How Asset Tokenization is Unlocking a New Type of Liquidity

Tokenization is the latest trend in the cryptocurrency space that leverages blockchain to securitize assets, both traded and non-traded.

The main benefits of asset tokenization are improved liquidity, faster settlement, lower expenses, and boosted risk management.

Capital markets are still in the infancy stages of adoption of blockchain technology and distributed ledger technologies (DLT), and the industry is continually looking for practical applications. One major group of such use cases is the creation of digitally tokenized assets. The tokens either represent property interests that exist only in the blockchain (such as non-certificated securities), or represent real-world assets found off the blockchain.

What is Asset Tokenization?

Asset tokenization is the process of converting rights- or a unit of asset ownership- into a digital token on a blockchain network. It can be applied to regulated financial tools, like equities and bonds, tangible assets, like real estate, commodities, luxury products, and even in works of authorship (like music), or intellectual property.

The benefits of tokenization are particularly evident in assets that are hard to trade electronically, like works of art, real estate, or exotic cars, and those that require increased transparency in payment and data flow to improve their liquidity and tradability.

The benefits of tokenization

The tokenization of assets brings several benefits to both investors and companies looking to fundraise:

A larger pool of investors

There is a limit to the level of fractionalization possible with physical assets. Selling 1/50 of a property, or a fraction of a company share is not possible in the traditional financial setup. But, if the property is tokenized, this entry barrier is eliminated. It becomes possible to buy or sell tokens representing fractions of ownership, allowing a larger pool of investors to take part.

In the art industry, the prohibitive prices that some artists charge at auction imply that only a small number of high net worth persons can participate. A large number of retail investors are restricted by their pocket sizes. Issuing tokens that represent fractional ownership of artwork will be a game-changer.

Wider geographic reach

Public blockchains are fundamentally global as they impose no/little external restrictions on global fundraisers and investors. You only need to pass the KYC (Know Your Client) and AML (Anti-Money Laundering) procedure to participate in fundraising or investing in asset-backed tokens.

Reduced settlement period

Tokenization minimizes transaction times, potentially by enabling 24/7/365 trading. Additionally, with the application of smart contracts that automatically complete transactions, settlement times are transformed into real-time transactions. This further reduces counterparty risk during the operation and the probability of trade breaks.

Infrastructure upgrade

Fundraising and trading in many asset classes are usually slow, complicated, and involve paperwork. By digitizing such assets on a blockchain, their efficiency is improved dramatically, with impacts further experienced in areas dominated with non-existent traditional infrastructure.

Reduced cost for reconciliation in security trading

Blockchain technology acts as a digital ledger for the record-keeping of each shareholder position/transaction. For issuers, this greatly improves the effectiveness of various administrative processes, such as profit sharing, voting, buy-backs, etc. Besides, the presence of secondary trading markets facilitates the accounting activities of investors, like net-asset-value calculations.

Regulatory development

There is a slow but sure trend from regulators globally of laying the regulatory framework pillars for the issuance and trading of asset-backed tokens. Notably, the real-time data and immutability of data held in blockchain networks will facilitate the role that regulators want to improve- clarity and protection for investors.

Heightened asset-liability management

Tokenization improves the ability to manage asset-liability risk via quick transactions and better transparency.

Increase in available collateral

By speeding up and enhancing the fractionalization of new asset classes, tokenization broadens the variety of available and acceptable collateral beyond traditional assets. This will significantly expand the options accessible to market participants when choosing non-cash holdings as collateral in securities lending.

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