Tokenization, the process of converting assets into digital tokens, is gaining traction in the business world. The World Economic Forum (“WEF”) recently held a panel discussion on the topic, featuring industry leaders such as Jeremy Allaire, CEO of Circle, and Jirayut Srupsrisopa, CEO of Bitkub Thailand. During that panel a wide range of applications of digital tokens were discussed such as Tokenization of electricity units, Central Bank Digital Currencies (“CBDCs”), investment tokens, tokens representing real assets etc. The flexibility of tokenization is immense, but so are the challenges arising from legal, compliance, potential regulation etc.
Srupsrisopa, Bitkub's CEO, discussed Thailand's efforts to create a separate license for investment tokens, allowing entities to tokenize a variety of assets, including bonds, carbon credits, and foreign exchange markets. In addition, Thailand's central bank is developing a CBDC that will be integrated into the Thai baht wholesale market in Q1 2023. These are just two major initiatives to promote Blockchain technology and innovate financial services.
With all the complexity and challenges coming with these initiatives, it’s very clear Tokenization will be a crucial aspect of the digital economy moving forward. As a result of their discussion, the panelists expressed even greater optimism about the future of Tokenization, predicting that a majority of real-world assets will be traded on Blockchains by the end of the decade.
In this newsletter, we will cover several topics related to Asset Tokenization i.e.:
The History of using Tokens
What is Asset Tokenization?
The Benefits of Tokenization
Market Size of Asset Tokenization
The Future of Asset Tokenization
Asset Tokenization is a very important building block for innovation in financial services and financial markets and can be utilized for a vast range of tasks. Over the coming weeks, we will continue to discuss Asset Tokenization and related topics in our newsletter, including the process of Asset Tokenization, the asset representation models, risks associated with Asset Tokenization, comparison of Asset Tokenization versus Securitisation, the leading Asset Tokenization platforms etc.
This article is also available on LinkedIn.
The History of using Tokens
In fact, tokens have been used for a long time prior to the invention of Blockchain technology. Throughout history, tokens have been used for a variety of purposes, including currency, identification, and accessing goods and services.
Tokens were used as a form of currency in ancient times. The ancients traded goods and services using shells, beads, and precious metals as currency. Tokens were also used for identification purposes in the early days. During medieval Europe, people carried tokens or seals that identified them as members of a particular guild or a profession. These tokens were used to gain access to goods, services, and privileges that were only available to members of that guild or profession.
More recently, tokens have been used in a variety of ways, including:
Tokens or cards are used to pay for rides in public transportation systems.
Tokens are used to play games in arcades.
Tokens are commonly used in theme parks to gain entry to rides and attractions.
In the digital age, virtual tokens are also used in online systems such as video games and online communities, where a token represents a unit of value or access to certain features. With the invention of Blockchain technology, new types of tokens have been created, as well as new use cases for tokens identified. Examples include cryptocurrency, utility tokens, and security tokens.
In this article, we will focus on security tokens, which are financial instruments representing ownership interest in a specific asset.
What is Asset Tokenization?
The Tokenization of assets allows for the creation of security tokens, the digital representation of the assets, making it easier to transfer, trade, and record ownership.
The Tokenization of real-world assets is now attracting industry attention with increasing use cases. Fundamentally, Tokenization is the process of converting rights – or a unit of asset ownership – into a digital token on a Blockchain. Tokenization can be applied to regulated financial instruments such as equities and bonds, tangible assets such as real estate, precious metals, and even to intangible assets including copyright and intellectual property. The benefits of Asset Tokenization are particularly apparent for assets not currently traded electronically like real estate or fine art, as well as those requiring increased transparency in payment and data flows to improve their liquidity and tradability.
The Benefits of Tokenization
Tokenization of assets can facilitate the creation, purchase, and sale of assets by reducing friction between issuers and investors. Fractional ownership and simple transfer are 2 key features of tokenized assets. With the reduced minimum investment amount through Tokenization, a broader range of investors is expected to invest in tokenized assets. Moreover, due to the fact that security tokens are more liquid, investors may exchange them on the global secondary markets at any time.
The secondary token marketplace can provide increased liquidity especially for illiquid tangible assets such as real estate, fine art or intangible assets like intellectual property. As an example, let us look at commercial real estate. The investment of commercial buildings was previously limited only to financial institutions, family offices, and ultra-high net worth individuals as the transaction value is usually in the millions of dollars. Tokenization provides a way for a wide range of investors to have fractional ownership of a commercial building for just a few thousand dollars. Also, Tokenization will facilitate fast settlements, eliminating all the complicated paperwork by using smart contracts. In summary, fractional ownership, small minimum investments, and simpler transfers will result in illiquid or complex tangible or intangible assets becoming tradable and accessible with improved liquidity through Tokenization.
In addition, an immutable record of ownership, as well as the rights of the interested parties, is embedded directly into the token, allowing sellers and investors to identify information such as the original owner, the current dealer, etc. Therefore, Tokenization will enhance transparency, making it easier to track and verify the ownership of the assets, and reducing the risk of fraud or errors.
Also, transaction costs for traditional assets can be very expensive and at times complex (for example real estate), but Tokenization will come with automated smart contracts which help decrease transaction costs and enable faster settlements. Therefore, tokenized assets will enjoy better market efficiency and optimized exchanges of goods and services.
In summary, Asset Tokenization offers a broad range of benefits, including enabled fractional ownership, increased liquidity, reduced minimum investment amount, improved accessibility, reduced transaction costs and enhanced transparency.
Market Size of Asset Tokenization
Research and surveys from institutions such as the World Economic Forum (“WEF”), Deloitte, or McKinsey project that up to 10% of the global Gross Domestic Product (“GDP”) will be stored and transacted with the help of Blockchain technology by 2025–27. The leading digital asset custodian Finoa estimates that US$24 trillion of financial assets will be tokenised by 2027. Finoa calculated this number by running a bottom-up market simulation which includes financial assets as well as real assets, such as listed equity, unlisted equity, bonds, home equity as well as other financial assets.
Market growth will be driven by different asset classes to be tokenised and the growing value of various assets stored and transacted on the Blockchain. Aside from real estate and fine art, Asset Tokenization is expected to have a significant impact on collectibles, commodities, and other physical assets. In addition, the increasing acceptance of digital assets by regulators, stock exchanges, and banks is expected to contribute to the growth of the market.
The Future of Asset Tokenization
With the advent of Blockchain technology, the Tokenization of assets is a natural progression in the growth of securitization. The use of distributed ledgers allows for unprecedented levels of transparency, transaction efficiency, and risk management. Additionally, it can facilitate the trading of previously untradable asset classes, which can lead to a significant increase in financial involvement and information efficiency in such markets.
Future Tokenization applications are likely to be more innovative and value-creating, particularly in assets that were previously unavailable or only available to a limited number of investors. Due to the power of Tokenization, virtually any asset can be ‘digitized and recorded on the Blockchain’, enabling the automatic, transparent, and transaction cost-effective division of cash flows or future appreciation in a regulated manner.
Larry Fink, CEO of BlackRock and a respected industry leader, addressed the current state of crypto and the future of Tokenization during a recent New York Times DealBook event. Larry Fink states that the utilization of Tokenization in conjunction with a distributed ledger holds significant potential for the future of markets and securities. This technology would enable the tracking of ownership and transactions, as well as facilitating instantaneous settlements, thereby revolutionizing the financial ecosystem.
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