Tokenisation at a glance
Cryptographic technologies in the last decades built the basis for a huge shift in the evolution of the economy through conceptualizing and deployment of a new type of economic process – asset tokenisation.
Asset tokenisation is a technological, financial, and legal process whereby the value of a real asset is digitised and converted into a token that is mapped onto a blockchain. The individual “tokens” represent the underlying ownership at the asset level with all its rights and obligations. This technology enables the transfer of rights encoded in crypto-assets stored on a blockchain or distributed ledger technology.
In this material, the different aspects of tokenisation will be discussed and explained with a focus on the rising trend of tokenisation of physical assets.
Forms of asset tokenisation
Crypto-assets are a fast-moving area and blockchain technology provides the basis for extensive growth in the diversity of assets. To describe them, it is necessary to try to present the distinguishing features of each crypto-asset class.
Value of tokenisation
Like any disruptive innovation, tokenisation does not exist in a vacuum. Tokenisation provides the foundation for the benefits of responding to current market trends and demand.
Speaking of financial assets, tokenisation significantly increases the efficiency of raising capital in terms of issuance. Through tokenisation, issuers benefit from faster transaction speed, higher transparency, and cost optimisation.
Digitisation also offers new opportunities for previously illiquid assets, which are subsequently available worldwide and at any time. The new access increases the interest of foreign investors and opens up numerous market opportunities.
Tokenisation of physical assets is a topic that is unjustly neglected in the media even if it creates additional value for asset owners and professional market participants. Asset managers can not only deal with their clients’ financial assets but also with their physical ones. This creates more flexibility for players and provides more space for economic activity.
Benefits of physical asset tokenisation
Tokenisation of physical assets is an area with high growth potential. It opens up the possibility of increasing the value of ownership of assets such as art, real estate, jewelry, classic cars, and many others. Investors can diversify their portfolios and gain access to new asset classes that were previously inaccessible due to high entry requirements. From a producer’s perspective, it is valuable because of the expanded opportunities to raise capital. For financial professionals, tokenisation creates a new tool to address physical assets and also make them bankable and securitised.
Tokenisation and fractionalisation create the conditions for assets to be broken down into admissible parts, lowering the entry barriers for investment. In the real estate market, for example, tokenisation increases the diversification of many individual investor portfolios and provides additional capital for projects. Fractionation will also facilitate the emergence of new assets that were previously difficult to trade.
Digital security tokens can be designed to have compliance already built into them. In the case of availability only to accredited traders, it can be coded that trading of the tokens is only possible between whitelisted investors. This programmability reduces compliance costs and eliminates the risk of breaches.
The fragmentation of assets drives the reduction of entry barriers and the increasing time efficiency with which tokens can be brought to secondary markets. The whole process of tokenisation leads to an increase in liquidity.
By removing barriers to investment, a wider range of stakeholders can acquire assets. Tokenisation also supports inclusive finance by opening up the investment market to a wider range of investors. Streamlining to a minimum intermediary function opens the doors to investment opportunities whose participation was previously restricted for geographical, infrastructural, or social reasons. Now access to financial markets and a variety of new types of investments are possible regardless of the characteristics of these investors.
Impact on the environment
Various consensus mechanisms are possible in tokenisation processes. To minimise the human footprint on the environment, technologists, financiers, legislators, and asset producers are encouraged to use the proof-of-stake consensus mechanism, which consumes significantly less energy due to its simplicity.
As it is a novel technology, the market needs to overcome various obstacles and gaps to make the technology accessible to a wider range of players. The biggest obstacles are in the areas of regulation, education, and infrastructure. Asset management is a conservative area where trust is a core value. Industry stakeholders want to understand how blockchain technology fits into existing or future legislation, they need to be educated about aspects and opportunities, and the necessary infrastructure needs to be built in parallel.