How Asset Tokenization Is Changing the Financial Landscape

Asset tokenization is getting significant coverage in the blockchain world - and, tellingly, in the mainstream business and financial press too. But what is it and what effects is it likely to have?

Gunnar Jaerv By Gunnar Jaerv on 23 November 2018

What is asset tokenization?

Asset tokenization is fractionalizing the ownership of a real-world asset, and using blockchain-based tokens to keep track of that ownership.

For instance, imagine an asset like a Malibu Beach apartment. It might be worth $48m — there are Malibu Beach residences on Zillow going for more than twice that. However, what if you want to use that asset as capital? Selling it is tough, because few people have pockets that deep. So you’re at the mercy of the banks. Even if it’s easy to find a buyer in theory, what if they’re on the other side of the world?

Many real-world assets aren’t easily transferable. They can’t be transported or broken up into multiple units of lesser value.

Tokenization offers a solution to this problem that incurs minimal setup and operational costs, meaning that both businesses and private individuals can benefit.

How does tokenization work?

Blockchain-based tokens can allow large sums to be divided so many investors can purchase tokens. They create tangibility and fungibility, meaning it becomes possible to trade in the value of a one-off asset using interchangeable tokens with a fixed value. Geographic restrictions are eliminated, so that sales can be made internationally even if the asset is immovable, such as in real estate.

Tokenization works best when it pairs blockchain-based token systems with traditional trusts. An asset is placed in trust, meaning a trusted custodian holds it. At the same time, its value is tokenized on a blockchain, something that can be done on several different blockchains and which we ultimately envisage being done through a blockchain-agnostic interface that allows cross-chain trading.

This way you get all the advantages of a traditional trust, a clearly-regulated system for dividing the possession of an asset (legal ownership) from the value of that same asset (beneficial ownership.) And you get the advantages of rapid, low-cost, international trading on blockchains: immutable, auditable, and entirely under the end user’s control.

How does tokenization differ from securitization?

But wait. Isn’t there already a tool in place for doing this? Securitization consists of packaging various assets and then selling on their cashflows. In many cases, the asset being represented is a debt, but otherwise, it appears very similar. How does tokenization differ from securitization?

First, tokenization works by creating blockchain-based tokens which can be traded in. In terms of how users can utilize them, they behave like a cryptocurrency; but they don’t have the instability commonly associated with cryptos. That creates, not something that behaves like an asset, but something that behaves like a currency; very different from a security.

Secondly, securities create liquidity from a pool of illiquid assets that are all of a similar type: mortgages for instance. By contrast, tokenization can create liquidity for single, individual illiquid assets: one house, painting or bullion deposit, rather than a pool of them.

Finally, securitization leaves trading in the hands of brokers. Tokenization puts the value of assets on the open market where their beneficial owners can trade freely themselves.

The future of asset tokenization

Asset tokenization has already found favor with leading financial institutions. Singapore’s Monetary Authority (MAS), the city-state’s de facto Central Bank, for instance, has already teamed up with Anquan Capital, Deloitte, and Nasdaq to develop a blockchain-based settlement system of tokenized digital assets.

Sopnendu Mohany, Chief Fintech Officer at MAS, said: "Blockchain technology and asset tokenization are fuelling a new wave of innovation globally."

"This project has demonstrated the value of blockchain technology and the benefits it can bring to the financial industry in the short to medium term,’ Mr Mohany continued. ‘The concept of asset tokenization, as well as other learnings gleaned from this project, can potentially be applied to a broad spectrum of the economy, creating a whole new world of opportunities."

Meanwhile, in New York, blockchain tokenization firm Fluidity and digital assets company Propellr have cooperated to tokenize a $30m apartment building — and an Andy Warhol painting has been auctioned for $5.6m over the Ethereum blockchain.

What’s likely in the future is we’ll see more and more individuals, companies and financial institutions turning to some form of tokenization.

Conclusion

Asset tokenization differs from traditional securitization, and allows end users more freedom over their own financial decisions while retaining the advantages of a traditional trust arrangement. It’s already become a significant area of interest for blockchain businesses, financial players — even including state actors — and companies in other fields like real estate. We can expect to see this trend continue as tokenization demonstrates its ability to bring fluidity to illiquid assets while keeping them secure.

Disclaimer:

Disclaimer: This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.

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