Everything such as real estate, artwork, and even business contracts can be tokenized now. This helps in enhancing the liquidity of assets. Powered by the game-changing blockchain technology which is slowly making its way towards the mainstream economy, tokenization offers a fantastic avenue for investors and entrepreneurs.
Understanding the Meaning of Tokenization
It refers to the creation of digital ownership of an asset by issuing valuable security tokens. The assets can be bought or sold safely on secondary markets existing in the economy.
How Does the Phenomenon of Tokenization Function?
The tokens created for a specific asset will represent a certain fraction of the entire value of an asset. Hence, it offers a good opportunity for investors to diversify their risks by spreading their investments across multiple asset classes located in different parts of the world. They can save money by not investing in the entire asset at once. The concept of fractional ownership broadens the access of the real estate industry to more people enabling a higher amount of funds to be fetched in the long run.
The Different Kinds of Assets That Can Be Tokenized?
The major assets that can be tokenized include real estate, business contracts, artwork, private equity, gold, metals, sports merchandise, etc can be tokenized. Intangible assets such as copyrights, company shares, patents, and trademarks can be tokenized on the blockchain. Other assets such as exotic cars, equities, bonds, and diamonds can be converted into security tokens on the blockchain platform. Hence, any asset can get itself tokenized easily. It depends on where the investor sets his eye on.
Benefits Rendered by Tokenization
Tokenization of assets guarantees a higher level of transparency and eliminates the interference of intermediaries. KYC/AML procedures are also strictly followed and compliance is ensured through smart contracts where everyone can know the investors’ obligations. Transfer of assets between different parties occurs seamlessly due to the reduced settlement time. It has revolutionized the business of asset management by reducing the fees involved and the reporting requirements. It helps entrepreneurs and investors to gain greater autonomy in their operations and easy ways to obtain capital cost-effectively. In the end, tokenization will create a more inclusive, efficient, and fair system to all stakeholders involved in the process.
Challenges to Tokenization in the Future
Not many businesses are aware of the potential of blockchain technology to transform the efficiency of their operations. The laws regarding security tokens are not common across all countries. The existing digital platforms need to work out issues such as financial intermediation, assurance and tax matters for smooth adoption of tokenization. Only those companies that possess the right financial expertise and capacity to support sufficient liquidity will succeed in tokenizing their assets.
Hence, there is a need for more knowledge on regulatory and compliance issues especially related to retail-grade assets. On the other hand, retail investors need to equip themselves with the techniques of asset valuation for tokenizing assets with low volatility. The market analysts have to understand the mindset of different kinds of investors such as mutual funds, pension funds, ultra-high net worth investors, and retail investors. Only time will tell if these next-gen platforms can unlock blockchain technology’s powerful potential for entering the business of financial assets. Despite some limitations, tokenization is the best method to facilitate price discovery, a higher level of transparency, liquidity, and improving access for investors.
Related: How to Tokenize Commercial Real Estate Asset
The Ideal Framework for Implementing Tokenization Successfully
With the advent of digitization reshaping business strategies, organizations have to adapt to survive as well as compete in the ever-changing market. Currently, implementation of asset tokenization has been quite uneven across sectors, entities and geographies. Illiquid assets are being transformed by reducing the risks and costs involved in clearing, settlement, custody, and collateralization. Tokens can be formed as an agreement between multiple parties simultaneously across different sectors or industries. A standardized taxonomy for tokens is urgently needed for determining common securities rules and issuance facilities. The tokens can be classified based on type (fungible or non-fungible), its unit (fractional or whole), value type (intrinsic or reference), representation type (common or unique), supply (fixed or infinite), template type (single or hybrid). If tokens are categorized clearly, it would be visualized well.
Summing up:
Concrete value can be created across the entire ecosystem only by analyzing the different economic structures and elements. A comprehensive illustration would be required for the lifecycle of the asset, the rights granted to the involved parties, and relevant multi-party transactions that are commonly applicable. It should be compliant with the guidelines issued by regulatory and compliance bodies. The token should be defined in a developer-friendly way. The success of tokenization and its taxonomy model depends on the success of its implementation across various sectors and different platforms. It requires a structured design approach based on an underlying-meta model. Bold steps are needed to be taken at this critical time where fundraising for business firms has become quite difficult due to the economic downturn.
