Digital Transformation of Real World Assets
Our world is full of untapped real-world assets. From private equity, real estate, gold reserves, fine art to agriculture, tangible items have been difficult to subdivide or physically transfer. Investors have manually traded these assets on paper, often through layers of intermediaries, which is slow, complicated and expensive. These trades are also more difficult to track due to the regulatory nature of paper transactions, especially when it involves cross-border legislation.
Asset tokenization is the process of converting ownership rights in a particular asset into a digital token on a blockchain. These can include unique hash values which represent physical assets, securities and financial instruments, real estate, gold, etc…
Tokenization of real-world assets and securities is already enabling new markets by decreasing barriers and frictions to information exchange and trade.
By switching to a digital token system, asset owners and investors can create new efficiencies like making assets more liquid by automating what was previously a cumbersome, manual process — while retaining the real-world characteristics of the underlying asset itself.
The problem with many current efforts to tokenize assets
Simply creating a token on a public layer one blockchain and calling it a share, a limited partnership unit, or any other representation of a real world security or asset is not enough.
While tokens have taken the spotlight, when it comes to regulatory compliant use of distributed ledger technology, there’s far more information that must be associated with that token to ensure governance, risk, and compliance.
Early efforts to tokenize securities and assets simply generated a token and left the rest of the data offline and off of the blockchain, relying upon traditional, mostly human-powered processes for auditing and proving the claim that a hash value on a blockchain is truly representing the underlying asset.
The lack of provability forces anyone researching the asset or a particular transaction back to finding the records and documents in a manner similar to what has already existed for decades.
Fungible vs. Non-Fungible Assets
There are two types of assets that can be represented as blockchain tokens: Fungible assets and non-fungible assets. Fungible assets are interchangeable, meaning each unit of the asset is exactly the same holding the same value.
For example, a unit of fiat currency like the US dollar is a fungible asset. All units of one dollar bills are exactly the same, holding the same value and being interchangeable. Fungible assets can also be divisible, in the example of the dollar, it can be divided into cents.
However, non-fungible assets are unique and not necessarily interchangeable. For example, a gold bar is typically unique. It is distinguished by its weight, purity, and even serialization. Every bar of gold might have a differing value and they are not usually divisible as a native, real-work.
Fungible and non-fungible assets can be represented digitally by a token on blockchain.
Fungible tokens are simple numbers associated with units of account. Transfers of a certain number of tokens between accounts represent value transfers. Blockchain-based platforms tend to use fungible tokens to implement tokenized economies.
However, non-fungible tokens (NFTs) are also viable — usually in combination with fungible tokens representing pricing. NFTs require more data to be stored to identify each individual unit, the management of this type of token is usually more complex.
Benefits of Asset Tokenization
The ability to represent the ownership of real world assets on a blockchain can disrupt the way we manage assets.
Presently, high-value investments are not accessible by a large percentage of the global population. New models of capital formation secured by distributed ledger blockchain technology represents an evolution to global capital markets and capital mobility.
- no territorial barriers: an investor from anywhere globally can invest in things across the world. For example, an investor in California might be able to invest in an office building in Argentina — all with the security, speed and ease of transfer of the blockchain network.
- no intermediaries: trade can be conducted without third-party brokers that often slow the process, making it inefficient and more expensive while adding the risk of additional error in any transaction.
- lower investment risk: any particular investment portfolio can become more diverse due to the potential of incremental ownership of a variety of assets.
- improved liquidity of tangible assets: blockchain tokens enable to introduce fractional ownership.
Globalization of capital coming from asset tokenization can significantly increase the demand and ease down the market entry, leading to diversification and growth in the market.
The legal status of the concept of asset tokenization varies across jurisdictions. Blockchain technology is quickly evolving. However the regulatory environment in many nations is far behind.
There are challenges like:
- improvement of security infrastructure and safety regulations,
- identification of incentives to trigger more market participants and more
- transactions to increase market depth,
- development of legal enforceability of property rights system,
- development of tax regulations
However, there are countries that already have prepared legal frameworks fitted into the new blockchain market models.
Nations like Bermuda, Switzerland and Malta are at the forefront of blockchain adoption, including asset tokenization. Real-world assets represent such a significant percentage of capital markets, it is only a matter of time before asset tokenization on blockchain becomes the norm across all asset classes.
- Investors can trade real-world assets that due to their low liquidity would have been difficult to exchange in the past. The illiquidity discount can be as high as 30%, which reduces the overall valuation of the asset.
- Tokens enhance the liquidity of previously hard assets with private equity being a prime example, with its low liquidity and large share of the global asset market.
- Asset tokenization reduces barriers and will attract new investors through fractional ownership, as they can own a percentage of a real-world asset and repackage it with traditional bonds or hedge funds to resell in crypto marketplaces.
- Asset tokenization can increase portfolio diversification and spreads risk as investors can now co-own multiple assets at once.
- Working with 10XTS technology, asset tokenization becomes a far more defined process by capturing the documents, information and data about an asset in a secure, digital vault accessible via a blockchain private key.
Blockchain-based tracking of assets has attributes that solves a lot of problems associated with management and trading of assets. This is appealing to both asset issuers and investors.
- Immutable — once someone buys tokens, nobody can erase or change the record of ownership.
- Accessible — blockchain tokens can be accessed from any place in a world, 24/7 via a web application or a smartphone app.
- Divisible — tokens represent the promise of greater liquidity, which increases the expected value from trade and eliminates the need for minimum investments.
- Cost-effective — in many cases, tokens eliminate the middlemen, which often limit investment accessibility by restricting investments to accredited investors only, demanding high fees and requiring an access to stock-trading accounts.
- Transparent — tokens eliminate asymmetry of information present during the transfer of ownership.
What can be tokenized?
Asset tokenization establishes the technology basis for a new category of crypto financial products. It is changing the traditional concept of ownership itself.
Many assets that can tokenized and moved to blockchain: financial instruments like stocks & bonds, real estate properties, gold, and even fine art.
Private Equity Shares
Information about shares and shareholders of small-to-medium enterprises has traditionally been manually accounted on spreadsheets or even still on paper. Each party maintains its own record-keeping in siloed records, which is redundant and inefficient — making it prone to error. LedgerLab makes it easier for companies to interact with shareholders, providing information, ownership transparency and availability to confidently execute trades on the secondary market.
Tokenization of real estate allows fractional interest ownership, which opens the opportunity for increased market participation and additional capital. This presents as a new opportunity to grow real estate investment markets.
Traditionally illiquid assets including art, aircraft leases, collectibles, fine wine, and many more can be digitized via LedgerLab to provide provenance, price discovery, and lending with the transparency and efficiency of blockchain. Increase value and participation in normally illiquid markets. Current solutions manage only already “digital” assets.
Tokenizing commodities can create billions in annual savings and new market opportunities across the commodities sourcing and trading lifecycle. Transforming physical assets into tradable digital assets creates liquidity and lowers barriers to entry in asset classes traditionally dominated by institutional investors individuals.
Tokenization of loans can reduce costs and foster greater market participation due to process automation and simplified workflows. The duplication of information among counter-parties, excessive manual processes, data re-entry, and lengthy settlement times creates cost and delay in today’s loan markets.
By tokenizing intellectual property, it permits fractional ownership of innovation the resulting technology. This creates new and interesting models of ownership and participatory income streams from licensing, etc…
As we move into the future of digitized and tokenized assets, 10XTS provides the regulatory compliant layer of evidence to prove the existence of entities, assets and transactions. This is the first step towards establishing blockchain-based capital markets information management solutions.
Talk to us about how we can build an asset tokenization strategy for you.