Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Can BNY Mellon make money from Tokenization?

BNY Mellon (NYSE: BK), or Bank of New York Mellon, is betting it can make money from tokenization.

In fact, BNY’s website and blog are touting tokenization as the next big thing in investments. Tellingly, Mellon’s blog states: “fundamentally, tokenization is the process of converting rights – or a unit of asset ownership – into a digital token on a blockchain.”

Interestingly, I do not think BNY Mellon is entering the traditional cryptocurrency market. Instead, Mellon hopes to make money by tokenizing existing assets like stocks, fiat currencies, mortgages, real estate, and precious metals.

How Stablecoins explain BNY Mellon’s Tokenization Scheme

For instance, Mellon could issue or support stablecoins. In detail, a stablecoin is a cryptocurrency that contains a smart contract. A smart contract is a kind of decentralized app (DApp) or digital robot.

Designers program the smart contract to release fiat currency from a trust account at a bank when you spend the cryptocurrency. The Gemni Dollar (GUSD) for instance, releases U.S. dollars from an account at the State Street Corp (NYSE: STT) when you spend it.

Thus, a stabletcoin’s value comes from the fiat currency they link to it. Importantly, BNY Mellon could apply the stablecoin model to a wide variety of assets.

Mellon could issue a smart token linked to property rights for instance. If they sell the property, a smart contract will automatically pay the token owners a portion of the proceeds of the property’s sale.

BNY Mellon’s Plans for Smart Debt

Intriguingly, Frank Fehrenbach; Mellon’s Senior Principal for Digital Partnerships, proposes the fractional tokenization of the property rights to big-ticket items like art works.

Consequently, hundreds or thousands of people could buy a piece of a masterpiece like the Jean-Michel Basquiat painting Sotheby’s sold for $110 million in 2017. Beyond art, BNY Mellon could apply fractional tokenization to stocks, bonds, movies, television shows, mortgages, songs, patents, copyrights, and real estate.

Therefore, BNY Mellon hopes to create “smart debt” that automatically pays creditors. For instance, a smart mortgage or home loan that pays the note holder the moment they sell the property.

Interestingly, BNY Mellon hopes to create a mass market for such smart debt through fractionalization. To explain, fractionalization is breaking rights or obligations into small easily sellable pieces. Using fractionalization, several hundred or several thousand people could theoretically buy the rights to a song, or a fictional character, for instance.

How Blockchains could enforce financial regulations and collect taxes

Thus, BNY Mellon could issue loans backed by fractional ownership in intellectual or physical property. In addition, the bank itself could sell the fractional rights through the blockchain using fractionalization.

BNY Mellon wants to use a blockchain because blockchains can reach more customers in more countries. In addition, Mellon’s executives think they can build mechanisms to enforce KYC (Know Your Client) and AML (Anti-Money Laundering) laws into the blockchain or tokens.

For instance, they could program a smart contract to stop a transaction if it detects KYC or AML violations. Moreover, it is theoretically possible to build a smart contract that reports KYC and AML violations to authorities.

Governments, central banks, and financial regulators could be more receptive to smart tokens under these circumstances. Regulators, in particular, could welcome a smart token that makes their job easier.

How Blockchain Could collect Taxes

In addition, it is theoretically possible to build a token that pays taxes when it conducts transactions. The token could send a portion of a sales price straight to the government to pay the tax, for instance.

Therefore, it could be possible to write a financial transaction tax like the Robin Hood Tax into the investments of the future. Thus, BNY Mellon could build a blockchain U.S. Senator Bernie Sanders (I-Vermont) will love and Libertarians will hate.

An interesting possibility is that BNY Mellon’s management thinks additional financial transactions taxes are imminent and are preparing for them. Notably, Sanders; and another advocate of wealth taxes U.S. Senator Liz Warren (D-Massachusetts), are doing well in America’s Democratic presidential primary, Market Mad House observes.

Finally governments will be more receptive to tokenization if they can make money from it. One popular objection to cryptocurrency is that it makes tax evasion easier, which reduces government revenues.

Can BNY Mellon profit from Tokenization?

Some markets BNY Mellon hopes to tokenize are lucrative and growing.

Economist Clare McAndrew estimates international art sales generated $67.5 billion in 2018, Artsy notes. In fact, sales of art works worth $10 million to $50 million grew by 17% in 2018. In addition, sales of art works worth over $50 million grew by 7% in 2018.

Moreover, international art sales grew by 6% in 2018. However, less than 5% of art dealers made 50% of art sales in 2018. In addition, 57% of art dealers reported declining.

Consequently, there could be a demand for decentralized solutions, like blockchain, that could break the stranglehold big dealers have on the art market. Another use for decentralization is to expand the art market beyond China, the United States, Japan, and the European Union. In particular, BNY Mellon could tap developing markets in places like Africa.

Notably, McAndrew thinks the art market will go online soon to cut costs. That could increase demand for new solutions like tokenization.

“The middle to the high end will stay offline,” McAndrew predicts. “But all of the lower value lots will go online. It’s too difficult to run a highly staffed and expensive business in big cities, for all those very low-volume lots.”

Given these circumstances, I think Fehrenbach’s idea for the tokenization of art has merit. The fractional tokenization of art could open big new markets among middle or upper-class art lovers for instance. For example, several hundred, or several thousand, small investors could buy a masterpiece and bring it to their local museum.

Is BNY Mellon a Value investment?

BNY Mellon (NYSE: BK) could be a value investment in tokenization because it makes money.

For instance, BNY Mellon reported a quarterly gross profit of $3.924 billion on 30 June 2019. Moreover, since Mellon is a bank that gross profit is the same as the revenues. However, Mellon’s revenue growth fell by -5.17% in the last quarter.

In addition, BNY reported an operating income of $1.284 billion and a net income of $1.017 billion for the same quarter. Thus BNY Mellon is already making a lot of money from international financial transactions.

BNY Mellon is a Cash Rich Company

One reason BNY Mellon could succeed in tokenization is that is a cash-rich company. For instance, BNY Mellon reported a Financing Cash flow of $13.245 billion on 30 June 2019.

However, BNY Mellon reports a negative free cash flow of -$2.018 billion, a negative investing cash flow of -$32.196 billion, and an operating cash flow of -$1.565 billion on the same day. Thus, Mellon’s business is lucrative but risky.

I think these cash flows partially explain, the interest in tokenization at Mellon. Management is looking for better, faster, cheaper, and less risky investments to ensure a better cash flow.

However, tokenization is a risky strategy because nobody knows if it will work. For instance, they need to solve many problems with blockchains; such as scalability, to make the technology practical. In fact, current blockchains could be too small and too slow to move large numbers of fractionalized tokens.

Conversely, BNY Mellon has the cash to spend to make tokenization work. For example, BNY Mellon had $90.747 billion in cash and equivalents on 30 June 2019.

In addition, Stockrow estimates BNY Million had $80.360 billion in cash and equivalents, $72.067 billion in short-term investments, and $135.127 billion in current assets on 31 March 2019. Finally, Mellon had $381.168 billion in total assets on 30 June 2019, up from $346.132 billion in assets on March 31, 2019.

BNY Mellon is a Value Investment

Currently, I think BNY Mellon is a value investment because of all the cash and its low stock price. In fact, Mr. Market priced BNY Mellon (NYSE: BK) shares at $41.92 on 4 September 2019.

Additionally, BNY Mellon stock paid a nice quarterly dividend of 31₵ on 26 July 2019. Plus, that dividend grew by 3₵ in summer 2019 rising from 28₵ on April 26, 2019. credited Bank of New York Mellon shares with six years of dividend growth. Plus, the BK dividend offered a dividend yield of 2.96%, an annualized payout of $1.24 a share, and a payout ratio of 29.7% on 4 September 2019.

If you are looking for a value stock with a lot of growth potential that could make money from tokenization. BNY Mellon is an interesting possibility. This bank could make money from tokenization because it is already making money.