At present, investment in several high-value assets is reserved for the few, or their value remains unrealized. The situation is more prominent in case the asset is illiquid or intangible. The high threshold value and opaque investment process are the critical roadblocks to investment and ownership. Blockchain tokenization promises significant transformation to this landscape. Asset tokenization enabled by blockchain can bring new and innovative investment and ownership models and make the current investing and trading scenario far more convenient and efficient.
Simultaneously, it will enable other business models around tokenized assets. Prominent examples are NFTs (Non-Fungible Tokens) which have stirred up the digital world and CBDC (Central Bank Digital Currency) where the central banks are trying to tokenize the money.
So, what is tokenization?
Tokenization refers to the process of converting the rights to any valued asset into a digital token. So, owning a token is a digital representation of owing the asset, partially or fully, as determined by the token definition.
The first step: Defining and creating token
At first, asset valuation and determining the values of the token to be issued against the asset are carried out. If the asset’s economic value is high, we can do fractionalization to divide the asset value into smaller units. This decreases the threshold value of the investment, enabling greater market participation. Defining token, as you can observe, is not the major hurdle, and it doesn’t even require blockchain technology for its success. In fact, shares of any company are almost similar to this process, where we can view shares as digital tokens.
So, why is blockchain viewed as the technology which is bringing the required transformation to the tokenization process? Or, why the tokenization process has been accelerating exponentially with blockchain technology? Some even say that blockchain has launched the concept of tokenization.
Reasons behind this causality:
Blockchain brings an expanded marketplace with enhanced trust
In the current system, listing many illiquid/high-value assets or other unregulated assets and their shares is complex and limited to close and mini marketplaces. Blockchain provides the architecture to expand the market in a trusted way, and it enables to perform the asset ownership trading in a simple yet secure manner. It brings democratization to the existing process by bringing more participants into this fractional investment model. And all this is done in an ecosystem where one doesn’t need to trust one another but on the technology. So, the fear of investment in unregulated assets or loosely regulated assets has been reduced.
Hence, even if tokenization as a concept was already there, it was limited to a small set of investors. Blockchain has given it wings.
Immutable and transparent transactions
Being immutable, the ownership data can’t be muddled, and no one can erase or modify the transaction. For any audit, we can examine the entire chain of asset token ownership. Since the ledger is shared, the system becomes transparent, eliminating the data asymmetry during trade and transfer of ownership.
Increase operational efficiency
Blockchain technology reduced the existing delays between transaction and settlement by efficiently handling the process of information sharing and transfer of ownership and value. Also, the tokens are easy to store, manage and trade on blockchain networks with greater transparency and integrity.
Trending tokenization opportunities
- Several central regulatory banks are working on CBDC (Central bank Digital Currency) projects where tokens can be used as a digital currency.
- Digital collectible as NFTs- The internet is full of news around NFT tokenization and how they are pivoting new markets.
- Tokenization of stocks and bonds- Financial institutions are introducing tokens to gain efficiencies and trust in book entry and accelerating their payment-vs-delivery process.
- Tokenization of high-value real estate- Several companies in the US and Europe have already tokenized high-value apartments, buildings, etc., and opened new investment windows with a lower threshold value.
- Artwork tokenization- The world of art is one of the key areas where tokenization is widespread. With rights management on blockchain, the ownership transfer and management via tokenization are eliminating fraud and establishing trust in the market.
- Tokenizing and trading of various commodities- precious metals, diamond, oil, etc.
Tokenization is transformative, but obviously, there are some challenges when we go for a pragmatic adoption of tokenization, mainly in regulatory frameworks. Some countries and organizations have already drafted, and many are in the process of drafting and creating a homogenous regulatory framework.
Blockchain tokenization has given rise to a new set of crypto-financial assets and added a fresh investment and ownership outlook. Active collaboration from the participants of any digital asset ecosystem can lead to better adoption and harnessing of benefits from the opportunities put forth by blockchain-enabled tokenization.