The fundamental approach to investment and fundraising has altered due to the tokenization of tangible assets. It’s fascinating to learn about the advantages of blockchain tokenization and how it affects the banking industry. Let’s start with the concept of asset tokenization.
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What is Asset Tokenization?
Asset Tokenization is a process through which assets are converted into tokens.Thanks to the advent and use of new technology, the world has undergone a tremendous transformation to a decentralized economy in recent years. This transformation affects every facet of life, from everyday activities like banking transactions to business interactions. Blockchain adoption is a significant step toward realizing the dream of a cashless society. At this stage, the concept of tokenization of assets comes. Asset tokenization refers to a process in which the issuer creates digital tokens on a blockchain or distributed ledger representing either physical or digital assets. Once an investor buys a token representing an asset on a blockchain network, any authority cannot change or erase the ownership of that asset. The asset’s ownership remains immutable. These tokens are stored on the blockchain network and store the assets’ value and ownership rights. Whereas, in the real world, these assets represented by the tokens exist.
The tokenization process generally involves the creation of a variant of the initial coin offering (ICO), which is also termed a security token offering (STO). There is a difference between STO and ICO in variants like equity, payment, or utility tokens. These tokens are released by leveraging smart contracts on specialized exchanges or direct sales. Any investor interested in partial or complete ownership of assets can own the desired quantity of digital ownership tokens. In this way, individuals gain partial or full ownership of a specific asset.
Benefits of the Assets Tokens
The tokenization ensures a compelling promise in the financial world, characterized by inclusivity, enhanced efficiency, and transactional fairness and transparency in asset management. The adoption of tokens can help minimize the friction in creating, purchasing, and selling securities. Following benefits ensure that investors and sellers can endure the economy of everything with tokenization.
(1) Improvement in liquidity: Tokenization could be done for private securities or commonly illiquid assets like fine art. Users can trade these tokens on the secondary market as per the issuer’s choice. This process results in access to a broad base of traders, thereby increasing the liquidity of the tokens. The investors achieve freedom, and sellers could get better value from the tokenized assets. In this way, tokenization can increase the liquidity of physical and illiquid assets.
(2) Accountability and Transparency: The transparency in the transaction has increased with the implementation of tokenization on blockchain technology. These tokens can embed token holders’ legal responsibilities and rights directly in the token. The records of ownership of tokens are immutable for specific assets. These tokenization features could help in enhancing transparency in the transactions. The rights and responsibilities of tokenized assets are similar to the previous owners.
(3) Faster transactions at lower prices: One of the most vital benefits of blockchain usage in tokenization is the completion of transactions at faster speeds and lower costs. The smart contracts in the token trade ensure the automation of specific parts in the exchange process. Software algorithms in smart contracts integrate the blockchain with trigger actions based on specific predefined parameters. It minimizes overall administrative expenses, primarily buying and selling, reduced with automation processes. Transacting parties can execute the deals faster due to less number of intermediaries.
(4) Better accessibility for investment options: Tokenization can improve the accessibility of different options for investment in assets. New participants have fewer barriers to entry with lower minimum investment amounts and periods of holding the tokenized assets. The customers could purchase the tokens representing minimal tokenized asset shares due to their higher divisibility. This feature lowers the investment period ensuring better liquidity with security tokens. The exchange of tokens is an easy process for the investors as the tokens are available in the second market worldwide, albeit with regulatory limits.
Future Prospects of the Tokenization
The advantages mentioned above of tokenization apply to many generally illiquid asset classes. Similarly, the tokenization of the illiquid assets can benefit from better efficiency and transparency and the reduced requirement of minimum investments. The adoption of tokenization in areas of the fine art sector and real estate are expected to grow.
As no particular type of assets can be tokenized, the issuers can opt for tokenization of all categories of assets, namely virtual assets like securities, etc. The market for tokenization would also experience a positive impact on the adoption of blockchain technology worldwide in various industries.
In conclusion, the tokenization of illiquid assets would positively impact the future economy. The growing adoption of digitization has created the need to perform all real-world activities on digital platforms. So, it is expected that more participants would join the digital world using the tokenization process, which imparts security, transparency, and transaction efficiency. In the following article, we will discuss this topic more. Please stay tuned to understand more about tokenization, and feel free to write if you have any queries.©
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