Reading time: ~2 m
1 What is tokenization – a brief overview of the various tokens
2 Benefits of asset tokenization on the blockchain
3 Asset Tokenization Security
4 The Future of Asset Tokenization
- Problems: Tokenization has received a lot of attention due to the popularity of blockchain, however the lack of legal framework limits the benefits that can be achieved.
- Why is it important: With tokenization, important benefits can be obtained, such as the democratization of investment, data security, and fractional ownership.
- Answer: In order for legislators to establish a legal framework that can harness the potential of tokenization, the concept, benefits, and use cases need to be understood.
What is tokenization – a brief overview of the various tokens
During a time of rapid development and increased interest in blockchain over the past few years, various processes that benefit from being implemented with blockchain technology have attracted attention. Tokenization is one of the processes targeted by the blockchain.
Asset tokenization is becoming more common in the context of financial services, real estate, and other aspects of traditional assets. This article provides an overview of the different categories of assets that can be tokenized, the advantages and disadvantages of tokenization, and real life examples.
The tokenization of real estate assets allows people who lack the large capital required to invest in whole real estate to invest in a piece of property and earn a return on investment.
The Blockchain Council defines tokenization as “the process of converting ownership and rights to certain assets into digital form.” It is useful to remember the difference between interchangeable and non-interchangeable assets. Fungible assets are not unique and can therefore be replaced by a similar item, such as a €1 coin, which cannot be distinguished from any other coin. Examples of fungible assets include gold and money. In most cases, these assets can be easily divided into smaller fractions. In contrast, non-fungible assets are unique and irreplaceable assets that cannot be separated in the analog world. One of the most common examples of non-fungible assets is the Mona Lisa painting.
Benefits of asset tokenization on the blockchain
One of the key benefits asset tokenization is that it allows assets that are not fungible and therefore indivisible in the analog world to be divided into fractional digital tokens. Theoretically, one example could be real estate or works of art. Unlike traditional processes, multiple people can own an asset through fractional ownership. The value of an asset is broken down into shares representing a certain percentage of the total value, allowing for multiple owners of an asset through fractional ownership. This not only lowers the barrier to investment in these types of assets, but also expands global access to investment opportunities, which promotes financial inclusion and democratizes investment.
When it comes to owning real estate, this has a potentially significant advantage as it lowers the barrier for people to want to invest in real estate. Tokenization of real estate assets allows people who lack the large capital required to invest in whole real estate to invest in a piece of property and earn a return on investment. Moreover, fractional ownership through tokenization increases liquidity as investors can trade their tokens easily and quickly, rather than waiting years to profit or lose on large and illiquid assets.
Asset Tokenization Security
Another important benefit of tokenization combined with blockchain is data security. Blockchain tokenization stores sensitive information as a combination of letters and numbers in tokens that go through a cryptographic function. This process ensures that each token is unique, but most importantly, it significantly reduces data security risks, since the alphanumeric code stored in the token serves only as a link to sensitive data and does not reveal the original data or personal information. This is due to data and privacy rights that are embodied in regulations such as the European General Data Protection Regulation – GDPR.
The combination of tokenization and blockchain also benefits from the core benefits inherent in blockchain: transparency, traceability, accuracy, and immutability. With tokenized assets registered on the blockchain, all transactions in respect of each asset are available to anyone who interacts with the blockchain. This establishes market credibility as the history of the owner of the asset can be easily traced. The fact that the blockchain does not allow any transactions to be modified further reinforces this trust. For example, it makes it impossible for sellers to manipulate an asset’s history to make it more attractive and charge more than its actual value.
The introduction of the token economy at different levels can help improve the competitiveness and efficiency of industries, increase trust and reduce complexity.
There are many examples of assets that can be tokenized and therefore also tokenized on the blockchain. One of them is Yenna Tech, an initiative to tokenize real farmland that aims to support farmers by facilitating their access to finance. The property of farm owners is tokenized and divided into shares of business value, such as plants, crops, construction, etc., for a specific unit of land.
The Future of Asset Tokenization
The tokenization of traditional assets opens up new investment opportunities to expand and accelerate access to financial services. Tokenization can generate asset liquidity that increases market movement by creating affordable ways to sell and buy, as well as increasing the number of people who can participate in the market.
The introduction of the token economy at different levels can help improve the competitiveness and efficiency of industries, increase trust and reduce complexity. This can be a decisive factor in supporting regions in the developing world to become internationally competitive and therefore empower their local economies.
Independently from benefits of asset tokenization problems will need to be addressed. For example, regulators will play a critical role in the development of the token economy, especially in Europe, where stakeholders often demand a suitable regulatory framework and regulatory clarity, before considering investing in new businesses and technologies. Consequently, one of the main current problems is the lack of a coherent legal framework with high standards of safety and consumer protection.
To achieve regulatory clarity, it is necessary to have an understanding of where the industry is headed and what challenges it faces, as well as an understanding of what the regulatory challenges are in terms of consumer protection and guarantees of fundamental rights such as privacy.