Asset Tokenization: How It Is Going to Shape the World
Asset tokenization is a process of converting real-world assets into digital tokens that can be stored, transferred, and traded on blockchain platforms. Asset tokenization has the potential to transform various industries and sectors by creating new opportunities for investors, owners, and entrepreneurs.
What is Asset Tokenization?
Asset tokenization is a way of digitizing tangible and intangible assets and converting them into tokens, which are then stored on the blockchain. One asset is not generally equal to one token: assets are usually broken down into smaller parts, which form many tokens.
For example, imagine that you own an illiquid asset, such as a piece of art, equity in a company, or a real estate property. Generally, there is no straightforward way to enhance liquidity from that asset until you sell it. When it comes to private equity assets, the sales opportunities can be even more limited as various regulations impact the sale of non-public equity.
Enter asset tokenization, the creation of digitally-secured tokens to represent shares of ownership in an illiquid asset. The sum of all of the shares will then equal the total value of the asset.
What are the Benefits of Asset Tokenization?
Asset tokenization can offer several benefits for both asset owners and investors:
Liquidity: Owners may sell tokenized assets on digital trading platforms or within the secondary market; thus, turning a normally illiquid asset into one that can be more freely bought and sold. This can also increase the market size and demand for certain assets that were previously inaccessible or unaffordable for many investors.
Fractional ownership: With asset tokenization, an investor may choose to buy a smaller percentage of a real-world asset through its purchase, meaning there could be a lower minimum investment requirement. This can also enable diversification and risk reduction for investors who want to invest in multiple assets with different characteristics and returns.
Security: A blockchain token is engineered to securely store ownership information, such as the token-holder's rights and responsibilities, so potential buyers may have greater transparency into the chain of title for the asset, as well as diversify their portfolio with different types of assets well as what their inherited rights would be after purchase. This greater transparency may lend itself to faster transactions and fewer costs associated with those transactions due to the diminished requirement to hire intermediaries to examine the token’s veracity and finalize the sales contract.
Compliance: Asset tokenization can also facilitate compliance with regulatory requirements by embedding smart contracts into the tokens that can automatically execute certain actions or conditions based on predefined rules. For example, smart contracts can enforce KYC/AML checks, tax reporting obligations, or dividend payments without human intervention.
What are Some Examples of Asset Tokenization?
Asset tokenization can be applied to virtually any type of asset where there is an ownership interest. Some examples include:
Securities: Stocks, bonds, and other financial instruments can be tokenized to create more efficient capital markets that can reduce intermediation costs,
friction and settlement times.
Commodities: Gold, oil, and other natural resources can be tokenized to enable fractional ownership, price discovery, and hedging strategies.
Real estate: Properties can be tokenized to allow for easier access, liquidity, and diversification in the real estate market. Token holders can also benefit from rental income or capital appreciation without having to deal with maintenance or management issues.
Art: Paintings, sculptures, and other artworks can be tokenized to create new revenue streams for artists and collectors, as well as democratize access to cultural heritage. Token holders can also enjoy digital display or lending options for their artworks.
Non-fungible tokens (NFTs): NFTs are unique digital tokens that represent ownership of scarce digital assets, such as online art, music, games, collectibles, or domain names. NFTs have gained popularity recently as they allow creators to monetize their work directly and transparently, as well as provide provenance and authenticity for their digital creations.
Asset tokenization is a promising innovation that has the potential to reshape various industries and sectors by creating new opportunities for investors, owners and entrepreneurs. By leveraging blockchain technology, asset tokenization