Tokenization is an emerging trend. Anything can be tokenized, and it enables fractional ownership of assets that may otherwise not be accessible to small-scale investors.
The assets industry at present suffers from a lack of transparency, efficiency, and is prone to risk. Blockchain technology allows for the digital representation of assets with smart contracts. Tokenization could possibly create a revolution within assets management.
Assets that are apt for tokenization
Venture capital – this asset class is well known for its illiquid nature. Investors usually have to wait 5 to 10 years to see returns on their investments. Increased liquidity would drive investor activity. Tokenized assets can be traded on the secondary market of the issuer’s choice.
Valuable metals – Innovative startups such as CEDEX are looking to see if investors have access to secure trade of precious metals and gems. Merchants could list their gems on the CEDEX platform and give them to a custodian, who’d release them following transaction completion.
Real estate – Customers can purchase fractions of real estate properties, obtain rent and sell when the price is higher, just like with traditional investing. Tokenization reduces the barriers to access.
Athletes, sports teams, and celebrities – Investing in clubs and players will soon be a reality, in a decentralized marketplace, on account of tokenization.
Flat currencies – Stablecoins can expect wider adoption. These assets provide a roadmap for other tokens to minimize transaction costs, processing times, and volatility.
Fine art and luxury vehicles – Tokenization will open up these assets to a class of investors who didn’t have access to them prior.
Commodities – Geopolitical inefficiency causes expenses in the supply chain and reduces costs incurred due to commodities producers.
Asset Tokenization — ushering in a new era
Generally speaking, tokenization significantly widens the prospects for investments, reduces process times, and renders processes more liable. The following are noteworthy advantages of tokenization of assets:
Utilizing smart contracts, the process of document production can be streamlined, which includes storage and administration. On a blockchain, the public has access to the same version of the document.
A security token contains the owner’s rights and responsibilities encoded right into the token, combined with an immutable record of ownership.
Decentralization eradicates the risks in the conventional single-point access model of the industry. Further, blockchain assets are subjected to cryptographic encryption, and they cannot be tampered with.
Owners of tokenized assets are offered greater control, with regards to access rights. Tokenization improves the scope for monetizing data by enabling users to share personal data with exclusive private parties.
Compliance is a critical aspect of asset management. Smart contracts could provide advantages in the automation of this process. This could minimize losses due to compliance lapses.
Challenges faced by tokenization
There are certain hurdles that need to be bypassed before tokenization becomes an everyday reality. A major issue is connected to regulatory alignment, taking into account the fact that blockchain-based platforms are decentralized by default.
Regulations are usually tech agnostic. This means that security tokens, dependent on particular features, can come under the purview of relevant security regulations, which vary from region to region. This is true not just for preliminary development and sale of tokens, but also for their trade on secondary markets.
Subsequently, many of the benefits of tokenization are undermined when regulations prevent the free and global exchange of security tokens. Compliance methodology of developing and exchanging tokens both in a regional and a global scope is the need of the hour.
Global regulatory alignment is not expected in the immediate future. However, clarifying the conditions in the regulatory environment for security tokens and enabling compliant involvement in the token economy is a potential path if reward opportunities are to be realized.
Certain firms are working towards resolving the compliance issue. If the token is compliant, then trade becomes possible on any exchange. Some firms have made attempts to embed compliance at the token level, thereby evaluating if a trade complies with regulations.
Token-specific regulation, if not, clear guidance from the regulatory authorities would be welcome, since there is vagueness as to how a security token should be evaluated under the legal framework.
Non provision of a legal framework severely restricts technologies. This opens up doors for scam artists and hacking, and is specifically relevant for any new technology. Scams and hacking are not just harmful to investors, but to the economy as a whole, an adequate number of these instances could dissuade investors and have a negative impact on the token economy.
Efforts at organized regulation have been uneven, but there are indicators that imply that the conventional market infrastructure is adapting to the token economy. The clarity in regulatory frameworks is of critical importance for the healthy development of the token economy.
After the technology has been addressed, certain pressing matters need to be deliberated on. How tokens will stay linked to the asset in question, is a point that needs to be considered. Another issue worth considering is the matter of governance.
There are additional concerns that need to be addressed with regards to hacking. Stability concerns also come into play, especially when something is being traded in a highly liquid market. These issues will be circumvented or minimized, but they require thought and intermediaries of some kind.