Table of Contents
Introduction
The introduction of bitcoin ushered in a new era of possibilities that might fundamentally alter how investments and assets are issued, managed, and traded. The blockchain is a sort of distributed ledger technology that is responsible for the creation of the world’s first cryptocurrency. This technology contains the keys to a wide variety of investment opportunities.
The financial landscape will be tended to by blockchain, which will enable an asset to be easily broken down into smaller units that represent ownership, encouraging the democratization of investment in historically illiquid assets, and bringing about fairer markets. Blockchain will also tend to the financial landscape. On a distributed ledger, anything of value can be represented as a token, whether it be a painting, a digital media platform, real estate property, corporate shares, collectibles, or anything else. It brings up an important question: what exactly is asset tokenization?
Asset Tokenization
Asset tokenization refers to the process wherein an issuer produces digital tokens on a distributed ledger or blockchain that represent either digital or physical assets. These tokens can be used interchangeably to represent either type of asset. Once you have purchased tokens that represent an asset, blockchain assures that no central authority can revoke or alter your ownership of that asset; rather, your ownership of that asset will continue to be completely immutable.
Let’s say you own a property in New York that’s valued at $500,000. Through the process of asset tokenization, ownership of this property might be converted into 500,000 tokens, with each token representing a minuscule percentage of the property (0.0002%). Let’s imagine you need to borrow fifty thousand dollars, but you can’t sell your home since you still need a place to live. In this situation, it wouldn’t make sense to sell your home, but you still need the money. As an alternative, you might issue tokens on a publicly distributed ledger, which would then make it possible for individuals to freely purchase and sell tokens on a variety of markets. When someone purchases a token, they are purchasing 0.0002 percent ownership in the asset. 500,000 tokens are required to acquire a 100% ownership stake in the property. Because the technologies behind distributed ledgers are immutable, no one can take away the ownership of the tokens or, in this context, the shares of a property that an investor has purchased.
Different varieties of tokenized assets
The tokenization of fungible assets
Two primary aspects define a fungible asset:
Interchangeable: each unit of the tokenized asset possesses the same market worth and validity; an example of this would be Bitcoin: The value of one bitcoin ($BTC) can be expressed in any unit. They have the same value on the market, and one can be substituted for the other. It is irrelevant where a Bitcoin was purchased because each Bitcoin possesses the same capabilities and is integrated into the same network regardless of where it was obtained. You can confidently trade one-fourth of a Bitcoin (BTC) with anyone else’s one-fourth of a Bitcoin (BTC), as each one-fourth of a Bitcoin (BTC) has the same value. This is true even if the other currency is one-fourth of a different coin.
A fungible cryptocurrency may be divided into an unlimited number of decimal places, provided that this capability was enabled when the cryptocurrency was first issued. The value and legitimacy of each unit will be the same.
Tokenization of non-fungible assets
A non-fungible token is defined as being:
Non-exchangeable: Because each token represents its distinct value, NFTs cannot be exchanged for tokens of the same type, making them non-interchangeable.
Non-divisible: Non-Family Trusts, in general, are not divisible; however, Fractional Non-Family Trusts (F-NFTs) do offer fractional ownership of non-family trust assets, such as pricey fine art or commercial real estate.
One thing that distinguishes one token from another of the same type is that it possesses information and properties that are unique to it.
Asset owners’ tokenization benefits
Liquidity
An individual needs $50,000 from a $500,000 condo. This person tokenized their condo into 500,000 0.0002% tokens. They may sell 50,000 tokens instead of the full property, ensuring a more liquid asset.
Price equality
Unliquidated assets often have no market value. In this situation, asset owners offer illiquidity discounts to reduce the asset’s price. Tokenizing assets would boost liquidity since fractional ownership lowers illiquidity discounts. Small-fraction sales allow owners to charge a reasonable market price.
Cost-cutting management
Transferring an asset nowadays requires lawyers to manage the paperwork and build confidence between you and a buyer, adding time and money. If you tokenize the same item and use a decentralized platform or marketplace, you’ll save time and money.
Investing in asset tokenization
Liquidity
With a tokenized property, regular investors can invest smaller sums of money. Historically, diversifying a portfolio with $10,000 required a lot of paperwork, which costs money and takes time. Tokenizing assets increases investor liquidity.
Less lockup
Investors can’t sell during lock-up periods. Large, illiquid assets might cause this. Tokenization of assets can shorten lock periods because investors can sell tokens in a liquid market. Investors no longer wait years to take profits or losses.
Transparency
Since blockchain is immutable, owners can’t change an asset’s history to make it more appealing. Investors may see a holding’s history and make better judgments.
Confidentiality
With ownership and decentralized identity (DID) details on the blockchain, a buyer’s private-public key pair produces a digital signature to verify their identity for KYC/AML. Standards organizations, like w3c, decide on DID IDs to ensure adoption across networks and platforms.
Tokenization’s future
Tokenization will revamp asset management. This democratizes market access while assuring fairness and security. The sole issue today is legal boundaries; how much they stand in the way depends on the asset you wish to tokenize. A network for trading basketball cards will have fewer difficulties than one for costly art.
To create a legal bridge between assets and distributed ledger technology, lawyers must overcome tax and cross-jurisdictional challenges. New solutions will emerge in the future to address these issues.
