Tokenization of Assets

Asset tokenization refers to representing digital tokens on a blockchain, which confirms the rights of ownership of real-world assets. 

Many of us want to own a piece in various types of masterpieces. Remember your childhood days when you tried to collect stamps, coins, or different kinds of stones?

Many people have a hobby to buy and collect paintings, watches, or vintage cars. So, while for some, it’s a hobby and they get a feel-good factor by collecting various types of entities, for many others, this takes the form of an alternate investment.

Till now, buying a painting or a vintage car was a very costly affair. But now, this can be done at an affordable price with technology.

What is Asset Tokenization 

Asset tokenization helps in getting fractional ownership. The important thing here is that the overall process is automated, transparent, non-intermediatory, and cost-efficient.

We have seen innovation whenever the cost of anything is brought down and made affordable for the masses.

Think of a scenario where, based on your hobbies and preferences, your bank rewards you with fractional ownership of a prized painting after each card usage.

Instead of the current practice, where first you accumulate points and later redeem those points to buy something, from day 1, based on your preference, you start owning a piece of a vintage watch or any other historical piece or anything else.

You can own a piece of a vintage car, a historic fort, or the gadgets used in your favorite movie.

Tokenization applies to various assets, including tangible assets like real estate and precious metals, regulated financial instruments like bonds and stocks, and even intellectual property rights like music and other works of authorship protected by copyright. 

Tokenization offers significant advantages for assets not already traded electronically, like artwork or exotic vehicles. It also helps assets that need more transparency in payment and data flows to become more liquid and tradable.

Owning a piece of your favorite thing is not a new concept. Today, you can also own shares in a company, making you a co-owner.

Along similar lines, some of us may have gotten membership in holiday plans from some hospitality group. You get ownership of an apartment and room for specific days in that hospitality group and enjoy your vacation.

Now, with ‘Tokenization of (almost) any Asset,’ you can own a piece of any tangible or intangible asset. This includes owning a piece in a building, jewelry, painting or IP software, digital pictures, etc.  

Tokens can be used by organizations to represent real-world assets. This representation takes the shape of a token, which can be programmed to include many different types of information and features. Programmability is a compelling feature.

It can help ensure tokens are issued or transferred based on earlier agreed rules. These rules can be related to liquidity, compliance, or anything else. 

The tokenized asset can be traded around the clock safely and effectively because all pertinent asset data has been encapsulated, and rich real-time transaction data is accessible on the blockchain ledger.

Asset Tokenization: A Brief History

The inception of blockchain technology and digital ledgers is when asset tokenization first began. This cutting-edge ledger technology offered a visible and secure way to track ownership and made tokenization viable. 

The launch of OpenSea was the first noteworthy milestone. OpenSea is a platform where non-fungible tokens, or NFTs, can be created and traded. As a result, asset tokenization gained traction and was first conceptualized for various unique assets.

Since then, others like Harbor, Alchemy Insights, and Securitize have joined the movement, accelerating the adoption and growth of asset tokenization in various industries. The potential here is enormous. By 2027, the global market for tokenized assets is anticipated to reach $24 trillion.

How Asset Tokenization Works 

Let’s look closely at how Asset Tokenization works. 

1. The Asset: Think of that attractive piece of art you’ve always liked. It may be the one unique vintage vehicle you’ve always desired. The universe of tokenization is built around this real or digital asset. Each component is carefully recorded to ensure that its genuineness and importance are accurately communicated. 

These assets can include tangible items like real estate or artwork, monetary items like stocks or bonds, intangible items like intellectual property, and even identity and data

2. Tokenization: The transformation of the physical asset into its digital counterpart is where the magic happens. Secure techniques divide the ownership into smaller portions, each represented by a separate token. Think of these as digital keys that provide access to the asset you own a fraction of.

3. Distribution: These keys, ready for distribution, are given to investors. Thanks to this, anyone can now possess a piece of something previously unattainable or prone to mistakes. The options are now unlimited. Regardless of a person’s financial situation, a global community of collectors can purchase a masterpiece, and art enthusiasts everywhere can own a luxury automobile.

4. Trading: Exchanging your tokens will be the exciting part. Save time waiting days for transactions to settle. Tokenization allows your digital keys to be continuously traded on global markets, giving you unmatched flexibility in purchasing, selling, and managing your investments.

As a result of the enhanced liquidity, assets are regularly sold and reach their full potential in a dynamic environment.

This four-step process, simple as it may seem, can fundamentally alter how we own and utilize assets. It democratizes access and fosters a more just and efficient financial system. 

The Technology behind Asset Tokenization 

 1. Blockchain is a crucial asset tokenization component. Apart from Blockchain, a robust ecosystem of auxiliary technologies is required to operate flawlessly and reach its maximum potential. 

2. Smart Contract: Smart Contract plays an essential role in Asset Tokenization. Because these automated contracts prescribe tasks based on predetermined criteria, they don’t require human participation. Imagine a token for real estate that employs intelligent contracts to deposit rent for investors every month automatically or a token for art that compensates the creator with royalties upon resale. 

Or think about historically significant items owned by a community that uses this technology, like an antique vehicle or fort. Now, a movie producer will pay this town a hefty sum to rent these for his historical drama. Win-win for all stakeholders involved. 

Provenance, Smart contracts, and Blockchain facilitate the establishment of tokenized asset ownership.

3. Oracles: Bridging the digital and physical worlds, oracles provide the real-world data smart contracts need to function effectively. Whether monitoring the temperature in a warehouse containing tokenized goods or verifying the authenticity of a physical work of art represented by tokens, oracles ensure accurate and reliable information is available to trigger the appropriate events. 

4. DEXs (Decentralized Exchanges): One does not need to use an intermediary with decentralized exchanges or DEXs. 

Because DEXs allow users to trade tokenized assets directly, they also eliminate the need for traditional exchanges and the associated fees. Peer-to-peer trading offers a safe and secure environment for change while giving investors greater freedom, control, and transparency. Understanding how Blockchain works with different auxiliary technologies can help you better understand asset tokenization. 

 Significant Features of Asset Tokenization 

1. Fractional Ownership:  You want to own a piece of the moon or a stake in a manuscript that wins a Nobel Prize. Asset tokenization unlocks this potential and makes even the most valuable assets accessible to anyone by dividing ownership into tiny bits.

Consequently, previously exclusive markets are now accessible to anyone, democratizing investment opportunities and doing away with traditional entry barriers. This opens exciting opportunities to a broader range of people, regardless of their financial circumstances.

2. Global Reach: The traditional geographic constraints are removed by asset tokenization. One can trade and invest in assets from anywhere worldwide, offering many interesting and exciting investment opportunities.

This global economy encourages innovation, liquidity, and accessibility through the cross-border linkage of investors and assets. 

3. Enhanced Security: In today’s world, security is essential. Blockchain technology, the basis for asset tokenization, provides an immutable ownership record, eliminating the chance of error and fraud.

The encryption and transaction verification processes ensure the integrity and security of your investments. 

4. Increased Transparency: The days of murky financial dealings are ending. Asset tokenization logs every phase of the process—from the issue of individual tokens to the trade of those tokens—on the Blockchain. Transparency is inadvertently integrated into this, as it includes all available information about the original owner and the history of each transaction.

Because of this unparalleled transparency, which fosters accountability and confidence, investors are equipped with complete knowledge of the ownership and background of their assets. 

5. Lower Expenses: Traditional asset ownership typically involves high fees and complicated processes. Asset tokenization streamlines these procedures, eliminating unnecessary intermediaries and significantly reducing transaction costs.

Because of its affordability, investment is now more accessible to individuals and organizations, allowing for significant cost savings. When combined, these fundamental elements yield a powerful and innovative ownership approach.

Asset tokenization aims to increase accessibility, encourage participation from around the world, and enhance efficiency and transparency in the financial system’s technology components. 

6. Unlocking Illiquid Assets: Tokenization makes traditionally illiquid assets, such as real estate and artwork, more transportable and accessible. 

7. Increased Efficiency: Tokenized assets are less expensive and need less administrative effort to manage and trade. 

8. Promoting Innovation: Tokenization facilitates the development of new financial services and goods, which enhances the atmosphere for investing. 

Role of Financial Institutions in Asset Tokenization:

There are numerous real-world applications for asset tokenization. And Banks can help their customers by enabling or offering this application. 

1. Own a Piece of History: Picture yourself holding a piece of the moon, a rare historical document, or the first edition of your best book. Thanks to asset tokenization, you may own some of these rare assets, making them available even to those with limited financial resources. 

 Imagine owning a piece of the Mona Lisa or sharing in a book that secures a Nobel Prize—dreams that were unimaginable only a short time ago but have now become a reality. 

2. Using tokens Real estate: Owning real estate has always required a substantial financial commitment. Asset tokenization removes these barriers, making fractional property investments possible.

This gives those with fewer resources access to a lucrative market. Imagine owning a piece of a commercial property or a luxury apartment building, expanding your investment portfolio, and earning passive income without the burden of significant obligations. 

 3. Making money for your passion: Do you want to put money into an innovative startup but don’t have it? Through asset tokenization, you can make direct contributions to the causes that are important to you. 

By investing in tokenized deals, you can contribute to their growth and profit when they take off. Imagine becoming wealthy and making a real difference by being an early investor in the next great software company or a game-changing green energy project. Whatever your passions—innovation, real estate, or history—this technology allows you to seize fantastic chances that were beyond your reach in the past.

4. Investment in new asset classes: Owning a piece in that royal watch or yacht or building on a famous street is easy and affordable now, thanks to asset Tokenization.  

Banks can become the guardians of digital assets. These Digital Assets with Asset tokenization can be provided as an alternative investment. 

Asset Tokenization Platforms

1. OpenSea: An industry leader in NFT creation and trading, opening the door for asset tokenization in several industries.
2. Harbor: Concentrates on tokenizing real estate assets to increase accessibility to fractional ownership for a larger group of people.
3. Securitize: Provides a full range of tokenization solutions for assets in various sectors, such as securities, fine art, and collectibles.
4. Alchemy: Gives investors useful information by offering data-driven insights and analytics for tokenized assets.
5. Polymath: This platform allows issuers to create and manage tokenized securities. 

Apart from these, Swarm Fund, FundRequest, Verta, Polypin, Bitbond, and Tokensoft are also important players here.

Examples of Asset Tokenization by Financial Institutions

1. Project Genesis & Project Evergreen: In 2021, the Hong Kong Monetary Authority (HKMA) and the BIS (Bank for International Settlements) Innovation Hub’s Hong Kong center conducted a test to issue tokenized green bonds. 

Later, HKMA initiated Project Evergreen in 2022. This assessed the suitability of Hong Kong’s financial infrastructure, legal framework, and regulatory environment for implementing distributed ledger technology (DLT) across the entire bond lifecycle, including primary issuance and settlement, coupon payment, and secondary trading settlement. 

2. Project Guardian: An initiative of the Monetary Authority of Singapore in collaboration with the financial sector, it aims to assess the viability of asset tokenization and decentralized finance (DeFi) applications. 

 3. UBS has conducted Ethereum trials of a tokenized money market fund. 

4. JP Morgan: In 2020, Onyx by JP MORGAN launched the inaugural bank-led blockchain platform dedicated to facilitating the transfer of digital assets, information, and value. 

Here, an application known as Tokenized Collateral Network (TCN) permits investors to pledge assets as collateral.

5. SC Ventures of Standard Chartered has introduced the Libeara tokenization platform. 

6. Citigroup has begun tokenizing consumer deposits under the Citi Token Services initiative. 

7. Expobank: It has issued the nation’s first tokenized diamond offering. By this, Expobank has democratized access to gemstone investments for small investors.

8. HSBC forayed into digital assets with the introduction of its gold tokenization platform. The action is implemented by the bank’s overarching approach to adopting blockchain technology and meeting the growing need for tokenized assets. 

HSBC’s gold tokenization platform, constructed utilizing distributed ledger technology (DLT), grants customers tokenized ownership of physical gold securely held in the bank’s vaults. By generating a digital representation of clients’ physical gold holdings with permission, the platform increases transparency and streamlines the trading process.

Conclusion:

 Not merely a technological breakthrough, asset tokenization represents a revolution in the storing and managing of assets. It can democratize access, create new financial opportunities, and enhance security and transparency.

With the development of technology and its growing use, we could expect more significant innovation and disruption in various industries. 

By becoming guardians of these digital assets and providing investment in these digital assets, financial institutions can play a significant role here. 

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