Overview

Today, tokenization has garnered considerable attention reshaping the future of traditional finance and driving sustainable growth in the global economic landscape. But what is the driving force behind this profound growth?

Blockchain has emerged as the transformative force, the foundation technology that has disrupted the conventional financial ecosystem and revolutionized asset investments through tokenization.

Tokenization offers innovative investments and has touched almost every nook and cranny of the global economy, be it the banking sector, commodities market, real estate, intellectual property, and many more. 

This article explores the significance of a tokenized economy and its impact on society and the global economy.

Tokenized Economy – The Implications of Tokenization on Financial Markets

A tokenized economy has enabled businesses to bring traditional asset investments to the forefront and be a part of the decentralized finance (DeFi) economy.

Tokenization can convert any kind of asset that has a financial value (both tangible and intangible) into fractional shares. These shares are represented as digital tokens on the blockchain. These tokens are asset-backed. In other words, they are tied to real-world assets that give stability, ownership rights, and security to investors.

Tokenized economy benefits and its impact on the financial landscape:

Improving market accessibility

Tokenization makes the market accessible to all kinds of investors. Since everything is done online through decentralized blockchain platforms, anyone with an internet connection and a smartphone living in the remotest part of the world can tokenize assets and participate in fundraising events.

Investments across borders

Digitalization allows seamless cross-border transactions. Blockchain simplifies transactions establishing new markets for asset investments facilitating wealth generation and inclusive investments.

Democratization of investments

Asset fractionalization allows investors and token issuers to trade fractions of the assets and distribute ownership rights. This democratizes investments leading to a wider market coverage and risk mitigation.

Market liquidity

Tokenization generates liquidity in the market by creating new market opportunities for illiquid assets like real estate, intellectual property, high-value art and collectibles, etc. This improves price discovery and fractional ownership aggregates diverse investments and greater wealth in the market.

More jobs

The tokenization industry has expanded leading to the creation of new job opportunities in the technical, legal, and financial segments. There has been a rising demand for tech professionals, tokenization experts, legal consultation service providers, financial consultants, blockchain developers, etc. It is also fostering an innovative environment for entrepreneurs and startups to venture and launch tokenization platforms.

Integrating traditional finance

As tokenization is gaining traction, traditional financial institutions like banks are exploring ways to incorporate regulatory frameworks to accommodate digital assets for their broader adoption.

Convenience and efficiency

Digitalization of assets reduces external barriers and makes investments convenient. Smart contracts and public blockchains allow uninterrupted, borderless, and seamless transactions of digital assets. These tokens can be traded 24/7 in decentralized marketplaces reducing the odds of trade breaks. All transactions are executed on blockchain and are KYC/AML verified. Furthermore, multi-sig digital wallets add layers of security and protect funds from money laundering, thefts, and cyberattacks.

How Blockchain Tokenization is Transforming Businesses?

At the core of tokenization is blockchain technology that is revamping traditional business models.

Here is how blockchain tokenization is helping to streamline modern businesses:

Distributed ledger technology (DLT)

Blockchain’s DLT is a decentralized database that records and keeps track of all transactions securely and immutably. Smart contracts automatize transaction executions, eliminate third parties, and reduce manual mistakes.

Easy and speedy transfer of assets

Smart contracts offer a real-time and instant transfer of assets eliminating time-consuming settlements of traditional transactions. Digital transfer of tokens also reduces overall operational costs.

Independent operations

Blockchain ensures peer-to-peer transactions between involved parties eliminating third-party dependencies. Companies and stakeholders can operate independently without the need to involve a mediator or other external agents.

Tokenizing illiquid assets

It is difficult to liquidate high-value or illiquid assets like real estate, collectibles, or private equity as it requires a lot of paperwork, time, and legal formalities. Tokenization allows easy trading of these illiquid assets on decentralized platforms. By fractionalization of these assets into fungible parts, they can be easily traded in secondary markets.

Cryptographic security

Blockchain provides cryptographic security that preserves business information and sensitive data from external sources. The information recorded on the blockchain is end-to-end encrypted which ensures that only the message recipient can decipher the message protecting the privacy and confidentiality of the data.   

Decentralized platforms

Tokenization has introduced new financial products and platforms that assist in raising capital and easy and fast trading of RWA assets. STOs (Security Token Offerings) and ICOs (Initial Coin Offerings) are fund-raising methods that issue tokens to investors to raise funds. The difference between ICOs and STOs is that tokens issued in STOs are mostly security tokens backed by traditional real-world assets or RWAs. STOs and ICOs are offered in DEX and other decentralized platforms that offer easy exits to investors and eliminate entry barriers and bureaucratic intermediaries.

Digital exchange platforms

Digital exchanges are platforms or marketplaces where digital tokens and cryptocurrencies are traded, sold, and bought. These platforms can be secondary markets or DEX (decentralized exchanges) platforms which are completely decentralized providing anonymity and confidentiality to users. These marketplaces are low in cost compared to traditional financial services.

Tokenization from Investor’s Perspective – Breaking Barriers

From investors’ perspective, tokenization is the roadmap to innovative and democratized investments.

Ownership fractionalization

Asset fractionalization divides high-value assets into affordable, smaller, tradeable digital units called tokens. Investors with minimum capital can participate and purchase these tokens and gain ownership rights.

Greater accessibility

Investors get access to global markets. Tokenization reduces the geographical barriers and makes investments that were restricted to specific markets accessible to all.

Faster settlements

All transactions are verified and executed on-chain on blockchain networks. Smart contracts facilitate easy and instant settlements reducing lengthy waiting periods.

Secondary markets 

Secondary markets offer easy exits and liquidation to investors. After tokens are traded on primary markets, investors can opt for secondary markets and fund their tokens.

Transitioning to the digital economy

Tokenization opens doors to tech-savvy and new-age investors who are ready to venture into a new digital economy and innovative investments.

Asset owners significantly benefit from tokenization:

• Blockchain automates the tokenization process. Asset managers, service providers, or token issuers no longer need to worry about workflow processes or division of funds among investors.
• Tokenization diversifies investment portfolios and allows asset owners to easily tokenize and monetize their assets and reach a wider spectrum of investors.
• Digitization lowers operational costs. There is no need to maintain expensive physical infrastructure or hire hands.
• Faster asset settlements and token distribution.
• Safer and secure settlements where blockchain scrutinizes, audits, and tracts transaction histories, market prices, and ownership records.

 

Tokenization Revolutionizing Traditional Finance Across Various Industries

Tokenization has unlocked investment opportunities across various industries:

Real estate tokenization

Real estate is highly-priced and challenging to navigate for novice investors. Tokenization breaks down expensive real estate properties into affordable sections that can be easily bought and sold through decentralized platforms. It removes intermediaries and makes investment transparent and inclusive for a wider audience.

Supply chain invoices

Supply-chain finance is a complex system. Businesses can experience significant delays in payment processing and invoice settlements. Blockchain tokenization converts ownership information into digital tokens. Each token is coded with the ownership rights and payment details. Tokenization fastens and simplifies payment settlements, streamlines logistics, verifies transactions, and provides end-to-end traceability and transparency of the products and services.

Tokenizing loyalty programs

Traditional loyalty programs often lack simplicity and transparency. Customers may struggle with inner workings, redeeming or earning points, etc. Many loyalty programs are generic and lack real value, and customers do not actively participate in these programs. This reduces the efficacy of these loyalty programs. Tokenized loyalty programs offer digital tokens that can be redeemed later to earn rewards such as exclusive entry passes, discounts, or even cryptocurrencies. Since everything is recorded on blockchain’s digital ledgers, it automates the process, improves trust, and reduces risks of disputes and manual errors. Brand-specific loyalty programs would enhance customer engagement and the overall efficiency of these programs.

Decentralized loans

The conventional lending sector works under the umbrella of various centralized financial institutions. It is riddled with high fees, lengthy paperwork, credit scores, etc. If businesses or individuals fail to show tangible assets as collateral, they may not qualify for traditional loans. The interest rates for conventional loans are substantially high and may take years for them to settle the loans. The loan-to-value or LPV ratio in tokenized loans is higher than the traditional loans. Businesses and individuals can show higher credit worthiness improving their credit scores. Lenders can track and get loan repayments on time.

Tokenized equity trading

Equity trading is the purchasing or selling the company shares in the stock market. The investor invests in the share(s) of the company and benefits from the profits and growth of the company. During tokenization, the equity shares are transformed into digital tokens. Tokenization of equity overcomes the hurdles of traditional equity trading of regulations, bookkeeping, maintenance of accounts, credit issuance problems, etc. Blockchain tokenization automates the equity trading process and allows easy transfer of ownership and funds. Investors can track and check the prices of equity shares in real time. Smaller investors can enter the market and participate in equity trading.

Tokenization of bonds

The bond market is dominated by big enterprises and institutional investors with high capital investments. Asset tokenization converts these high-value bonds into approachable and smaller investment shares that can be easily afforded. This encourages broader and more diverse investments. Tokenized bonds can be easily traded and liquidated in secondary markets. Digitization of bonds on blockchain facilitates easy transfer of funds without bureaucratic interferences and long waits.

Tokenization of creative assets

Tokenizing creative assets like art and music converts them into unique and unchangeable NFTs. They bring authenticity and ownership rights to the tokenized assets. Tokenization has redefined creative asset ownership and trading and opened new investment frontiers for artists and creators.

Financial Risks of Tokenization

The long-term growth of the tokenization and its interconnectivity with TradeFi can cause financial instability in the traditional financial ecosystem. For instance, the fire-sale of tokenized assets or crypto market price instability may impact the traditional reference assets whose values were tied to the digital tokens.

The decentralized crypto market operates 24/7, 365 days, whereas the traditional markets are open only for a limited time. This mismatch of trading hours may raise complications and hurdles during trading.

Many DeFi exchanges have automated margin calls that liquidate digital tokens when the prices drop below a critical level. This can trigger uncertainty in the underlying asset markets. Moreover, since digital or crypto assets are volatile, they might transfer this volatility to the underlying real-world assets.

Asset tokenization is still at a nascent stage. There is a general lack of knowledge and technical incapability among investors. The complexity related to tokenization may act as a barrier and prevent investors and asset owners from venturing into the market.

Evaluating the tokenized asset’s value is challenging, especially for unique assets like art or collectibles. The integration of tokenized assets with traditional financial systems and regulatory compliance might seem challenging and complicated for businesses.

Looking Ahead – The Social Impact of Tokenization

Tokenization is a revolutionizing investment vehicle that democratizes access and accentuates the purchasing power of the average investor. Apart from its far-reaching financial and economic implications, tokenization has a huge impact on the broader society. It is creating enormous opportunities for a large section of unbanked and underserved investors who do not have access to traditional banking facilities.

Asset tokenization has promoted financial inclusion, and entrepreneurship, created new jobs, given digital identities, and empowered average investors to take control of their assets.

As more real-world assets are tokenized, society and the economy could see the emergence of an entirely new class of investment vehicles. These investment models prioritize inclusivity, equitable distribution of income, and a well-balanced economic structure.

Tokenization is not just an innovative financial revolution, it prioritizes sustainable investments, and economic prosperity, and paves the way to the growth of an urban decentralized economy.