The emergence of Bitcoin opened up a new world of opportunities to revolutionize how investments and assets are issued, managed, and transacted. The technology behind the world’s first cryptocurrency, blockchain, is one type of distributed ledger technology that holds the floodgates to multiple means of investment.
Blockchain will tend to the financial landscape and enable an asset to be easily broken down into smaller units, representing ownership, encouraging the democratization of investment in historically illiquid assets and bring about fairer markets. Whether it be paintings, digital media platforms, real-estate property, company shares, or collectibles, everything can be tokenized on a distributed ledger. This leads us to the question: What is asset tokenization?
PHYSICAL ASSETS REPRESENTED IN THE DIGITAL WORLD
The process of tokenization refers to issuing blockchain-based tokens that can be traded, stored and transferred in the digital world. These tokens exist on the chain, act as a store of value and carry the rights of the assets they represent, while the real-world assets backed by these tokens continue to exist “off-chain.” This concept isn’t new. A typical example of tokenization is “‘air miles” programs that can be converted into specific goods, services or flights. Digital tokens follow the same approach.
What can be tokenized?
The possibilities are endless as tokenization allows for both fractional ownership and proof-of-ownership. From traditional assets like venture capital funds, bonds, commodities, and real-estate properties to exotic assets like sports teams, race horses, artwork, and celebrities, companies worldwide use blockchain technology to tokenize almost anything. However, we have grouped them into four main categories:
Asset: An asset is any item of value that someone can transform into cash. It’s further divided into two classes: personal and business. Personal assets can include cashand property. Business assets include assets that are present on the balance sheet.
Equity: Equity (shares) can be tokenized; however, the assets remain in the digital form of security tokens stored online in a wallet. Investors can typically buy shares on a stock exchange.
Funds: An investment fund is a type of asset that investors can tokenize — these tokens represent an investors’ share of the fund. Each investor is provided tokens which represent their share of the fund.
Services: A business can offer goods or services as a way to raise funds or conduct business. Investors can use tokens to purchase goods or services provided by the supplier.
Types of tokenized assets
Fungible asset tokenization
A fungible asset has two main characteristics:
- Interchangeable: Each unit of the tokenized asset has the same market value and validity — for example, Bitcoin: All units of 1 $BTC are exactly the same. They hold the same market value, and are interchangeable. It doesn’t matter from whom a $BTC was purchased, since all BTC units have the same functionality and are part of the same network. You can swap one-fourth of a $BTC for anyone else’s one-fourth of a $BTC, with confidence that your $BTC’s one-fourth holds the same value, despite being one-fourth of different coins.
- Divisible: A fungible cryptocurrency can be divided into as many decimal places which were configured during its issuance. Each unit will have the same value and validity.
Non-fungible asset tokenization
A non-fungible token is:
- Non-interchangeable: NFTs can’t be replaced with tokens of the same type because each token represents a unique value.
- Non-divisible: NFTs are not typically divisible, although F-NFTs do offer fractional ownership of NFTs, such as in the case of expensive fine art or commercial real-estate.
- Unique: Each token differs from another token of the same type and has unique information and attributes.
Benefits of asset tokenization
LOWER MINIMUM INVESTMENT THRESHOLD
In the traditional financial world, investment barriers can be extremely high. Think about the amount of investment required to buy a real estate asset or a piece of art. With tokenization, we can lower the minimum investment threshold, allowing even small retail investors to diversify their portfolios and enter the previously exclusive markets that were only for large investors and high above their reach.
UNLOCKING THE VALUE OF ILLIQUID ASSETS
Through fractional ownership, traditionally illiquid assets can unlock their liquid potential and become tradeable on secondary markets, thus allowing a broader base of investors to participate in the ecosystem.
LESS ADMINISTRATIVE BURDEN
Tokenized assets allow faster transactions with less administrative burden. Through the use of smart contracts, many cumbersome manual processes can be automated and streamlined, while the clearing and settlement processes can become simplified and more efficient.
REAL-TIME TRACEABILITY AND VALIDATION
With an immutable record of ownership, tokenized assets allow for improved traceability and transparency. Each record is documented on an immutable shared ledger that contains the whole history of activities performed over an asset. This ensures that relevant parties have a clear view of the updated ledger of ownership records.
The future of asset tokenization
Tokenization is poised to transform asset management as we know it today. It democratizes access to markets while ensuring fairness and security. The only obstacle today being legal boundaries — to what extent this hurdle stands in the way depends on the type of asset you want to tokenize. A network for exchanging Basketball cards will have small hurdles compared to a platform of expensive paintings.
Creating a legal bridge between assets and distributed ledger technology needs legal professionals to solve tax-related and cross-jurisdictional issues. Nevertheless, new solutions will come into the market, which will iron out these concerns in the years to come.
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