Asset Tokenization
As the finance industry continues to develop, technology is becoming an integral part of tomorrow's
capital
market, specifically, through tokenization.
Blockchain technology allows securities to be
digitally
tokenized and opens
up a vast amount of possibilities for both assets and investors and ultimately, will re-shape the future
of
capital markets altogether.
What is Asset Tokenization?
Asset tokenization is, in short, the process of converting ownership rights and obligations of a particular asset and its associated value into digital tokens using blockchain technology. Therefore, each token represents a proportion of the asset's initial value, whether that be regulated financial instruments like equities, bonds or funds, or even tangible assets like real estate. Finally, a Smart Contract digitally facilitates, verifies or enforces the negotiation or performance, without the need for third parties.
Real-world example.
Suppose we disregard Smart Contracts and Blockchain for a minute. Let us say you want to
invest
in real estate, but your opening investment is $20,000, and you plan on gradually increasing
your investment each month. Indeed, with the traditional real
estate market, this is quite inconvenient to do. How do you expect to buy a few square
meters of
an apartment?
Suppose we reverse the situation. Imagine that you own a property —
say an
apartment
in central London, and you would like to raise some funds to renovate the property. The
apartment is valued at $2,000,000 but you need $100,000. Raising the necessary funds may be
awkward.
We now decide to tokenize
the $2,000,000 apartment into 2,000,000 tokens (the number is optional, we could have issued
20,000 tokens). Thus, each token represents a 0.00005% share of the underlying asset.
Finally, we issue the tokens on a Smart Contract supporting platform, like Ethereum, so that
the
tokens can be freely bought and sold on different exchanges. When you buy one token, you buy
0.00005% of the ownership in the asset. If you buy 1,000,000
tokens, you own 50% of the asset. Buy all 2,000,000 tokens, and you are 100% owner of the
asset.
Blockchain is an immutable public ledger. It ensures that nobody can "erase" your ownership
once
you have bought tokens even if
it is not registered on a government-run registry.
Thus, to conclude this example,
we
took an asset, tokenized it, and created its digital representation that lives on
Blockchain.
Blockchain
guarantees that the ownership information is immutable.
Why is the market shifting to tokenization?
No territorial barriers
Investors can invest in the property mentioned above or other assets while being located in another part of the world without physically visiting. Thus investment becomes secure, quick and straightforward.
Elimination of brokers
Trading assets can take days or even months to accomplish a settlement. It requires external entities to verify the documentation of transactions and investor's eligibility, which adds additional expenses to the process. However, tokenization eliminates the requirement for intermediaries with Blockchain's ability to provide immutability and transparency.
Fractional Ownership
Assets become highly divisible when digitalized. Therefore, investors can invest in small to large percentages of tokenized assets. For example, you can buy a 5% share of a tokenized painting or real estate property.
Improved liquidity
Blockchain presents a low-friction environment for investments. Asset tokenization facilitates the automated transfer of ownership while guaranteeing compliance. Tokenized assets benefit from reduced complexity and expenses, and the opportunity to invest with fiat money and P2P trading on regulated exchanges, thus improving liquidity.
Quick and cheaper transactions
Since token transactions and transfers are completed with Smart Contracts, the exchange process is automated and simple. Automation reduces the difficulties associated with purchasing and selling and requires no intermediaries. As a result, deal executions are simple and have low transaction fees.
Broader Investor Base
Since asset tokenization allows for fractional ownership, virtually anyone can become an investor, allowing them to diversify their investment portfolio into assets that they could not previously afford.
