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Tokenization of assets is transforming the way we invest in assets – from real estate to commodities. Asset tokenization is poised to disrupt various industries, specifically the financial industry, and those who do not act now are more likely to lag.
The tokenization of assets involves issuing a blockchain token, specifically a security token, which represents a real-world tradable asset. These security tokens are created through security token offering (STO) where different types of tokens, such as equity tokens, utility tokens or payment tokens are produced. A security token can represent fractional ownership of an asset (such as fine art, real estate, etc.), or a share in a company, or participation in an investment fund. Post security token development, the tokens are traded on a secondary market.
The new token economy holds massive potential to build a more efficient financial world by alleviating friction involved in the process of creating, buying and selling of securities. The following are the benefits of tokenization of assets – for both investors and sellers.
After the assets, especially private securities and illiquid assets, have been tokenized, they can be traded on the secondary market. The access to a large base of traders leads to increased liquidity, offering significant benefits to investors who have more freedom and sellers as the tokens benefit from greater liquidity, consequently acquiring greater value from the underlying asset.
Smart contracts, which are software algorithms integrated into a blockchain to trigger actions when the pre-defined conditions are fulfilled, execute transactions of tokens, thereby automating specific parts of the exchange process. This automation streamlines the process of buying and selling tokens and mitigates the need for an intermediary. This leads to accelerated transactions and lower transaction fees.
A security token is embedded with the holder’s rights, legal responsibilities and an immutable record of ownership. This allows for transparent transactions, enabling you to know who you are dealing with, what your and their rights are, and who the previous owner of the token was.
Tokens are highly divisible, which means that investors can gain fractional ownership of an underlying asset. If the orders are easier and cheaper to process, it can forge the path for a considerable reduction of the minimum investment amount. Furthermore, greater liquidity of security tokens reduces minimum investment periods as investors can exchange their tokens on the secondary market that operates round-the-clock globally.
The token economy drives a revolutionary shift from centralized trust agents to individuals. Cryptology makes third party functions redundant as blockchain participants run complex algorithms to validate the integrity of transactions. Financial institutions need to find out how to adopt and adapt to the new token economy. The following are the key areas that financial institutions need to take into account to survive in the token economy.
Financial institutions need to decide on what role they want to play in the value chain. For example, they can serve as a safe keeper of tokenized assets, or harness their expertise as custodian banks to create life cycle event transactions on blockchain’s distributed ledger, or automate life cycle processing through the use of smart contracts and deploy them on a blockchain platform. In addition, financial institutions can maintain their customers’ accounts in cryptocurrency tokens or coins.
Once the financial institutions have chosen their business models, they will have to implement different operating models. Since the key component of these new operating models is blockchain, financial institutions will have to choose the platform that they will work on or collaborate with. This decision will pivot around different factors like the regulation that has to be followed by the financial institutions, the services that they will offer to their clients, and other factors associated with the product, such as the product strategy and the potential of the product.
Financial institutions offering asset tokenization service need to comply with various obligations, such as Anti-Money Laundering (AML), Know Your Customer (KYC), Markets in Financial Instruments Directive (MiFID), and other obligations. The token economy directs more direct, expedited, and irreversible transactions, thus there is an indispensable need for operational measures to adhere to these obligations. Financial institutions need not start from ground zero, but they can partner with new players like tech startups or blockchain analytics software vendors to implement new operational measures and remain compliant with regulations while operating in the digital space.
The legislative and regulatory frameworks vary from jurisdiction to jurisdiction, thus financial institutions need to ensure that the tokens comply with both token issuers’ and token investors’ jurisdictions. They need to have stringent measures in place to prevent any investment that is not compliant.
The burgeoning popularity of Bitcoin and other crypto coins and tokens is making them a luring target for cybercriminals. Although the distributed ledger is reinforced with high-level security, owing to cryptology and consensus mechanism, there may be certain loopholes and the entire ecosystem needs to be fortified with top-notch security. Financial institutions should implement proper security measures to secure the value chain and offer advanced, secure solutions to their customers to store their wallets and private keys. The institutions should carefully orchestrate security at various levels – from network and infrastructure to systems and applications.
Tokenization forges the path for a new financial system that is more democratic, efficient, and vast. Asset tokenization is gaining rapid adoption – new players are building their infrastructures while traditional players are upgrading their existing infrastructures to integrate the new token economy.
If you are planning to embrace the token economy to stay relevant in the market, Antier Solutions can help. Our mission-driven asset tokenization service drives the development process, providing you with a perfect solution that facilitates market penetration and engagement with potential investors. Whether you want to tokenize a real estate asset, an art piece, any exclusive good, illiquid asset, or venture capital funds, our seasoned blockchain engineers can effectively cater to your requirements.
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