Blockchain technology is abuzz with terms like “asset tokenization.” This phrase is at the forefront of the cryptocurrency community’s discussions, promising a fresh “token economy” where conventional assets like company shares can be altered into digital assets through blockchain.
Various names like tokenization of illiquid assets, asset-backed tokens, security tokens, and tokenization of company shares often refer to it. Despite its prevalence, many still need clarification about what real asset tokenization entails and its business advantages.
If you are a newbie in crypto, you can also learn how to get bitcoins and other cryptocurrencies.
Tokenization is generating a token to represent a physical tradable asset digitally. Real-world assets with value, such as commodities, art, and real estate, can be traded digitally if transformed into a token. If successful, the tokens are generated via security token offerings (STO) and traded on crypto exchanges.
Through tokenization, companies can unlock huge value from otherwise illiquid assets and raise funds for other essential projects. In summary, real-world asset tokenization is not just a trendy term. It is an innovation opportunity that businesses and companies can use best.
Real-world asset tokenization is not a straightforward process. To fully understand, you must familiarize yourself with Smart contracts and their role in transforming real assets into digitally tradable ones.
The smart contract serves as a controller and executor. The contracts directly encode the agreement terms of parties involved on the blockchain for self-enforcement and execution.
If contract conditions are satisfied, tokens can be shared with investors through smart contracts, ensuring accuracy, efficiency, and transparency.
It fulfils these by recording the contract conditions and agreements on a public ledger. Technically, the process of real word asse tokenization can be summarized thus;
The Ethereum community has created multiple token standards to represent different types of assets. These standards have made integrating distributed digital assets easier, facilitating balance among various blockchain projects.
The unique features of any asset can be properly represented through a collection of accepted functions known as a token standard. However, it is vital to evaluate the basic features of any asset, that is, fungible or non-fungible, before choosing a token standard. There’s also the aspect of authorization rights and purpose to consider.
Privacy should also be considered when deciding the model for asset tokenization. With the blockchain introducing transparency as a default property, not all industries or use cases will embrace this. But techs like zero-knowledge proofs can address these privacy concerns.
There’s the need to consider various aspects before executing the model to represent the model. By carefully evaluating all conditions, data stored off-chain and on-chain can be easily identified. This includes regulatory and legal constraints in relation to the degree of data trust, data privacy, and token characteristics.
Ideal engineering practices are also crucial for real-world asset tokenization. This is quite important during liquidity and issuance management. A detailed term sheet should be available to provide necessary information about the issuance of digital assets.
Auditing is a necessary step during the tokenization process. Auditing should be executed using professional third parties or via standardized methods. Ensure you verify the informatic code before it deploys online.
After a successful security evaluation, the code can be deployed on the blockchain. Launching either private or public will depend on the perimeter and use case being considered. Once deployment is complete, users can begin to store and transfer tokens.
The cost implication of asset tokenization varies. Platforms often charge an average of $30,000 to $100,000. The cost incurred usually depends on the chosen features for the token. The time duration also takes between three to six months.
For post-tokenization management, token holders earn interest payments and future dividends from tokenized assets. This can be through fiat currency deposited into their accounts or cryptocurrency.
Additionally, the issuers of digital tokens manage the taxation, accounting, and financial reporting associated with these tokens.
There’s a need to address the regulatory requirements of platforms decentralized on the blockchain. This is vital if broader adoption of asset tokenization is to happen.
For example, security regulations regarding security tokens differ from one state to the next, curbing the global and free exchange of tokenized real-world assets. A standard and precise regulation for security tokens needs to be established for broader adoption.
Furthermore, there’s also the need for proper clarity on the role of financial organizations in the value chain of these tokenized assets. Will they act as an adviser offering consultations for token design, or will they leverage their competence as custodians?
Another factor to consider is platform integration. Organizational resources will be wasted if the business model can’t collaborate with the chosen platform.
In addition, guidelines like Know Your Customer (KYC) and the Anti-Money Laundering Directive 5 (AMLD5) law are to be observed by institutions offering services to clients. As such, issuers must follow these regulations to operate as cooperative service providers.
Asset tokenization streamlines the creation, buying, and selling of securities for digital token issuers. For example, previously illiquid assets like fine art or intangible ones like real estate can now be traded on secondary markets, providing enhanced liquidity for sellers and investors.
Additionally, vital ownership records and associated rights are permanently embedded in the token, enabling easy access to information such as the token’s original owner and current dealers. Automated smart contracts further reduce transaction costs and speed up processing by eliminating the need for manual transaction review and validation.
Furthermore, straightforward send-and-receive settlement and clearance transactions can be automated, taking only seconds instead of hours or days. This leads to improved market efficiency and optimized exchange of goods and services.
The reduced minimum investment amount widens access to a broader range of people for tokenized assets. Moreover, as security tokens are liquid, investors can trade them 24/7 on global secondary markets.