of trust. By definition, physical assets are not decentralized. Your girder stash is yours until you monetize it, but once you monetize it, you become custodian for other people’s girders. You need substantial infrastructure and a flawless reputation for them to trust you enough to accept your coin, even to hold as an investment. For tokens to be widely accepted as money requires even more trust. And if you don’t want to be responsible for looking after other people’s property, then we are back to “buyer collects.” Paradoxically, decentralizing physical assets destroys the whole point of asset-backed tokens. 

The cost of reliably linking tokens to real assets inevitably drives the market towards consolidation, oligopoly and even monopoly. Of course, people could back their tokens with decentralized digital assets. But investing in digital assets so you can issue a digital asset of your own is a long way from simply monetizing whatever is lying around in your garage. Why would anyone bother to do this?

If everyone owned decentralized digital assets as a matter of course, the utopia of everyone issuing their own asset-backed tokens and transacting freely without government involvement could perhaps become reality. But until that happens, tokenization of assets seems likely to remain the province of professionals, and “be your own bank” merely a lovely dream.