Massive tokenization of assets, where can it lead us
I can’t really say, we’re already living in a digitalized economy because the world is full of untapped real-world assets. From private equity, gold reserves, fine art, real estate, to agriculture, these physical items have been difficult to physically transfer or subdivide. These tangible assets are manually traded on paper by big investors, often through layers of intermediaries, which is very slow, complicated and expensive. These trades are also more difficult to track due to the regulatory nature of paper transactions, especially when it involves cross-border legislation.
It’s true, we use apps to send money to our loved ones, buy stuff in the groceries, pay bills and lots more but vast areas of our economy are being handled via analogue.
There is essentially no limit to what can be tokenized – from private equity to agriculture, the opportunities for companies and entrepreneurs to generate tokenized assets is only limited by imagination.
What is tokenization of assets?
Asset tokenization is the process of digitalizing real (physical) assets on distributed ledgers, or can also be defined as the process of converting ownership rights in a particular asset into a digital token on a smart contract.
These assets can represent regulated financial instruments (equities, bonds, funds and loans), tangible assets (real estate, precious metals, artworks), or intellectual property (copyright to works of authorship).
Tokenizing assets could have numerous benefits such as reduction of cost associated with human error, alleviating the need for intermediaries, paperwork reductions, quick and cheaper transactions and many more. Tokenization brings ease-of-transaction to unwieldy, cumbersome assets like homes, commodities and more, thereby helping investors to unlock trillions of dollars from the economy.
When asset is tokenized, the digital asset address a liquidity problem affecting the traditional asset, especially assets like real estate, fine art and precious metals. These assets are difficult to transfer into cash with so many paper work involved, making them difficult to exchange.
Where can massive tokenization lead us?
- It can lead investors and asset owners to create efficiencies liquidifying assets by automating what was previously cumbersome.
- At the moment, big value investments like real estate properties, gold, or famous fine art are reserved for the few. With digital assets, often called tokens, secured by blockchain technology, anyone can be a fractional owner of a tokenized asset.
- Massive tokenization is leading us to trade safely on secondary markets, which opens up a world of opportunities for increasing autonomy over wealth.
- Massive tokenization is leading us to discover new markets and decreasing barriers and frictions to information exchange and trade.
- Massive tokenization is leading us to broaden the investor base, which is beneficial for new start-ups looking to quickly access capital.
Here are some of the reasons why the market is shifting to tokenization
- No territorial barriers: An investor can invest in an asset domiciled in any part of the world without visiting such place. Investment are secure, easier and faster with asset tokenization on a smart contract.
- Elimination of middlemen: Trading assets usually takes longer time to achieve due to intermediaries and high volume of paper work. It requires external entities to validate the documentation of transactions and investor’s eligibility, at an extra cost. But, tokenization eliminates such bottleneck and provides immutability and transparency using Blockchain technology.
- Fractional Ownership: Tokenization removes the barrier of large acquisition of asset by making it highly divisible. An investor can invest in small percentages of tokenized assets. For example, you can buy only 10% share of any tokenized asset.
- Improved liquidity: Tokenized assets provide higher liquidity in the future – a secondary markets for tokens. This reduces complexity and costs, present the possibility to invest with fiat money and P2P trading.
- Quick and cheaper transactions: Assets tokenization are carried out on a smart contract which the process is automated to reduce the burden associated with buying and selling. The smart contract makes transactions faster with lower transaction fees.
By transforming traditional assets into tokenized assets via the blockchain, markets can grow and develop more efficiently. Digitizing key elements for any sector will bring new actors, new roles and new services in the market. Asset tokenization presents new opportunities to the traditional players to meet the new demands of the token economy.
Despite all that assets tokenization bring to the table, there’s need to overcome some challenges such as “uncertainty in regulations” to widen the scope of tokenization and token economy.