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Today, a large chunk of the world’s wealth is locked in illiquid assets.¹ The advent of asset tokenization, however, could fundamentally change the way we invest by opening up access to illiquid assets–allowing millions of people around the world to invest in assets they otherwise wouldn’t be able to access.
Boston Consulting Group’s conservative estimate is that the total size of tokenized illiquid assets could reach $16 trillion by 2030. In fact, in the best-case scenario, the potential of asset tokenization could reach up to $68 trillion.¹
What is asset tokenization?
Before we go into why asset tokenization matters, let’s take a step back and discuss what asset tokenization is.
At its core, asset tokenization involves digitizing tangible and intangible assets and converting them into digital tokens, which are represented on a distributed ledger or blockchain. You can think of it as a way of converting real assets into digital assets. Common assets that can be tokenized include real estate, precious metals, intellectual property, sports, art, entertainment, and more. Such assets can be stored and traded fractionally or in whole, as well as transferred to another owner.
Use cases for asset tokenization
Tokenization is possible for virtually any asset.
Take real estate as an example. For a long time, property investment was considered a privilege exclusive to high-net-worth individuals. Today, however, you can own fragments of a property, thanks to tokenization. The token can represent a portion of the deed, an equity interest in a legal entity, ownership of the collateralized debt, or any other form of asset related to the real estate.² The tokenization of real estate not only removes the legal process of transferring ownership but also cuts out transaction costs, land transfer taxes, and notary visits.³
Asset tokenization also has the potential to open up the global art market. In 2021, Swiss digital asset bank Sygnum partnered with Artemundi, an art investment firm, to tokenize Picasso’s oil on canvas painting Fillette au béret. Fractionalized shares were offered at $6000 each for a chance to own a slice of the $3.68 million masterpiece, with fractionalized ownership over the painting recognized by Swiss law.⁴
In the context of finance and stocks, asset tokenization also enables you to purchase tokenized stocks of major companies like Apple, Tesla, Google, Netflix, and more. Unlike the traditional stock market, tokenized stocks can be traded 24/7 from anywhere in the world.
Benefits of asset tokenization
The tokenization of assets offers a number of benefits to both investors and sellers:
- Improved liquidity: Tokens can be traded on a secondary market of the issuer’s choice, which opens access to a broader base of traders and theoretically increases liquidity.
- Automation: Through smart contracts, compliance, document verification, trading, and dividend payments can be carried out automatically via the blockchain. Intermediaries are removed from settlement processes, which reduces logistical challenges involved in the creation, purchase, and sale of securities.
- Increased transparency: By default, blockchain implies transparency. Asset tokenization allows users to view the entire history of activities performed over the asset; ownership over a certain asset and the associated chain of ownership can be easily identified.⁴
- Immutability: All data stored on the blockchain is immutable, meaning asset information and transaction records are verified and data cannot be manipulated once recorded.
- Increased accessibility: Tokens are divisible, meaning investors can buy tokens that represent very small percentages of an asset. For those who can’t afford high-ticket assets, fractional ownership enables a wider range of investors to access the market, spurring greater financial inclusion.⁵ In addition, tokens can be exchanged globally and 24/7/365.
Limitations and challenges of asset tokenization
Although asset tokenization enables new liquidity and fractional ownership, digital tokens are in a nascent stage. The legal status around smart contracts remains undefined, and without a universally accepted classification of tokenized assets, regulatory bodies, financial institutions and jurisdictions continue to hold different viewpoints.
How to tokenize an asset
To wrap up, let’s look at what the asset tokenization process looks like. Typically you would take the following steps:
- Identify and audit the asset. Whether it be real estate, a physical commodity, a regulated financial instrument, an artwork, a collectible, or a piece of intellectual property, you need to audit it to verify its value and unique characteristics.
- Choose a token. Depending on your asset and business model, this may vary. Different token types like utility tokens and security tokens come with their own standards and trading criteria.
- Analyze legal regulations. Consider global, country- and industry-specific legal regulations related to your token and asset. Your ability to operate in certain countries and issue tokens may be affected by these standards.
- Create a tokenomics model. This defines token supply and demand characteristics, outlines token value, and specifies the rights associated with the asset.
- Choose your tokenization platform, taking into account the token protocol, whether it’s a private or public blockchain, its adoption, and how developed the infrastructure is.
- Develop smart contracts. At this time, you’ll decide on the number of tokens and how many to distribute publicly. If you’re interested in fractionalizing your tokens, you also need to decide how many smaller units will compose each token.
- Distribute tokens on your own or via a third-party platform.
Looking ahead
Blockchain-based tokenization holds exciting potential for development, but regulatory hurdles and knowledge gaps need to be overcome before widespread adoption can happen. Still, its ever-expanding applications across sectors have opened a wide range of illiquid asset classes to investors and could be a key source of competitive edge for businesses.
Sources
- On-Chain Asset Tokenization. BCG
- A Primer on the Tokenization of Real Estate. EisenRamper
- Tokenization – From Illiquid to Liquid Real Estate Ownership. EY
- Pablo Picasso’s Oil on Canvas Painting Fillette Au Beret to be Tokenized. The Coin Republic
- Tokenization of Assets. EY
- How Tokenization Will Contribute to Financial Inclusion. Nasdaq
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