The biggest portal about international asset protection and diversification

icon-skype-png icon-telegram-png icon-viber-png icon-whatsapp-png

The biggest portal about international asset protection and diversification

+507 848 3045
+44 7700 304814
+372 5 489 53 37
+381 6911 12327

Asset Tokenization: What Is It and How Is It Used?

Fifteen years prior, asset tokenization and its prospective influence on essential business operations were not widely recognized. Although the global economy was becoming largely digital in the early 21st century, the now-familiar terms associated with this innovation, namely, token, blockchain, distributed ledger, and smart contracts didn’t even exist before 2009.

With the birth of cryptocurrencies, marked by the creation of the first Bitcoin block on January 3, 2009, terms related to digital assets began to circulate. Despite this, for a significant period, they were seen as separate from traditional financial concepts. Asset tokenization was a notion without resonance, as blockchain technology and conventional economic structures operated independently.

Asset Tokenization

So, what is asset tokenization and why is the digital (re)distribution of ownership so impactful? Reconciling a digital token with a tangible asset may seem challenging due to their seemingly indirect connection. On the face of it, a token might be mistaken for a crypto, which is tradable for fiat currency. Yet, the truth is more complicated in this case.

A token can be viewed as a digital unit of account, assuming the functions traditionally associated with securities in the digital realm. While distinct from cryptocurrencies, tokens are still related to them. Therefore, tokenization transcends simple digitization. It implies integrating assets into an established, acknowledged, and systematized value system.

Let’s consider a relatable example to understand tokenization. Imagine you have an antique clock passed down from your great-grandmother, and you’re suddenly in dire need of money. Selling this heirloom could solve the financial issue, but what if keeping it in the family is crucial?

Pawning the clock, using it as collateral for a bank loan, or borrowing money from people you know might all seem like viable solutions, but these options come with their own set of issues. The main one is that it is impossible to partially monetize the clock, obtaining some of its value in cash while still keeping the asset in your possession.

This type of predicament is common in day-to-day life: having assets that are difficult or unprofitable to monetize without giving up ownership. This is where the concept of asset tokenization becomes a game-changer.

To secure financing, consider asset tokenization. This process involves not digitizing the physical asset like the clock in our scenario but rather the rights to it. For instance, if the heirloom clock is valued at USD 10,000, you could split this amount into 1,000 equal shares. By selling just 20 of them, you’d raise USD 200. Essentially, tokenization is the act of transferring the asset ownership rights onto the blockchain ecosystem.

As of 2024, the concept of tokenization, though still emerging, has proven its practicality. A notable example of it is the digitization of rights for Andy Warhol’s 14 Small Electric Chairs, a late work from the iconic American artist’s oeuvre, created in 1980.

Tokens are poised to play a crucial role in the economy of tomorrow. Yet, questions remain about the viability, applicability, and commercial success of the technology. Originating from the cryptocurrency sector, the term token has yet to significantly impact the daily lives of many. However, Deloitte, the esteemed consulting firm founded in 1845, is sure that the digitization of ownership rights heralds the future. According to some forecasts, by 2027, the total value of tokenized assets could reach USD 24 trillion, signaling a trend toward mass adoption. With this in mind, understanding tokenization is vital, as it is set to shape our future.

Digital transformation and blockchain

A token’s significance as a unit of account is intrinsically linked to its application. Much like traditional securities such as stocks, tokens lack substance without the issuing entity. Thus, any discussion of tokenization’s tangible benefits should be held with prudence. It is through the lens of a particular asset and its distribution framework that we can gain meaningful insights.

Let’s take a look at some practical aspects of tokenization:

  • Fractional Ownership: Since it enables the division of assets into numerous shares, tokenization also lowers investment barriers and improves investor flexibility.
  • Higher Liquidity: The process simplifies transactions and facilitates easier trading on secondary markets.
  • Reduced Costs: By eliminating intermediaries in direct sales, you can significantly decrease financial losses in transactions that involve digital ownership rights.
  • Global Accessibility: Tokenization removes geographical barriers, as transactions don’t require the physical presence of either buyers or sellers.
  • Robust Security: The blockchain’s architecture offers strong protection against unauthorized access and hacking, minimizing fraud risks or risks resulting from any third-party actions.
  • Transparent Legality: Tokenization simplifies the verification of ownership rights for regular company assets like shares, making blockchain records instantly accessible and recognizable by authorities.
  • Continuous Operations: Unlike deals that involve third parties, say a lawyer or a notary, the tokenization system operates 24/7, free from the constraints of third-party business hours.
  • Diversified Portfolios: Tokenization allows for the inclusion of previously indivisible assets, broadening portfolio options with a low entry barrier.
  • Regulatory Compliance: Blockchain-recorded transactions meet national and international regulations, reducing legal disputes and the risk of third parties contesting them is practically nonexistent.
  • Simplified Inheritance: Tokenizing assets can potentially streamline the inheritance process, mitigating disputes and protecting against unauthorized claims. In the case of inheritance issues, disputes are not uncommon even with a will in place. Yet, by transforming assets into tokens, the inheritance process is greatly simplified. This method also prevents courts and those not included in the will from laying claim to the inheritance or any portion thereof.

Asset tokenization: real-world uses

For a technology to prove its relevance, it must showcase practical uses during its formative phase. Tokens are well-established in the sector of cryptocurrencies, but the journey of applying digitized rights to physical assets is only now gaining traction.

For your convenience, here are some examples of such uses:

  • Real Estate: For investors deterred by high property prices or geographical barriers, asset tokenization is a possible solution, granting the liberty of equity participation in property ventures.
  • Art and Collectibles: This sector offers a tempting investment path but often requires substantial capital to start. Whether it’s paintings by esteemed artists or historical relics that are not easily transferable, like sculptures or architectural pieces, tokenization enables investment participation without the need for considerable initial capital, especially when budget limitations exist.
  • Investment Funds: The legal complexities of traditional investment projects pose a significant challenge due to the myriad of regulations governing assets and investment processes. Tokenization offers a solution by simplifying legal participation while maintaining transparency with regulatory bodies.
  • Intellectual Property: Legislative regulation in the intellectual property (IP) sector is fraught with challenges, given the unique nature of IP assets and their significant investment potential. Asset tokenization, encompassing a range of IPs from musical works to scientific research, facilitates investor participation in these projects. The method also rewards asset creators who are compensated for their work and can pursue further creative projects.
  • Various Goods: Any product that is created for sale or that may potentially be sold can undergo tokenization. The type of asset, be it precious metals, farm produce, electricity, pharmaceuticals, or industrial equipment, is irrelevant here. Digitizing ownership rights benefits both investors and manufacturers, resulting in transaction transparency that meets the expectations of both regulatory agencies and supervisory bodies.
  • Securities: The practice of digitizing ownership rights for securities like stocks, bonds, and derivatives is already established. It offers clarity to regulatory bodies and adheres to all aspects of current corporate laws. In the business world, asset tokenization is rapidly advancing. As of now, it already covers a significant part of this sector.
  • Supply Chain Management: With international trade expanding and economic globalization intensifying, logistics complexities are on the rise. This often leads to difficulties in tracking goods and results in their misplacement or delayed deliveries. The integration of blockchain technologies, either as a standalone solution or coupled with asset tokenization, offers a significant enhancement to logistics operations, greatly simplifying the tracking and management of goods.

Technical implementation

The world of asset tokenization is getting more complex and exciting by the day, with lots of new ideas popping up. Although not all of them will make it, the market is about to grow a lot and become more established in just a couple of years. Blockchain technology, which is key for turning ownership rights into digital form, is getting safer and more reliable. This means that attacks on blockchain systems are happening less often. This improvement is thanks to better hardware and, even more so, to more advanced and up-to-date software as well as the way it’s put into use.

Below, you will find the asset tokenization technologies that are already applied:

  • Smart Contracts: They simplify the execution of commercial agreements by automating processes, while also providing strong security, transparency, and adherence to regulatory standards.
  • Decentralized Ledgers: Serving as secure repositories for transaction data, decentralized ledgers bolster trust among all interested parties and safeguard against unauthorized alterations of commercial information.
  • Consensus Mechanisms: These are critical in maintaining the unassailable integrity of blockchain networks.

Asset tokenization algorithm: digitizing ownership rights

  1. Identifying the Asset Owner: Establish the rightful owner of the asset to be tokenized.
  2. Regulatory Compliance Analysis: Evaluate the asset tokenization process to make sure it meets the corresponding legal standards.
  3. Smart Contract Creation: Develop self-executing smart contracts that facilitate the secure transfer of digital ownership rights.
  4. Token Generation: Generate tokens, each symbolizing a fraction of the asset’s ownership.
  5. Investor Registration: Onboard buyers who must complete the Know Your Customer (KYC) procedure.
  6. Transaction Execution: Conduct trades of the tokenized asset, with each transaction being securely logged on the blockchain.

Brief FAQ on asset tokenization

Asset tokenization might seem like a new and complex idea, even to those well-versed in the field. Traditional business professionals, often educated on classical economic practices, might hesitate to give digital innovations a try. This may lead to a lack of understanding about what tokens are or how one can digitize ownership rights. If the concept of asset tokenization is still not clear to you, we have compiled a brief FAQ section for better clarity. Should you need more information on this subject, please request an individual consultation with International Wealth experts.

What is asset tokenization?

Asset tokenization involves recording ownership rights to an object (which can be anything) in a digital token on the blockchain.

What’s the main advantage of the technology?

The primary benefit is fractional ownership rights, even for assets that are physically indivisible or not intended for division, such as works of art.

Is any blockchain platform suitable for asset tokenization?

The technology is evolving rapidly. Ethereum, Polkadot, and Tezos are among the most commonly used platforms.

What does asset tokenization mean on a physical level?

At its core, asset tokenization creates a token, i.e., a record in a distributed ledger containing information about partial or full ownership rights to a specific asset.

Can any assets be digitized? 

Yes, as long as they are transferable or tradable.

What about security?

Blockchain-based technologies offer a high level of security. While theoretically hackable, the task is extremely difficult and practically implausible.

Are there any restrictions based on the country of residence?

No. Asset tokenization transcends artificial boundaries based on citizenship, tax residency, wealth, or investor status.

Is asset tokenization already used?

Yes, primarily in real estate, antique trading, and art transactions.

How promising is asset tokenization?

In today’s rapidly evolving economy, asset tokenization is poised for continued growth as blockchain technologies solidify their positions in various industry sectors.

Need a consultation?
Please help us make the portal even more informative, up-to-date, and valuable for you and your business.

Your email address will not be published.