With the rise of blockchain technologies, the world of finance is undergoing fundamental transformations. The financial ecosystems are the recipients of a number of benefits due to the introduction of decentralization, immutability, and distributed blockchain systems. Blockchain is encouraging the further democratization of the investment market in illiquid assets by bringing about fairer, more transparent markets.
Blockchain allows for breaking down an asset into smaller units for additional investments. It can be anything from exotic assets like paintings, racehorses, and sports teams to traditional assets like real estate property, company shares, collectibles, commodities, debts, and bonds. Almost anything can be turned into a token on a distributed ledger. But this leads to two questions: What is asset tokenization? and How to tokenize an asset?
What is asset tokenization?
Asset tokenization is turning any real tradable asset into digital tokens on a distributed ledger or blockchain. Tokenization can help divide and establish ownership rights into different shares. Thanks to blockchain, the ownership of assets is secured so no one can erase or change them. The possibilities of asset tokenization are limitless. The entire world can be tokenized and broken down into smaller pieces.
What assets can be tokenized?
There are four key types of assets that can be turned into digital tokens – intangible, fungible, non-fungible, and financial tokens.
Intangible assets. They don’t have a physical presence such as copyrights, patents, trademarks, etc.
Fungible assets. These assets are easily replaced by identical items. Fungible assets include commodities, common shares, options, and dollar bills.
Non-fungible assets. They cannot be divided into smaller parts in the real world. Non-fungible assets include cars, art, real estate, etc.
Financial tokens. These tokens include monetary vessels, precious metals, stones, gems, and gold.
Benefits of asset tokenization
In 2022, only a small percentage of the population is able to accurately assess high-value investments. This fact acts as a deterrent to the development of the investment market. However, the tokenization of assets delivers new opportunities for further growth and diversification of assets in the market.
Additional benefits of asset tokenization include:
- Greater liquidity of assets
Private equity value is estimated at $4 trillion, and real estate also has trillions locked. Hence, tokenization can open the following assets to a global investor pool and a new market for trading previously non-fractionable or illiquid assets.
- Higher accessibility
Accessibility is one of the greatest benefits offered by asset tokenization. Tokenized assets can be accessed 24/7 from any part of the world.
- Full transparency
Since each record is kept on a shared and decentralized ledger, no one can claim to own assets fraudulently. This gives you a full view of the token ownership, including who and when a token was purchased. Nothing can be covered up.
There is no way that the data stored on a blockchain can be corrected, changed, or deleted. Thanks to improved traceability, anyone can view every transaction performed with a particular asset at any point in time.
Asset tokenization completely removes the need for intermediaries. Thanks to smart contracts, a major portion of transactions are automated. This results in faster and more cost-effective transactions.
- Fractional ownership
Tokenized assets become divisible units that allow for small-percentage investments. Fractional ownership makes it easier for billions of new investors to enter the market.
Challenges that slow down the adoption of asset tokenization
Asset tokenization is a complex process that has the potential to transform the market and innovate the global economy. Here’s what you need to know before going all-in on asset tokenization:
- Lack of regulations. Most of the challenges of asset tokenization are linked with regulatory issues and its borderless nature. There are no universal regulations that would apply in different countries and different jurisdictions. Regulators, developers, and state politicians need to work together to define the legal framework regarding tokenized assets.
- Cyber attacks. Blockchain is a target for criminals. In 2020, hackers successfully launched over 122 cyber attacks and stole $3.8 billion. Though it seems like a huge problem, this number has been declining year over year. In 2019, there were 133 attacks.
- No standards. There is no formal framework for developing and managing tokenized assets. The development of common standards can help standardize the market and ensure trust among every participant in the market.
What are asset-based tokens?
Asset-based tokens are digital representations of physical assets that are secured by those assets. Any physical asset like gold, real estate, soybeans, crude oil, or equity can become an asset-backed token.
Benefits of owning asset-based tokens
- Lower trading costs
- Increased liquidity and market depth
Asset-based tokens are projected to increase the liquidity of the underlying physical asset. The market of tokenized assets is projected to reach $24 trillion by 2027. This means that 10% of the world’s GDP will be tokenized. The process of asset tokenization can help unlock enormous amounts of capital kept in traditional illiquid systems.
How to tokenize an asset?
The concept of tokenized assets can revolutionize a greater number of business verticals. The world’s tokenization market value is projected to reach $5.6 billion by 2026. It can make you think that the introduction of asset tokenization into your business isn’t a bad idea.
Here’s how you can tokenize an asset:
- Choose an asset. Don’t forget to conduct extensive research to study the market to identify what niche you are able to occupy.
- Develop your business model. Before developing your own solution, you need to determine the right business model that depends on the following factors:
- Your role. You can be either a token keeper or an advice issuer on how to build a token.
- Your monetization strategy. You can take advantage of smart contracts or develop life cycle events using distributed ledgers for higher benefits.
- Your platform functionality. You can become a central distributor and provide access to various tokenization platforms or maintain user accounts on cryptocurrencies.
- Build your platform. With Unicsoft, you don’t have to worry about the technical part of the development process. Our field-tested blockchain developers can turn any business idea into a fully-fledged software solution.
- Integrate your platform. The process of platform integration depends on your business model. Now you need to take care of product/service types, your target audience, the infrastructure involved, and any legal aspects.
- Study the legal issues. Before entering the market, you need to ensure that your platform complies with all the regulatory requirements.
- Publish a whitepaper. Tell the world about the importance of asset tokenization, its adoption, and its impact on the business world.
- Win over investors. This is probably the hardest part of your journey. You need to start your marketing campaign long before you launch your platform.
The securities trading process can be broken down into the following stages:
- Securities issuance
- Transfer of securities
- Additional financial services
The traditional value chain starts from an institution that issues securities. Access to the primary market is limited to authorized investors. On the secondary market, the control goes to the stock exchanges and brokers who trade within specific time frames. Next, the authorized intermediaries ensure all parties fulfill their obligations. They also transfer securities from the seller to the buyer after the payment is made.
That’s not the end of the journey, though. The new owner must ensure the securities are stored in a protected location like a financial institution or depository (another third party). They must also consider service costs along the chain, including tax, accounting, and management.
What makes a chain with tokenized securities different? First, securities can be issued by a number of market players – from traditional institutions to tech companies and consultancies. Second, you don’t need intermediaries for securities distribution. Exchanges are no longer the only trading option as blockchain is a peer-to-peer network.
What’s more, there are no time limits for trading. Transaction settlement does not require third parties either since all payments and transfers are fulfilled by blockchain. Also, you have several options for storing securities: entrust a third party with your tokens, store them yourself, or keep them online or offline on a separate device.
Asset tokenization promises major changes to securities trading: less monopoly on the market, no intermediaries at some stages, and, as a result, cheaper financial services.
Let’s see how different industries leverage tokenization.
Industries to benefit from asset tokenization
Asset tokenization is overhauling quite a few business domains.
Asset tokenization can disrupt traditional financial products via decentralized finance, or DeFi. It could impact the financial landscape of investment, payment, margin lending, and product structuring sectors. The use cases in these domains range from gold tokenization to security offerings and bonds.
DBS Bank, for example, issued its first tokenized bond of 15 million SGD (Singapore dollars) in 2021. Another case is PAX Gold — a cryptocurrency backed by the physical gold reserves of Paxos, a for-profit NY company. PAXG token represents the real-life LBMA (London Bullion Market Association ) — certified gold bars in a 1:1 ratio (one token to one troy ounce).
Real estate is another industry to benefit from asset tokenization. Tokenized assets make investing simpler and smoother. There is no need for intermediaries, so buyers and sellers can interact easily. Moreover, tokenized real-estate assets allow you to invest even small amounts of money in high-end real estate.
Quite a few real estate companies offer investments via tokens. RealT, for instance, enables investors around the globe to buy real estate in the US via fully-compliant token ownership. What’s even more interesting, real estate is the field where investors can receive utility tokens, i.e., tokens that represent physical ownership over some part of real estate. It means you can own a house, a hotel room, or an apartment — your property rights secured by the real estate tokens.
Healthcare institutions deal with tons of sensitive information daily. Tokens can replace the most sensitive patient data like PPI, ePHI, and PANs with unique values — cutting the risk of data breaches.
This use case in action: tokenization of patient data is being used in real-world evidence studies. By generating a patient-specific token, organizations can de-identify patients and, using their medical history from different sources, track the patient’s engagement with the healthcare system. This way, the real patient’s identity is replaced with unique encrypted tokens that retain all the needed data.
With asset tokenizations, fans and investors will find investing in their favorite players and clubs easier. But they aren’t the only ones to benefit from asset tokenization. More funding means more support and opportunities for athletic clubs, too.
Asset tokenization works for both traditional and e-sports, as well as fantasy leagues. NBA Top Shot and Sorare are the most popular cases. In the first one, basketball fans can trade video clips, which resemble traditional card collecting, only enhanced with blockchain. The second platform offers digital sports collectibles in the form of NFTs. Tokenization in sports also covers tickets as tokens for unique content or verified access to the favorite team or metaverse tokens for enhanced interaction with the athletes.
Blockchain allows artists to monetize their art and art lovers to invest in their favorite pieces without spending millions of dollars.
One famous case you may have heard of was the tokenization of Pablo Picasso’s Fillette au béret. Sygnum, a Zurich-based digital asset bank, transferred the legal ownership of this masterpiece to blockchain and divided it into 4,000 art security tokens, 1,000 Swiss francs each. Other examples are tokenized versions of popular memes, the first tweet, and artworks like Abstract Composition by Wladimir Baranoff-Rossiné and Beeple $69-million worth NFT.
Asset tokenization is transforming multiple industries, like carbon credits tokenization, and Unicsoft is thrilled to be at the forefront of this innovation. And not just thrilled. We have already brought several projects to life.
Unicsoft experience in tokenization
One of Unicsoft’s clients needed a solution for carbon credit tokenization and trading. Our task was to create a marketplace where companies and individuals could acquire and trade voluntary carbon offsets (VCOs). These offsets create a market where one party buys the offsets, funding the projects toward reducing emissions.
The VCOs are issued as NFTs, backed by real, verified carbon credits. They are minted on a private blockchain, accessible via the platform, and can be traded seamlessly. Unicsoft’s holistic solution covered both the institutional and the retail marketplaces. We’re planning to expand it with features like crypto wallet deposit and withdrawal, as well as native mobile apps.
An NFT platform for the diamond investing was another exciting project Unicsoft helped implement. In this case, tokenization can significantly democratize limited markets, currently accessible only to the wealthy elite. Our client, Kimby, needed a platform to source highly-vetted assets — precious gemstones. Like in the case of Picasso’s masterpiece, they planned to fractionize the assets and sell the shares worldwide. Unicsoft experts handled business analysis, the first stage of this project. The solution is expected to feature a marketplace with an integrated crypto wallet, inventory management module, BI functionality, fraud risk management, P2P lending, and staking. The platform will run on AWS.
Asset tokenization revolutionizes various business domains and delivers new services and roles to the market. It opens up new opportunities for traditional market players to meet the demand of the next-generation economy. Contact us to learn how to harness the power of asset tokenization for your business.