The Potential Of Tokenization
How big is the global asset pool?
Estimates vary, but HSBC Bank puts the figure around US$178 trillion. Of this, 44% is owned by just 0.9% of the population.
There is massive potential to democratise access to these assets.
What Is Asset Tokenization?
Tokenization is converting asset ownership into a digital token on a blockchain.
For example, a developer could tokenize a Hotel development. The developer issues coins to represent the asset, which people can buy and trade. This makes it possible for the investor to own a tiny fraction of an asset at a low cost. It provides greater liquidity in asset markets and makes it easier for a business to raise finance.
Compare tokenisation to the current process, where a developer would need to seek qualified investors and endure cumbersome paperwork and endless intermediaries and middlemen.
Tokenization doesn’t only apply to real estate. Tokenization can represent equities and bonds, tangible assets, precious metals, intellectual property and assets not yet envisioned.
What Are The Benefits Of Asset Tokenization?
There are many benefits. Here are just a few.
There are more potential investors. If investors can easily own a small slice of an asset, this opens up investment to millions more people. One of the barriers to private equity investment is that investors need to be pre-qualified and have significant sums to invest. You could invest as little or as much as you like through asset tokenization. People who are unbanked in third world nations could invest in real estate in Sweden with the same access as a Wall Street broker.
Smart contracts can reduce settlement times. A smart contract is a program that is stored on a blockchain and runs when predetermined conditions are met. Settlement can therefore execute 24/7 and doesn’t need many of the intermediaries we see today. This significantly reduces costs and increases efficiency.
New asset classes will be unlocked. It hasn’t been feasible to offer fractionalised investment in small assets such as cars, art and intellectual property. Tokenization will make that process available to all. It will make it easier for smaller entities to raise funds against such assets.
Tokenization will eliminate many paper-based processes and turn markets digital. Once everything is in digital format and handled by smart contracts, efficiency in these markets will be vastly improved.
The Issues With Tokenization
As with any significant change, there are challenges.
The regulatory environment is unclear. Regulation tends to drag some way behind innovation; however, the existing body of securities law may be applicable and adapted. People who own tokens will need assurance that their ownership of an asset has a legal basis.
There are technical challenges. The crypto environment exists mostly on-chain, meaning transactions occur on a blockchain and are reflected on a distributed public ledger. Tokenized assets may require some transactions to be made off-chain. Off-chain means agreements are made between transacting parties that aren’t written to a blockchain, at least not when they are made. Negotiating both on-chain and off-chain contracts adds to the complexity of the technical environment.
There is little investor momentum. There won’t be much investor momentum until there is significant supporting infrastructure. Until there is investor momentum, supporting infrastructure will lag. However, this problem will likely be overcome by linking asset token markets to existing marketplaces and leveraging existing clients.
When Will This Happen?
It’s happening now.
NFTs are one example of asset tokenization. Non-fungible tokens are being used to transfer and authenticate digital artworks traded on exchanges such as OpenSea.
“Investment bank Jefferies lifted its NFT market-cap prediction to more than $35 billion for 2022 and estimates the market will reach beyond $80 billion by 2025. NFT artwork sales are also through the roof — collectors spent $100 million more on NFTs in 2021 than the previous year. ”
But NFTs barely scratch the surface of what is possible.
The asset investment process is clunky, expensive and inaccessible to many people. Many assets have an undefined market value because they can’t easily be brought to market.
Suppose investments can be made more efficient, more available and more accessible. In that case, the use case speaks for itself. Trillions of dollars in assets will be made available to people who previously didn’t have access to them. As Web 3.0, asset tokenization, regulation, insurance and cryptocurrency merge to create an end-to-end digital ecosystem, asset tokenization activity will explode.