Explore 10 benefits how asset tokenization transforms business
In the realm of finance, security tokens emerge as an evolution of traditional securities like bonds and alternative investments like hedge funds, representing ownership of an asset. Traditional finance knows securities as tradable assets with some monetary value associated with them. Give these securities a unique twist and enable them by deploying blockchain technology. Unlike their conventional counterparts, security tokens leveraged by blockchain are subject to regulatory oversight, these digital representations adhere to strict compliance standards. There is whole new level of SEC drama that erupted in the summer of 2023 on what is security and what is not. In January 2024, the SEC made an important decision to approve the Bitcoin ETF for spot trading. This, combined with BlackRock's observation of a high level of activity, is incredibly positive news for decentralized products like Bitcoin. It signifies that they are gaining recognition and becoming more accessible to traditional investors, bringing them into the mainstream limelight in a truly uplifting manner.
Earlier in January, 2024, according to Charles Hoskinson, the Founder of Cardano and co-founder of Ethereum, the Securities and Exchange Commission (SEC) is still unable to provide a clear explanation as to why certain digital assets should not be categorized as securities. Hoskinson argues that the SEC has not yet convincingly demonstrated why decentralized assets like bitcoin and ether should be exempt from securities law, while other cryptocurrencies such as Cardano should be subjected to it. We won’t challenge the securities law too much here as the aim of this article is different.
Exploring Tokenization's $10 Trillion Potential
Alternative investments, including private equity (PE), private credit, real estate, and hedge funds, have the potential to boost returns and offer diversification for investors. Roland Berger reports conservatively that the market value of tokenization is set to reach $10 trillion by the year 2030. It’s applications can disrupt gaming, personal finance, IOT, sports, and even infrastructure projects. We will try to cover articles around this topic in the future.
According to Bain Company, tapping into a more robust distribution of alternatives to both institutions and individuals could unlock a substantial new-revenue opportunity through cost savings and by entering new lines of investments. This represents a significant prospect for the alternatives industry to generate an additional $400 billion annual revenue.
This article explores the why behind tokenizing securities, delving into the transformative potential of blockchain. By automating laborious processes associated with securities issuance, from ecosystem assembly to token distribution, blockchain-driven tokenization not only boosts efficiency but also minimizes errors, translating into significant cost reductions. Moreover, this digital shift expands investment opportunities globally, paving the way for innovation in products and liquidity provision of traditionally illiquid assets like real estate and fine art.
Why you can’t ignore the transformative nature of asset tokenization?
Imagine the money a business can save on legal, compliance, senior executives' paychecks, administration costs, and agencies in case a shareholder conflict comes up. In 2022 alone, the financial companies have spent nearly US $274 billion in compliance costs. The immutable nature of blockchain can fix many of the non-compliance hiccups.
In a cost to benefit calculation, the tokenization of assets can reduce the costs up to 40% for a typical business looking to fundraise. See the graphic below for the numbers drawn by Entoro Capital, LLC
Source: Survey of Entoro Capital, STO legal counsel, S&P and Pitchbook
While the EU compliant German tokenization provider Cashlink GmbH claims that costs from 35% to 65% could be saved when considering the tokenization of collectible assets, precious art, luxury goods, employee stock options, real estate assets, precious metals, sustainability projects and alternative assets. However we think that the Cashlink numbers could be biased here.
Roland Berger reports that tokenization can save costs upto 4.6 billion Euros by the year 2030 with the underlying assumption that the adoption rates will increase significantly.
New investment opportunities in traditional industries and business models
Broadridge Financial Solutions, an American fintech company claims to manage over $1 trillion worth of repurchased agreements or so called “repos” on its natively built Distributed Ledger Repo which if you think about it quite a powerful implementation.
Blockchain's role in attracting capital for sustainability initiatives can benefit business owners in the sustainability industry. Tokenizing carbon credits by transferring their information to a blockchain enhances efficiency and accessibility. This process makes carbon credits digital assets that can be easily bought, sold, and transferred, streamlining the trading process. Increased liquidity attracts more capital to sustainability initiatives by opening opportunities for a broader range of investors. Issuing carbon credits directly on the blockchain ensures transparency, as all associated attributes become publicly accessible, promoting trust and confidence among potential investors. The emergence of business models based on tokenization, such as Regenerative Finance, Green Finance, and Sustainable Finance, align financial incentives with sustainable development goals. These models provide a platform for businesses to attract dedicated capital for sustainability initiatives, enabling growth and impact on environmental objectives. Overall, blockchain's role in attracting capital offers increased liquidity, transparency, trust, and alignment with sustainable development goals for business owners in the sustainability industry.
How tokenization applies to real world assets
Tokens are not just the unit values worth a certain US $ amount, they can represent physical assets such as cars, real estate, and ownership over books, and games among others. Proving ownership over assets in a decentralized way is a game changer here in that users can claim ownership in a zero knowledge proof way. Companies like Amazon or Netfix can provide that you own an asset but ultimately these centralized entities are in control of your data.
According to the World Bank over 1.5 billion people remain unbanked and have no access to financial institutions. They likely live under corrupt governing systems that deprive them of basic financial access leaving them with no ATMs, banks, or investment opportunities. For people with access to the internet who live under failed financial systems, tokenization can make financial services accessible to them giving them more freedom to own their financial future.
Real estate, equities, bonds and funds of financial value will adopt real world use cases faster than other sectors. There are already plenetly of use cases already in place. World Mobile built on Cardano, raised over 40 million by launching it’s very own token. What they say they are cracking is the question of how one would bring incentives to access the internet in nation states like Tanzania where cell data for download costs more than ROI. With the money raised they are able to provide the necessary infrastructure to specific regions to bring internet to people’s cellphones. Contributions to the infrastructure are made by node operators who maintain hardware to hold the internet and the operators therefore are rewarded for their management.
Here are the top 10 benefits of tokenizing real world assets
Benefit 1: Increased liquidity
Tokenization enables fractional ownership, allowing investors to buy and sell smaller and more affordable fractions of an asset. By breaking down the ownership into tokens, it becomes easier for multiple investors to own a portion of an asset. This increased liquidity makes it simpler to trade assets, attracting more potential buyers, and reducing the need for intermediaries.
Benefit 2: Fractional ownership
Tokenization allows for the division of assets into smaller fractional ownership units. This enables investors with limited capital to diversify their investment portfolio across multiple assets.
Benefit 3: Access to global investors
Tokenization enables businesses to reach a global audience by breaking down geographical barriers. Digital tokens can be easily traded across borders, attracting investors from different jurisdictions and expanding the investor base for businesses.
Benefit 4: Improved efficiency and transparency
Tokenization enhances transparency and accountability in asset management. Every transaction and change in ownership is recorded on the blockchain, providing a comprehensive audit trail. Investors can rest assured that not just a few powerful players are controlling the asset or engaging in market manipulation tactics. This brings greater trust and confidence to investors, as they can verify the authenticity and history of the assets they are investing in. Asset managers can also leverage this transparency to attract more investors and comply with regulatory requirements.
Benefit 5: Reduced costs
Tokenization eliminates intermediaries and reduces associated fees, such as brokerage fees, title search fees, or legal fees involved in traditional asset transactions. This can result in cost savings for both investors and asset issuers.
Benefit 6: Increased security
Tokenization of assets increases security by converting physical or traditional assets into digital tokens that are stored in a secure and decentralized blockchain network. This process eliminates the need for physical paperwork or intermediaries, decreasing the risk of theft, fraud, or loss. Tokenization uses cryptographic protocols and smart contracts to establish ownership rights and secure transactions, ensuring that only authorized individuals can access and transfer the assets. The transparency and immutability of blockchain technology also enable real-time auditing and tracking, making it easier to detect and prevent any suspicious activities. Additionally, tokenization allows for fractional ownership, spreading the risk among multiple token holders and reducing the impact of a single point of failure. Overall, tokenization offers enhanced security measures that safeguard the authenticity, ownership, and transfer of assets.
Benefit 7: Enhanced market accessibility
Tokenization of real-world assets can benefit various industries. In real estate, tokenization allows smaller investors to purchase fractions of properties, increasing accessibility and liquidity. Tokenization also democratizes the art market by enabling fractional ownership and easier trading. In the commodities sector, tokenizing assets like precious metals and agricultural products can make them digitally accessable. Tokenization can revolutionize venture capital, intellectual property, energy and infrastructure, agriculture, luxury goods, debt and loans, and carbon offsetting projects by providing easier access, liquidity, and new investment opportunities.
Benefit 8: Improved market efficiency
By converting physical assets into digital tokens ownership can be easily transferred. For example, in the real estate industry, tokenization enables the digital transfer of property ownership without the need for lengthy paperwork and intermediaries, leading to faster and more efficient transactions. All relevant data and documentation about an asset, such as ownership history, legal contracts, maintenance records, and financial performance, can be stored on the blockchain. Accessible to all stakeholders, this decentralized and immutable nature of the blockchain ensures transparency, reduces the risk of fraud, and simplifies due diligence processes.
Benefit 9: Streamlined asset management
Tokenization can enable businesses to efficiently manage and monetize their assets. For example, real estate developers can tokenize their properties to raise funds for construction projects without wholly relying on traditional financing.
Benefit 10: Interoperability and cross border transactions
Tokenization leverages blockchain technology, which operates on a global network. This allows for seamless and efficient cross-border transactions between different parties, opening up investment opportunities and increasing market accessibility.
Benefits and opportunities for business owners
If you are in traditional finance, crypto collectibles, retail, Defi or even real estate, there is definitely ways you can reap the benefits of tokenization. What tokenization does is simply get rid of intermediary costs so if you are in an industry that relies on agencies or escrows for trust, do discover tokenization further. Rewarding your customers in token form for their loyalty and active participation is not just a great idea to retain them, but also a great monetary value that would delight them for the returns earned. You can also issue tokens to your employees as a part of retention measures and drive them to growth as part of your company’s success.
Typically, people are familiar with ESOP (Employee Stock Options Plan), which is a program where a company encourages its employees to purchase company stock options at a specific price when the stock value has reached a certain peak. This specific price is called the strike price, and it is predetermined. If an employee decides to exercise their options and the stock price is lower than the strike price, the company will repurchase the stocks from the employee, allowing them to make a profit.
To illustrate, let's consider Bob, who receives 100 stocks from his technology company and can buy them at $70 after a specified period following the company's initial public offering (IPO). After the vesting period, Bob can buy back all the shares for $1000. If the strike price is higher than the current market price of the stock, Bob will profit. Generally, companies repurchase the stocks from their employees as a token of appreciation for their loyalty. If the strike price is lower than the market rate of the stock, it would not make sense for the employee to purchase the stocks. Now, take this concept and apply it to the tokenization of options.
Applying the concept of ESOP to company tokens is a relatively recent phenomenon, especially in the context of cryptocurrency or blockchain-based projects. Company tokens, also known as utility tokens or equity tokens, are digital assets issued by a company through the use of blockchain technology. A pan-European company Salt X raised funds to enable exactly that, according to a report by EU-Startups.
Similar to stock options, company tokens can be distributed to employees to incentivize their contributions, align their interests with the success of the project, and offer them the potential for financial rewards.
There are some natural advantages of tokenizing employee stock options
Grants: The company can grant a certain number of tokens to eligible employees, usually in proportion to their role, responsibilities, or contribution to the project. These tokens can be stored in digital wallets accessible only to the employee.
Vesting: Tokens can come with a vesting period, just like stock options. During this period, employees cannot transfer or sell the tokens. Vesting ensures that employees remain committed to the project and its long-term success.
Utility: In addition to having potential financial value, company tokens can also have utility within the project's ecosystem. They might provide access to certain features, services, or products offered by the company.
Liquidity: Unlike traditional stock options, token liquidity can occur through secondary token markets like cryptocurrency exchanges or decentralized platforms. The employees can choose to hold the tokens, sell them for other cryptocurrencies or fiat currencies, or utilize them within the project's ecosystem.
One of the best parts about offering token options to an employee is the digital nature of it which makes the liquidity process more convenient for an employee and that takes away additional headaches from employees. Tokenize .it, a German company does that by creating employee tokens for standard Germany registered GmbH companies in a legally compliant manner. The provision of token program can provide German companies benefits of employee retention, team satisfaction and higher productivity. While this is a great incentive and tokens are a great instrument, the general public in Germany is still quite skeptical of crypto and mainstream perception that it’s highly volatile persists.
It is important to handle this matter cautiously and consider any tax implications. The token should be structured in a way that grants the holder the right to exercise a future purchase of equity based on meeting specific goals, rather than granting outright ownership, which could trigger taxes. Disclaimer: Please pay attention that this is not financial advice and in no way can this be considered legal expertise on taxes. DYOR.
Cardano vs Solana: Tokenization developments, benefits and examples (outcomes achieved)
NMKR.io is a crucial infrastructure provider for the token projects in the Cardano space. The company started as a minting powerhouse to mint their artwork on Cardano and later set itself apart from it’s counterparts like Jpg.Store to position itself as a provider for so called real world use cases. In this pursuit, harnessing the underlying Layer 1 of Cardano has been it’s launchpad to provide its services at scale. While the community in the Cardano space will develop it’s own way, NMKR’s founder Patrick Tobler has been vocal about user experience and utility in a broader sense. NMKR has provided consultation services to tokenize famed projects like Book.io, and Nucast that are beyond jpegs. Projects like Empowa, TVVIN, Indigo Protocol, and AtalaPRISM’s Studentreader are fantastic toeknization initiatives that bring positive change to the world.
In late 2022, the company made an announcement on Linkedin showing a use case in partnership with Tiamonds.
Now both Cardano and Solana offer exceptional scalability solutions compared to many other Layer 1 solutions. They are both great for Defi use cases, where Solana has made significant strides in the aftermath of FTX. Cardano too looks promising as it gears towards becoming self-governant. At the time of the writing dated January the 10th 2024, Solana has a TVL of US $1.34 bn market cap whereas Cardano stands lower in comparison at US $337m. This indicates that Solana has more assets locked within the blockchain, indicating a greater level of economic activity, liquidity, and usage of decentralized applications. Cardano’s Defi capacity can match or surpass that of Solana in no time, therefore the numbers are not absolute measures to predict the strength and what’s to come. Eventually the market sentiment plays a great role.
One of the biggest enablers of Real World Asset tokenization on Solana has been the launch of Euro pegged stablecoins EURC launched by the company Circle. So many Defi businesses can benefit from that. A company named Ondo Finance has also brought tokenized US treasuries onto Solana with the aim to bring more users and allow expansion of Solana’s Defi applications.
Uncertainties: Regulations, investor protection concerns, and market volatility
Polygon DevX Global Tour, 2023 in Berlin, Germany
Prominent speaker Thomas Nägele participated in a panel discussion with entrepreneurs, addressing legal considerations for entrepreneurs and developers operating within the European Union. The focus was on launching businesses in compliance with the Markets in Crypto-Assets (MiCA) regulations, navigating user protection, fostering an informed customer base, and operating effectively in a dynamic market.
As the benefits of tokenization is discussed in the markets, we are noting a regulatory shift in the narrative. Market volatility has been a grave concern for holders and investors alike.
Whether tokenization hedges against market volatility by offering investment opportunities into traditionally stable assets like real estate is largely unproven. Yet there is potential for this use case besides more mainstream financial instruments. Tokenization has benefits in providing liquidity to assets that have high entry barriers making them more accessible in addition to easy transfer of ownership and divisibility of the asset. Tokens representing digital ownership are not new however legal recognition of such is another game.
In the Europen Union especially, the MiCA regulation aims to encompass a wide range of crypto-assets, such as payment tokens, non-fungible tokens (NFTs), and utility tokens, without excluding any others. The objective is to promote innovation and fair competition within the crypto-asset services sector while ensuring significant consumer and investor protection. MiCA also strives to combat market manipulation and prevent illicit activities like money laundering, terrorist financing, and other criminal activities.
Regulation (EU) 2022/858, introducing the pilot regime for market infrastructures using distributed ledger technology, presents a promising opportunity for widespread acceptance of blockchain technology. It's important to recognize that as a result of this pilot program, banks will likely be issuing Central Bank Digital Currencies (CBDCs), which represent digitalized money. Additionally, the introduction of tokenized stock markets in Europe will likely lead to a future where various assets and financial systems are tokenized. This development holds great potential for positive advancements and increased efficiency in the financial sector.
Only time will tell what comes out of the European Union’s pilot program launch in the year 2024. A so-called sandbox approach is commonly used in the fintech industry. It refers to a way of developing regulations that keep up with new technology. This approach allows regulators to experiment and create regulations based on the results of these experiments. By giving participants a temporary exemption from current laws, they can work with new technology under supervision to test it out in a secure environment.
In this particular case, a Pilot Regime allows certain market infrastructures involved in DLT (Distributed Ledger Technology) to be exempted from specific rules laid down in European financial service legislation. This exemption allows for testing and development of crypto-assets as financial instruments. Overall, this approach helps European legislators gain experience and make adjustments to financial service laws to support the growth of new technologies like crypto-assets.
What’s the future outlook?
Tokenization has the potential to revolutionize the financial scene, providing tailored solutions for individuals and corporations. Combining blockchain technology with financial expertise, it simplifies collateralization procedures, eases capital calls, and increases liquidity. Tokenization also enhances portfolio strength and resilience. Ultimately, it empowers individuals to manage their investments according to their own needs and priorities. Tokenization is redefining alternative investments and is poised to reshape finance.
