- In today’s digital and globalized world, companies such as financial institutions are experiencing a strong pressure on cost reduction and business optimization, therefore businesses try to explore digital solutions to create new revenue streams and optimize existing legacy systems with the support of emerging technologies.
While some digital solutions can simply be adopted by businesses and existing regulatory frameworks, others require a deeper understanding of the underlying technology itself and implications associated with them.
The tokenization process marks a promising solution in converting rights to an asset into a unique digital representation – a token.
Reasons behind tokenization:
No territorial barriers
An investor can invest in the property located in any part of the world without visiting there physically. Investment becomes secure, fast and easy with asset tokenization on the blockchain.
Elimination of middlemen
Trading of assets usually takes days to months to achieve a settlement. It involves external entities to validate the documentation of transactions and investor’s eligibility, which adds extra costs to the process. But, tokenization removes the need for intermediaries with blockchain’s ability to provide immutability and transparency.
When assets are digitized, they become highly divisible. Thus, investors can invest in small percentages of tokenized assets. For example, you can buy only a 10% share of a tokenized real estate property. It dramatically removes the barriers for billions of investors to enter the market.
Bringing the investment process on the blockchain provides a low-friction environment. Asset tokenization enables the automated transfer of ownership while ensuring compliance. With reduced complexity and costs, tokenized assets present the possibility to invest with fiat money and P2P trading on regulated exchanges, which can improve liquidity.
Quick and cheaper transactions
Since the transaction and transfer of tokens are done with smart contracts, the exchange process is automated. The automation can reduce the burden associated with buying and selling, with no intermediaries required. As a result, it fastens the deal execution with lower transaction fees.
Broader investor base
Traditionally, the trading of real-world assets has a restriction on the level of fractionalization. But asset tokenization eliminates the limitation by making it possible to sell or buy tokens that represent fractions of ownership. It results in a broader investor base to participate in the investment process. Tokenization would open opportunities for a new set of investors and allow them to diversify their investment portfolio into assets that they could not afford previously.
Technical approach to tokenize assets:
- Selection of the model for representing assets
- Modelling of the asset
- Technical and security review of the informatic code
- Deployment of the informatic code
Several token standards have emerged from the Ethereum community to allow for the representation of different kinds of assets. The introduction of these standards eases the DLT/Blockchain adoption and enables interoperability between multiple DLT/Blockchain initiatives. This allows tokens inheriting from the same token standard (from the same ‘family’) to use some generic smart contracts or to be stored in some widespread wallets enabling the storage of ownership information.
Before implementing the token model chosen for representing assets, one must ask several questions that will impact which information will be embedded on chain and which will remain stored in off-chain databases.
Before deploying a token in live, some precautions need to be taken due to the immutability of Blockchain and the irreversibility of the development. Indeed, once the code ruling how your asset will behave on DLT/Blockchain has been released, it is not possible to turn back.
After security review have been performed, the code can simply be deployed on the DLT/Blockchain considered, either public or private depending on the use case and perimeter considered.
Different fundraising options are based on different tokens. Each token has its own characteristics. Depending on whether an accounting, tax or indirect tax perspective is applied, the same token can be subject to different classification.