I had an email exchange with Meni Rosefeld who is on the core dev team for Colored Coins. Below are his answers to my questions (published with his permission):
Q: What advantages does CC provide to the current global asset management industry?
A: The greatest advantage is the removal of barriers of entry. Currently, new businesses wishing to raise capital use cumbersome and inefficient private deals; and those aspiring to be listed in order to allow for the market to valuate them with an efficient mechanism, can only do so with a great expenditure. With colored coins, anyone can easily raise funds in exchange for equity, removing barriers of entry, encouraging innovation and allowing society as a whole to better allocate its resources between ventures.
Q: One criticism of CC is that it still requires centralized servers to issue and track tokens. If this is the case, would it not be easier to simply do all trade privately at the centralized exchange where it will be more scalable and private?
A: No centralized servers are needed for tracking – this is done in the decentralized network of the host currency (such as Bitcoin). There does need to be an entity issuing each particular colored coin – however, an entity raising funds for a generic purpose is not usually in the business of running an exchange. Without colored coins, they would have to resort to a large 3rd party exchange with all the usual problems of barrier of entry (for both issuers and exchanges) and vendor lock-in. With colored coins, they can outsource the tracking and exchange to the efficient decentralized network. The issuer is only involved when issuing or recalling the coins; investors can then trade the coins between themselves without involving any 3rd party, which has implications for privacy, efficiency, and the kind of advanced transactions one can do.
Q: How does CC able to differentiate itself from other endeavors such as Ripple and Open Transactions?
A: The distinctive feature of colored coins is that it’s integrated into a host blockchain such as Bitcoin. OT and Ripple work very differently from Bitcoin and thus have an adoption curve in both people’s ability to understand the system and the existing hardware, software and business infrastructure. With colored coins built on top of the established currency Bitcoin, it enjoys all of Bitcoin’s known advantages, and will be more easily adopted by users of Bitcoin (who are anyway the ever-growing target market).