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 bringing about fairer markets. So What is asset tokenization? What are the benefits of asset tokenization? Follow GIG’s article.
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What is asset tokenization?
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 bringing about fairer markets. Whether artwork, digital media platforms, real-estate property, company shares, or collectibles, everything can be tokenized on a distributed ledger.
Asset tokenization is how an issuer creates digital tokens on a distributed ledger or blockchain, which represent either digital or physical assets. Blockchain guarantees that once you buy tokens representing an asset, no single authority can erase or change your ownership – your ownership of that asset remains entirely immutable.
Which assets can be tokenized?
The possibilities are endless as tokenization allows for both fractional ownership and proof-of-ownership. Companies worldwide use blockchain technology to tokenize almost anything from traditional assets like shares, capital funds, bonds, commodities, and real-estate properties to exotic assets like sports teams, racehorses, artwork, and celebrities. However, GIG has grouped them into some primary categories:
Tokenized real estate allows for fractional ownership, opening the door to attracting investment capital and increasing market liquidity. Tokenized real estate assets provide an opportunity to expand real estate investment markets.
Tokenization of commodities can offer new market opportunities across the sourcing of commodities and trading lifecycle. Converting physical assets into tradable digital assets offers improved liquidity and lesser barriers to entry in asset classes led by institutional investors.
Currently, information about shareholders and shares of small-to-medium size companies is recorded on paper or spreadsheets. Each party manages records in its database, creating silos that are inefficient and prone to errors. Tokenization of equity shares allows companies to interact with shareholders by providing information on a single shared and immutable ledger. Shareholders will have ownership transparency and authenticity to run trades on the secondary market.
Illiquid assets, including artwork, wine, ownership interests in private companies, partnership shares, and more, can be tokenized to offer provenance, lending, and price discovery through the blockchain’s transparency.
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 that represent their share of the fund.
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.
What are the benefits of asset tokenization?
Benefits of asset tokenization from an asset owner’s perspective
With tokenization, the liquidity of those assets has grown by leaps and bounds. If we take an example of a $250,000 real estate, it will be quite tricky for everyone to invest. However, if broken down into representative tokens worth $25, representing a 0.01% stake in the asset, retail investors can buy the asset.
Assets that can’t be liquidated often have an unestablished market price. In this case, asset owners typically provide buyers with incentives like illiquidity discounts, which reduce the asset’s price. Token assets would increase an asset’s liquidity, as it facilitates fractional ownership, which eliminates illiquidity discounts. Moreover, selling small fractions of ownership enables owners to charge a fair market price.
Reduced management costs
Suppose you transfer ownership of an asset today. In that case, it requires lawyers acting as intermediaries to handle the paperwork and create trust between you and a buyer – this results in extra time and cost. If you choose to tokenize the same asset and utilize a decentralized platform or marketplace, it’ll automate many parts of this process, saving time and cost.
Benefits of asset tokenization from an investor’s perspective
Considering the example above of a tokenized property, it’s now possible for retail investors to invest small amounts of money in a property. Investors have a chance to diversify their portfolio by investing, for example, a sum of $10,000 – this wasn’t historically possible without a lot of paperwork, which costs money and takes extra time. Investors benefit from the increased liquidity of assets through tokenization.
Shorter lock-up periods
Lock-up periods restrict investors from selling their assets. Sometimes this is due to the asset being large and illiquid. Tokenization of assets can shorten the lock period because investors can sell their tokens quickly in a liquid market. Investors, in this scenario, no longer have to wait for years to take profits or losses.
Since the underlying technology behind asset tokenization, blockchain, is immutable, owners cannot change an assets’ history to make it appear more attractive. This allows investors to see the history of a holding and make more informed decisions.
With ownership and decentralized identity (DID) details kept on the blockchain, a buyers’ private-public key pair forms a digital signature, ensuring it’s them — this can be used for things like KYC / AML verification. Additionally, there are DID identifiers decided upon by standards organizations, such as w3c, ensuring acceptance across many different networks and platforms.
The challenges of assets tokenization
We need to overcome some challenges to widen the scope of tokenization and token economy. The rising interest has made the government authorities and brokers very attentive to asset tokenization.
Code of conduct
The lack of code of conduct and common standards for developing and managing tokenized assets compels financial entities to review the business architecture and exposes investors to unwanted practices. Using formal frameworks will ensure trust among all market participants. Using formal frameworks will ensure trust among all market participants.
Regulations & Jurisdictions
The lack of regulations within jurisdictions and the borderless nature of nascent blockchain technology presents a challenge for investors and institutions to hold tokenized assets confidently. Regulators, local and global policymakers should coordinate to state the legal framework, including all aspects of digital asset management.
In general, the development potential of asset encryption is huge in all areas of business activities, but to ensure the stability and sustainability of operations will still depend a lot on policymakers to provide an appropriate legal framework to regulate the market well.
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