Why you should think about it as portfolio manager?
Ever since Bitcoin emerged, the world started to have numerous new opportunities to revolutionize the way people issue, manage, and transact investments and assets. The technology used for cryptocurrency, Blockchain, is one of the types of distributed ledger technology that people have been utilizing to have multiple means of investment. In this article, we will attempt to have asset tokenization explained.
Blockchain lets us mold the financial landscape. It lets us easily break down assets into smaller units, and each unit represents ownership. It encourages democracy in the investment of historically illiquid assets. Blockchain lets us bring about markets that are fairer for everyone.
Tokenization of any assets is possible on a digital ledger, be it a painting, a digital media platform, a company share, a collectible, or even a real-estate property. But what exactly is asset tokenization?
What is Asset Tokenization?
Asset tokenization definition - the process in which an issuer takes any real-world asset, whether it’s tangible or intangible, and digitizes it. These digitized assets then get broken down into smaller pieces which become what we call “tokens”. These digital tokens take their place on a distributed ledger or blockchain, and the issuer is then able to utilize these tokens in various ways. Tokens, in a broad sense, are representations of something else. In the specific case of asset tokenization, though, a token represents a proportional piece of a digitized asset. It also means that an owner of a token has associated ownership rights or other types of rights to the digitized asset their token represents. Asset tokenization is made possible because of blockchain. Blockchain also guarantees that once you buy digitized assets or tokens, a single authority cannot change or erase your ownership. As for what assets can be digitized and broken down, the list includes everything; it can be anything. Some assets that can be digitized are real estate, art, precious materials, and natural resources, equity, and more.
The Purpose of Asset Tokenization
Asset tokenization is an implementation process in the service of many different objectives. Its primary use is for financial inclusion, security, and the improvement of the efficiency of various business processes.
The tokenization of assets also helps increase the business liquidity and is why many organizations utilize it. It also helps add liquidity to traditionally illiquid assets, making it an attractive option in asset management.
The Origins of Asset Tokenization
The concept of asset tokenization must have started with the rise of cryptocurrency? Wrong. The use of tokenization to improve data security for financial services has been around since the 1970s. Numerous conventional enterprises use tokenization to safeguard confidential and sensitive information in finance. It can include but is not limited to credit card numbers, financial statements, and personally identifiable information. Tokenization has a traditional approach of replacing sensitive client information with strings of non-sensitive letters and numbers, maintaining all the data securely. A perfect example of tokenization is the process of mobile payments. Tokenization has already evolved from tokenizing sensitive information and data to also tokenizing assets. It is the asset tokenization we hear about today.
Asset Tokenization in Action
Let’s say an investor is looking into investing in the real estate market. He set his sight on a building that seems promising; its location will increase in value as the years go by. Now, there’s one problem: The building costs a million dollars, the money it takes to invest is very high. In the above scenario, the investor either needs to have good liquidity or get a loan from a bank to invest in the building. These two courses of action can become future problems for this investor. Deploying a large amount of cash to invest can lead him to an undesirable situation in the future in terms of liquidity. Or if he enters debt instruments, he will be in for an indebted position which is also not advisable; with the pressure of paying back in an established term together with interest. Asset tokenization comes in as a hero in this scenario. By using asset tokenization, investment in the building doesn’t have to be a pain in the pocket. The building can be broken up into as many parts as needed. We can represent the one-million- dollar building with 10,000 tokens worth a hundred dollars each. You can even make 100,000 tokens worth ten dollars each.
With the usage of asset tokenization, the investor doesn’t have to worry about going into debt or performing some magic to get more money and invest in what he deems a profitable investment. He can decide to buy, say, a hundred tokens to obtain profit in proportion to how the building performs.
Benefits of Asset Tokenization
Increased Liquidity
Increased liquidity is generated by reducing the barriers to investment and allowing a broader range of people to invest in assets. In traditionally illiquid markets such as real estate, fine art, and valuable resources, technology like this can help sellers find more possible buyers to interact with. It is because the range of investors increases, thanks to the reduction of capital needed to invest.
Asset tokenization not only widens the range of investors. Blockchain, the technology that makes asset tokenization possible, also provides a decentralized system that lets people from all over the world tokenize their assets. It means that not only the range of investors increases but also the number and range of sellers.
For the benefit of increased liquidity, let’s use the example of a seller that needs to get $10,000 on hand. Let’s say he has a condo valued at $500,000. Utilizing the condo to get $10,000 would be a pretty difficult thing to do, but with asset tokenization, it becomes simpler. He can tokenize the condo into 500,000 tokens each, worth 0.0002%. This solution lets the seller get his needed money by selling 10,000 tokens, rather than selling the entire property and losing the condo’s utility as a livable area. Asset tokenization ensures that the seller has a more liquid asset.
Eliminates the Need for Intermediaries
Today, transferring an asset’s ownership requires lawyers to act as intermediaries to handle the paperwork and create trust between the seller and the buyer. Blockchain lets the asset owner and its buyer contact each other directly, which removes this need for involvement from intermediaries. If a tokenized asset and its owner decide to use a decentralized platform, many parts of the ownership transfer process will get automated. It lets them save time and cost. This automation of manual processes is possible through the use of smart contracts. Tokenization makes lengthy transactions done in seconds which makes markets more optimized and less expensive by reducing costs of time.
Transparent Process
Transparency is the well-known benefit of using blockchain and extension asset tokenization. Blockchain holds an immutable record of tokenized assets ownership, allowing traceability and transparency. Owners cannot change the history of an asset to make it more attractive. An inalterable shared ledger records all history of all activities performed over the asset. Anyone can view the history and the transactions performed of an asset in the blockchain at any given time. Being able to review the transactions of an asset and its whole history allows traceability and provides trust. Proof of ownership is, by default, already provided when one performs asset tokenization.
Improved Accessibility
Asset tokenization, of course, provides more accessibility. It helps divide a specific asset into fragments as minimal as possible. Consequently, it also makes investors gain ownership of shares as minimal as possible. It means that shares and assets are more accessible to a wider range of investors, and asset management is not as taxing as it usually would be.
Challenges of Asset Tokenization
Regulatory Issues
The biggest challenge asset tokenization is facing is the lack of regulations. Blockchain has a borderless nature that offers various opportunities for businesses and individuals, but at the same time, countries have yet to develop regulations that would apply in different jurisdictions. The situation is commonly faced by new global trends and technologies, though. With some work from the joint forces of politicians, regulators, and developers, establishing legal frameworks and global laws and regulations related to asset tokenization will take place soon.
Possibility of Attacks
Just like any other technology, hackers often target the blockchain. Throughout 2020, hackers initiated 122 cyberattacks on blockchains and stole a total of around $3.78 billion. Though this may not be the most uplifting thing to hear, there has fortunately been a downward trend in the number of cyberattacks on various services running on the blockchain. But the problem will soon be overcome, as with any other regulatory issue. Early stages of new technology and concepts will always face a few hiccups on the road.
Uncertain Codes of Conduct
Codes of conduct are absent in the creation and management of digital assets. And it forces financial entities to dictate the business architecture. It also exposes both investors and sellers to possible undesired practices. Fortunately, formal frameworks and regulations will soon help ensure trust and build common standards in asset tokenization.
The World is Getting Tokenized: The Various Fields Affected by Asset Tokenization
Asset Tokenization in Real Estate
One of the most promising uses of asset tokenization lies in the real estate sector. Real estate tokenization lets owners fractionalize ownership of their property into tokens. Real estate becomes accessible to many investors and tradable on various exchanges using asset tokenization. It lowers entry barriers and helps reduce the friction between buyers and sellers.
Overall, it helps improve inclusivity in the real estate market and helps defend against real estate fraud. Some promising projects have already emerged. For example, in October 2018, a Manhattan condo in New York priced at a whopping $30 million was tokenized on the Ethereum blockchain. Then tokenization of a Paris hotel to attract a broader range of investors and reduce minimum investor subscription amounts came in a year after. It resulted in €26 million worth of issuance and was one of the topmost real estate tokenization projects in Europe. These projects show that asset tokenization is molding the real estate landscape innovatively. It will help significantly improve the liquidity of the real estate market and open it up to an extensive range and number of investors.
Asset Tokenization in Art
When fine art is the topic of discussion, images of world-famous artists, expensive auctions, and classy museums often come to mind. The market of contemporary art has a business model that has remained untouched for decades, which, over time, has led to a lack of transparency, low liquidity, high investment barriers, and various copyright issues. The art world’s traditional market is hard to change, but blockchain can do it. Blockchain can help make art more accessible not only to art lovers but also to artists themselves. Artists can now tokenize their artworks and sell them globally; without the need for intermediaries. The tokenization of art helps solve the challenges in the art market and opens it up to a broader range of investors. Asset tokenization is also a great way to make an immutable registry for copyright records of artworks and provide liquidity and transparency for all participants. A great example of asset tokenization in use in the art world is a startup called Maecenas. Maecenas has introduced a blockchain-based marketplace for artwork that tokenizes art and lets everyone buy, sell, and trade part-ownership of various artworks. Artworks are tokenized into smaller pieces and sold at a fraction of the original cost. Interested buyers can purchase these tokens through bank transfers, credit cards, or cryptocurrencies. Additionally, using Smart Contracts ensures a fair and transparent process and distribution. Another example is Monart. Monart is an international art community and an innovative marketplace that invites investors to buy shares in artwork collections. They encourage investors to capitalize on the art market’s growth through the use of asset tokenization. Aside from that, the platform also offers its own cryptocurrency called MART. This art-based cryptocurrency is built upon the standard public Ethereum blockchain with an audited ERC-20 token.
With the rise of this new style of art marketplaces, the art world can only become more accessible to investors. Thanks to asset tokenization, the art marketplace is undergoing positive changes that help increase liquidity and reduce investment barriers for art.
Asset Tokenization in Precious Metals and Natural Resources
For centuries, precious metals and natural resources have always been a source of interest for various traders and investors. Before modern money, there were gold, silver, and resources. In the 21st century, these precious metals and resources are still highly coveted. The difference is in the form of trading: slowly, the investment and trading in these resources are changing because of asset tokenization. One of the most commonly tokenized resources is gold. Tokenized gold has many benefits. When an investor buys asset tokens, it comes with rights to the attached real assets. It makes the investment and purchase of gold infinitely more accessible and simpler. One other advantage is the elimination of unnecessary documentation and the involvement of third parties who are not always reliable. Trading tokenized gold is easy; it is comparable to trading cryptocurrencies. Many cryptocurrency coins' prices are pegged to the physical gold prices anyway. XAUt, DGX, Meld Gold, and PMGT are only a few of them. Aside from gold, silver tokenization also exists. It works almost the same way as gold, except it has more volatility. Traders of silver coins can quickly get profits out of its volatility. A few of these most popular silver-pinned coins are SVC, SLVT, and LKNS. As for natural resources such as oil and gas, there is currently only one token of note, PDX. PDX is the first regulated currency supported by oil and gas reserves. The company behind it has a vision of establishing one of the top digital currencies and an innovative financial ecosystem. With the evolution of asset tokenization, there are undoubtedly more natural resource-based tokens to come aside from PDX. With all of these examples, we can expect only more to come. The asset tokenization of various natural resources and metals has proved viable, profitable, and convenient. More investors and providers will be attracted, which will ultimately lead to the growth of asset tokenization in this field.
Asset Tokenization in Equity
The tokenization of equity became familiar upon the arrival of decentralized blockchain systems. In particular, tokenized equity is usually used in the form of ICOs or initial coin offerings for blockchain-based projects. The blockchain infrastructure also provides extra advantages to the activities when dealing with tokenized equity. The blockchain system handles all corporate actions such as acquisitions,
dividends, and mergers. It helps conserve the time spent manually organizing these activities. Automation is an advantage of the blockchain that is helpful in the asset tokenization of equity. Many new businesses and startups have started to fundraise using ICOs, providing investors with allotted token shares. One example is Quadrant Biosciences Inc., a U.S.-based biotech company that tokenized all of its equity into tokens named Quadrant Token. It was a success, raising over $13 million through the issuance of shares in token form, priced at $1.25 per share. Asset tokenization proves to be a useful mechanism in the world of equity shares. With the automation, speed, and transparency it offers, it will surely become more and more integrated with the necessary activities in equity trading.
Asset Tokenization Platforms
An asset tokenization platform converts real-world assets into digital tokens. The process is called TAAS - Tokenization as a Service. Financial institutions and institutional investors use asset tokenization platforms.
Top 5 Asset Tokenization Platforms
PixelPlex - It is an End-to-End Security Token Offering Platform enabling users to run security token offerings and access innovative investment opportunities worldwide with a ready-made solution.
Securrency - It is a complete securitization platform for real-world assets with a simple drag & drop process for tokens issuance with a single click.
Stobox - It provides technology and consulting to help clients leverage digital assets and tokenized securities, enabling their businesses to simplify operations with digital assets removing obstacles to their adoption.
Tokensoft - It is a technology and security platform for companies seeking to issue assets on the blockchain, distributing and managing your assets through a single interface.
Polymath - It provides technology in making easy ways to create, issue, and manage tokens or digital securities on the blockchain.
Asset Tokenization’s Effect on the Future
Asset tokenization is already molding the landscape of asset management today. It is slowly but surely taking its place in numerous markets, changing them to make them safer, more equitable, and liquid. It’s not a temporary phenomenon anymore, a trend that will fade out with time. Companies, startups, and individuals find more and more objects to tokenize. Asset tokenization becomes more cemented in the world of asset management. We can now tokenize anything,
and although initially, the process seems complicated, more and more people and organizations are becoming aware of the various benefits it can offer. Subsequently, asset tokenization is poised to keep impacting the world of asset management. And as we speak, there is intense work on addressing the few obstacles such as legal boundaries, missing regulations, and technological vulnerabilities. Developments will come, and the future of Asset Tokenization will only look brighter and more ironed out as time goes on.