The world of finance has undergone revolutionary changes in recent times, driven by a phenomenon called blockchain- a distributed ledger technology that enables decentralized transactions without the need for intermediaries. One of the most significant applications of blockchain has been tokenization- a process of creating digital tokens that represent real-world assets. Tokenization of real assets is disrupting the traditional financial system and changing the way value is transferred.
Traditionally, assets like real estate, commodities, and art have been difficult for small investors to access due to the high cost of acquisition, lack of liquidity, and compliance requirements. Tokenization enables fractionation of these high-value assets into smaller digital units, thereby opening up access to a broader range of investors. For instance, instead of buying an entire building or an entire share, investors can buy small fractions of it, making it possible for anyone to invest in high-value assets.
The innovation behind tokenization is that it allows investors to own a small percentage of real assets without acquiring the asset itself physically. The assets are tokenized on blockchain and divided into smaller units or shares, called “tokens,” which are usually traded on digital exchanges. These tokens represent fractional ownership of the real asset and can be transferred as a digital asset. This means that investors can now own a part of a real asset and benefit from its appreciation without having to go through the hassle of physically acquiring or managing the asset.
The use of tokens for ownership transfer is not only faster and more efficient but also cheaper than traditional methods such as buying physical shares. Tokenization reduces the need for intermediaries in the transfer of ownership, eliminating the associated costs such as brokerage fees, trade clearing fees, and the costs of physically exchanging documents. The savings in costs and time associated with tokenization make it an attractive option for investors.
Another advantage of tokenization is the increased liquidity of assets. Tokenized assets are traded on open markets, enabling investors to buy and sell tokens easily. Traditionally, real estate or other hard assets are difficult to liquidate, and the process of finding buyers and closing transactions can take a long time. Tokenization removes these barriers and allows for a more streamlined and efficient transfer of ownership. This increased liquidity can attract more investors, increase demand, and potentially drive up prices.
The adoption of tokenization has been mainly driven by the benefits it offers to both issuers and investors. For issuers, tokenization offers an opportunity to access a broader capital market, raise funds efficiently, and reduce the cost of capital. Issuers can tokenize their assets and offer them to a wider range of investors in small units. This allows for faster access to capital markets and reduces the costs associated with traditional capital raising methods.
Investors also benefit from tokenization because it offers greater transparency and security. Tokenization on the blockchain ensures that every transaction is recorded and verified, reducing the chances of fraud or manipulation. This enhanced security provides investors with greater confidence and trust in the tokenization process.
Tokenization is also being used for many types of assets. For example, tokenization of commodities like gold or silver has attracted a lot of interest from investors who prefer the security that comes with owning physical assets without the hassle of acquiring and storing them. Tokenizing art like paintings has also become popular, allowing investors to own a part of a valuable piece of art and benefit from its appreciation.
The tokenization of assets is still a relatively new concept, and many regulatory and legal challenges need to be addressed. The regulation of tokenized assets is still evolving and varies from country to country. It is expected that increased regulatory clarity will provide more certainty to investors and issuers and enhance the adoption of tokenization.
In conclusion, tokenization is an innovative and disruptive technology that is changing the way value is transferred. It offers a new way of accessing investment opportunities and increases liquidity while improving transparency and reducing costs. While the technology is still in its infancy, increased regulatory clarity is expected to drive further adoption and innovation in the space.
Tokenization of real-world assets has been a topic of discussion for several years now, but it has only just begun to gain widespread adoption in the corporate world. The technology and infrastructure required to support this industry have finally caught up, making it possible for fund managers and institutions to feel comfortable using it at scale. This was the key message delivered by panelists at the recent Consensus 2023 festival held in Austin, Texas.
According to Securitize CEO Carlos Domingo, real-world assets will be tokenized on private blockchains first, followed by permissioned chains, and finally public chains. He compared the process to the cloud computing industry, which was once considered out of bounds for big corporations, but has now become standard practice even for cautious institutions such as the Central Intelligence Agency. Domingo emphasized that while private blockchains are acceptable, they only solve part of the problem.
Christine Moy, head of Digital Assets at Apollo Global Management, added that tokenization changes the way value is transferred, and that it is now possible due to closing the technological gap. Morgan Krupetsky, Director of Business Development for Institutions at Avalanche Labs, concurred, stating that institutions and investors have become more comfortable with the technology as they’ve come a long way since the concept first emerged on the market in 2017.
Krupetsky noted that rising rates have added a sense of urgency to ensure the technology is ready for the mainstream, and that we are at the point where customers just have to say “yes please” to tokenization. He believes that if tokenization receives the positive market reception that the panelists on stage are hoping for, it will represent the next chapter in the crypto industry.
According to Domingo, the crypto industry has focused on unregulated things that were not necessarily productive. By putting real assets on the chain, he believes the industry can become more productive in the long run.
In conclusion, tokenization of real-world assets has been a buzzword in the crypto industry for several years, but it has only recently gained traction among institutions and investors thanks to the closing of the technological gap. Private blockchains were considered acceptable but only solved part of the problem. Tokenization changes the way value is transferred and will represent the next chapter in the crypto industry if it receives the positive market reception panelists hope for. By putting real assets on the chain, the industry can become more productive in the long run.