The revolution pushing the digital economy forward took giant steps in 2021, as digital assets began to blend seamlessly into overall economy’s fabric. Undoubtedly, 2022 marks a year of ongoing innovation for digital assets.
Many financial institutions find themselves responsible for innovating new tools serving both traditional and digital investment demands.
Blockchain, for example, is one of the most talked-about concepts in the financial industry. It has made countless advances while also providing specific benefits through decentralization, transparency, distributed structure, and immutability.
The Worldwide Semiannual Blockchain Spending Guide forecasts that annual spending on blockchain solutions will reach $11.7 billion by 2022.
Blockchain technology possesses a vast range of applications in the global financial ecosystem, with asset tokenization representing one of the most noteworthy and useful examples.
Asset management remains a high-priority topic for every organization. However, the current asset management landscape feels sluggish and beset by a slew of problems, including document duplication, a lack of transparency, and commonplace forgery. Asset tokenization enhances blockchain’s potential to transform the physical asset management process.
Tokenization is the process of converting a tangible or intangible asset into a digital “token” that serves as a proxy for it.
Tokenizing a wide range of assets is feasible, including cash, equity securities, and debt instruments, as well as real assets like real estate, commodities, antiques, and works of art. Custody, collateral management, cash and liquidity, fund administration, accounting, and payments are just a few of the areas where tokenization could lead to innovations.
According to a BNY Mellon report, 72% of asset managers say they are looking to develop solutions for asset tokenization.
Once you buy tokens representing an asset, blockchain ensures that no one authority can remove or change your ownership–your ownership of that asset is entirely immutable.
Assume you own a $500,000 property in Florida. Asset tokenization might turn this property’s ownership into 500,000 tokens, each representing a small percentage of the property (0.0002%). Let’s imagine you need $50,000; selling your home wouldn’t make sense because you need a place to live, but you still need the money.
Instead, you create tokens on a publicly distributed ledger that individuals may freely buy and sell on various markets. When someone buys a token, they purchase 0.0002% of your asset. To become a 100% property owner, they’ll need 500,000 tokens. Because a distributed ledger on the blockchain is immutable, no one can take away an investor’s property ownership.
Realistically, anything can be tokenized, from a work of art to a diamond.
Tangible assets are known as fungible assets. They include fiat money, jewellery, and other items you could hold in your hands. They are converted into tokens and stored on a blockchain, which is dependent upon stored units of records (“blocks”).
Fungible assets can be readily converted to tokens because they don’t require much data. They use hashes to store information on the blockchain. The great majority of asset tokenizations leans toward fungible tokens.
Non-fungible assets are distinct and are not always interchangeable. A gold bar, for example, is usually one-of-a-kind. Its weight, purity, and serialization characterize it. Each gold bar has a different value. Since non-fungible tokens have more data to verify per coin, blockchain maintenance becomes more complicated.
Much of the world’s population currently lacks access to high-value investments. The evolution of global capital markets is represented by new ways of generating and moving capital, which are safeguarded by distributed ledger technology.
By implementing blockchain technology, the process of creating, issuing, and managing securities becomes more efficient and error-free, resulting in exponential cost savings. However, tokenization benefits in other ways as well.
It improves the liquidity of typically illiquid, non-fractional assets such as real estate. For investors, this means increasing access to previously unavailable assets and the potential to diversify their portfolios.
Small and medium-sized enterprises utilize tokenization to increase the security of their e-commerce transactions while remaining consistent with industry standards and relevant regulations.
Tokenization in Real Estate
Real estate tokenization aims to achieve the goal of making funding more accessible to a broader audience. The purpose of tokens, in this case, is to act like company stocks. Users can purchase these tokens without relying on expensive intermediaries. Due to the expense and complexity of stock exchanges, tokenization may supersede their purpose.
Real estate tokenization uses blockchain and eliminates the need for intermediaries while significantly reducing investing requirements. This strategy carries the potential to liberate trillions of dollars through liquid global real estate assets. It also makes these assets available to a broader investor base.
Tokenization in Art
Using blockchain to sell artwork with NFTs is the same as converting art pieces into digital tokens. These tokens then trade like stocks.
When a painting or sculpture is chosen for tokenization, it’s appraised and valued by an accredited curator. The relevant platform will now convert the artwork into digital tokens and distribute them to potential buyers. Buyers can purchase tokens for a variety of artworks and build diverse portfolios—whilst always retaining the option to immediately exchange tokens.
Further, the act of dividing artwork ownership democratizes the art industry, opening the door to a wide array of new investors.
Tokenizing Precious Metals
Tokenization works with any asset, but it’s especially useful for trading precious metals. They are excellent stores of value. They do, however, have some drawbacks, the most significant of which is transportation and storage. This applies to all metals, including gold, silver, or platinum.
Tokenization breaches the traditional boundaries of the precious metals market. It breaches the boundaries of all markets, frankly. It enables investors to gain precious metal exposure, such as of gold, through a token itself unrelated to a bar of gold.
Transfer of ownership occurs instantly when buying or selling tokens in exchange for fiat currency. However, if the holder wishes to convert their tokens into bars, there is a waiting period.
“Here to stay” undervalues the potential of tokenization. We argue it barely touches the surface.
Tokenization appears determined to disrupt the entire financial industry by removing the barriers associated with physical assets. Investing just became much more interesting, for a much greater audience of investors.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.
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