The digital era started with the birth of the ‘Internet’ in 1983 and got revolutionized with ‘Bitcoin’ in 2009 and even further with ‘Blockchain’ in 2011. Bitcoin became the first digital asset ever, and blockchain technology changed the way businesses are operated.
This technology has digitized everything from real estate, painting, collectibles, precious metals, currencies to shares and securities.
Hence, ‘’Tokenisation refers to the process of digitally representing an existing, off-chain asset on a distributed ledger’’ (Hileman and Rauchs, 2017). Today the way we invest has changed with the augmentation of blockchain.
Therefore, William Mougayar – Author of Business Blockchain (Wiley, 2016) states that the old question, ‘Is it in the database?’ will be replaced by ‘Is it on the blockchain?’.
Figure 1 – Source: OECD, 2020Tokenisation of the assets can be of real-world assets that exist on the off-chain world as well as the assets native to the on-chain world [Assets that are built on the distributed ledger technology (DLT)].
Figure 2 – Source: OECD, 2020ICO is a most used digital token created by start-ups representing the funds distributed to investors for fundraising (OCED, 2019).
The benefits of tokenization illustrated in figure 3 portray the reason why one should adopt it
Asset tokenization of tangible or intangible assets will craft a globally transparent and regulated environment having unparalleled liquidity that facilitates swift and easy transactions with the fragmentation of assets and ownership. The tokenization of assets offers digital certificates of assets backed to tokens which eschewed users from price instability.
It eliminates the intermediaries and boosts the self-execution of transactions creating efficiency of the business. The platforms for tokenization of the assets are highly scalable and customizable as per user needs. The Financial Stability Report, 2019 states the clearing and settlement process as the biggest breakthrough of asset tokenization.
All these factors contribute to the rising of value sinks from proportionate current value sinks. The tokenization of assets will impact the economy as a whole by quantifying the Tokenisation of native assets (exist on-chain) Tokenisation WHY? Transparency Legal Framework High-Volume Liquidity Lower Illiquid Premia Retain Intrinsic Value Cost & Speed Efficiencies Globalised Access Real-time Clearing & Settlement Quick Launch Fractional Ownership 3 | P a g e social, environmental, and economic resources using DLT and deriving the economic value of the same which was not possible in the traditional economy.
The cost of knowledge combined with the cost of not knowing and information lost results in the value sink of the traditional impact economy. The rise of tokenization combined with data formats of the World Wide Web Consortium (W3C) for carrying qualitative and quantitative data will recapture retain the capital resulting in the shrinking of the economic black hole and rising value in the new impact economy as elucidated in figure 4. In 2018, Morgan Stanley Institute for Sustainable Investing announced the ‘’arrival of sustainable investing’’ and estimating the sustainable capital to be around $50 Trillion over the decade. As correctly stated,
“We don’t think of it as just a digital
transformation. We’re driving an end-to-end business transformation”
— Simeon Preston, MD & COO FWD Insurance
Let’s take the example of real-estate property to understand the tokenization of real-world assets. Real-estate in particular because like gold, bitcoin real-estate also have limited supply since we have only one earth and land to be occupied is limited just like the mining of bitcoin and gold.
The global prices of real-estate are an exorbitant forming difficulty for average income earners to buy the properties. This issue can be resolved through blockchain technology. The tokenization of assets provides the value and right to the asset holder. There will be a real-assets marketplace similar to the financial assets marketplace where all the digitized real-estate properties will be listed facilitating individuals to buy from them.
In figure 5, Mr. X now owns the land worth $5,000 and the value of tokens will change with market dynamics resulting in higher rewards. Thus, tokenization of assets gets the ball rolling for small investors in lavish business/assets which otherwise is not possible in the conventional business world. The Deloitte Report 2018, states the tokenized securities like real-estate, privately held SME equity, collectibles (art, antiques) may benefit from ‘illiquidity premia’ which bags investors with greater rewards and value of the underlying asset.
In 2019, Mata Capital, a French asset manager tokenized its real-estate property valued over €350M. The venture, not only breakthrough the real-estate industry but the logistic industry as well by tokenizing the logistic platform in north of Paris worth €220M from one of its alternative fund holdings (ConsenSys, May 2020). It created ‘Codefi Assets’ as a partnered solution with ConsenSys, a platform based on Ethereum for managing and issuing digital assets.
The tokenization of assets has disrupted the financial sectors. Banks are eyeing alternative solutions like DLT for efficient settlement of cash side of transactions with their utility coins. For instance, Bank of Canada, Jasper (figure 6) created tokenized cash and equities to facilitate better asset collaborations during delivery vs payment settlement. The bank formed two systems Payment Canada Large Value Transfer System (LVTS) and Canadian Depository for Securities (CDS) for tokenization of cash and equities respectively.
This process ensures an equal amount of cash and equity on the chains with the corresponding pool continuously. This enabled immediate finality of settlement resulting in liquidity efficiency by reuse of tokens and cash
“Startups and major financial companies around the world are now racing to develop systems for the next phase of this evolution: tokenizing assets.”
The micobo Gmbh is a leading software enterprise offering tokenization solutions to the financial institution with the mission to ease the digitization process and be one back-bone in the success of financial institutions. It provides tokenization of assets and DLT solutions for the industries demonstrated in figure 7.
Still, the adoption of asset tokenization on a large scale remains a challenge related to underlying technology as well as operational and business risks. Network participants can perform a ‘51% attack’ or can fork if they disagree and deviate from the original protocol and create a new network. Hence, the responsibility of the action remains a question as the single accountability point is missing.
Mitigation of risks of network stability, exposure to cyber-crime, and migration to the world of DLT are focal points for technological experts. With further adoption of the tokenization follows the technological advancement and highly regulated infrastructure moderating the challenges and risks involved.
Asset tokenization is an industry game-changer since it is a legally approved and value-driven mechanism. The most impressive aspect of tokenization of assets is the strides towards the adoption of this use case of DLT. Major companies like Microsoft, Deloitte, FSB, Central Banks NASDAQ, World Bank, Vanguard, and IBM are collaborating and integrating the mechanism in their business to influence and aware small enterprises as well as individuals about the tokenization of assets. Hence, tokenization of assets is the most promising use case of blockchain encompassing nearly all the human economic activity amounting to a hundred trillion dollars annually. Hence, quoted
“‘’This is not just a question of changing skillset. It is a changing of mindset’’.”
— Julie Dodd, Director of Transformation at Parkinson’s UK
If you are an individual/Corporate looking for managing and valuation of tokenized assets or digital assets you can contact us for financial advisory services. We also deal in ICO/IDO and STO as well as provide token advisory services. For detailed knowledge and updates on Blockchain Technology and Cryptocurrency, stay tuned to this space.
About the Author – PARIKA SONI
Parika Soni is a Financial Analyst at Admantium Crypto Advisors, an Investment banking and consulting firm focused on blockchain technologies. We help early-stage entrepreneurs and startups in Building Business Models and Developing Business Ideas take a 360-degree view of how to build a sustainable business using blockchain technologies, translating concepts into clear cut plans.