Are you curious about what is the role of asset tokenization in crowdfunding? What are the advantages of blockchain-backed tokenization? Then, you are in an appropriate place. In this article, we will discuss tokenization and its benefits.
What is Asset Tokenization?
Some years back, it was a challenging task for a project to raise funds. However, this condition has changed because of the proliferation of blockchain technology, as it enabled the global community to take part in crowdfunding using smart contracts.
Independent of fundraising, whether it is bank funding, self-funding and venture funding, etc. The traditional financing system is a cumbersome and complicated process.
Among these types of fundraising, venture capital is not possible without an already launched product. Adoption of the blockchain in crowdfunding has made this process transparent, safe and accessible worldwide. Initial Coin Offering (ICO) is one of the popular ways of fundraising.
In ICO, the startups can create their smart contracts on the blockchain platform and launch their cryptocurrencies for fundraising.
Investors can invest their funds in buying the crypto-equities just like stocks in crypto exchanges. The value of the crypto-equities fluctuates with the company’s performance.
But the major problem with capital raising with crowdfunding is that it needs a team of blockchain experts. After completing the ICO, the expenditure made on the ICO activities becomes a waste for the startup companies.
It is an additional expenditure for the startups. Funds are needed to develop the complete ecosystem of blockchain experts, ICO advisors, and technical infrastructure.
Because of these factors, many startups opt for readymade platforms. Entrepreneurs and investors also adopt the crowdfunding process to focus on the actual business requirements.
Tokenization is also a kind of crowdfunding. It implies representing any rights or assets into a digital replica, i.e., token. Even before the emergence of blockchain technology, tokenization was done.
However, blockchain technology gives an infrastructure layer to token stored, programmed, transferred, or recorded securely and transparently.
Kinds of Tokens from a functional perspective.
Security Tokens
These tokens are identical to the traditional securities like shares, debt, or stock of any company. Companies use STO or security token offerings for issuing these tokens with certain rights.
In most jurisdictions, securities law regulates security tokens. Like other securities, security tokens are available outside the trading platforms, and their value is subject to speculation. Either an off-chain asset (like real estate, commercial documents, art, etc represents security tokens) or an on-chain asset. Someone can tokenize anything having value, for example, intellectual property, data, and income-based rights.
For example: Investors can invest in STO of real estate tokens. They can predict their investment value that would appreciate with an increase in the property price.
Utility Token
Utility tokens are beneficial in safeguarding the participation in bulk sales for raising capital on a project. A company issues the utility tokens when they intend to create a coupon, exchanged in the future for availing their services.
The price of the utility tokens is constantly fluctuating, which enhances the chances of profits for the investors.
Currency/Payment Tokens
These tokens are exchanged or used for payments just like a currency. Similar to fiat currencies, currency tokens are also traded for other fiat currencies and cryptocurrencies via self-hosted digital wallets or centralized or decentralized exchanges. A famous example of a currency token is Bitcoin; the government does not regulate.
Now the question arises whether an investment in tokens is beneficial?
Benefits of Digital Asset Tokenization
Adopting DTL results in an immutable proof of security, ownership, and transparency
STOs and tokens are shared, immutable, and distributed ledger because of their underlying blockchain infrastructure. This ledger serves as a trustworthy source of information. Token holders have access to data like their rights, who they are dealing with, who has owned the token previously, etc. This level of security and transparency enhances user confidence.
Increase in liquidity and access
Tokenization easily converts the illiquid assets into a tradable financial investment, which can be offered using Security Token Offering (STO).
Tokenization enables a single asset to be a help or controlled or owned by many investors fractionally. Any investor with an internet connection can opt for tokens, subject to regulatory considerations. The issuing company gets a more diverse and broader set of investors. Another benefit of investment in a token is its traceability in the secondary market like digital exchanges, over-the-counter desks, etc., that are internet-based and open for 24*7 tradings, eliminating barriers like geographical locations and time zone.
Automated versatility and compliance with programmable tokens
smart contracts backed tokens, with self-executable code lines deployed n a blockchain. Smart contracts enable automated compliance and security, like KYC, to ensure compliance. This system also provides the dividend and interest payment coded into the tokens.
Better speed and efficiency
Due to smart contracts, the transactions in tokenized assets are performed on a real-time basis, eliminating the post-trade reconciliation. Automation reduces the additional burden of administrative tasks and promotes disintermediation, resulting in reduced cost with higher efficiency.
Even though there are many advantages to tokenization, we cannot ignore its disadvantages.
There is no legal and regulatory infrastructure for tokenization, leading investors and entrepreneurs to remain wary of the regulatory front. Smart contracts, an essential characteristic of the tokenization model, have uncertain legal status, projecting it as a hurdle in adopting these technologies.
In conclusion, tokenization of assets is beneficial for issuing companies and investors. Issuing companies can raise funds from a broader range of investors irrespective of their time zone and location. Investors can gain from the fluctuating prices of various kinds of tokens in the secondary market. These profits are possible because of the adoption of smart contracts backed by the blockchain.©
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