At its core, asset tokenization relies on blockchain technology, which serves as the foundation for creating and managing these digital tokens. Blockchains are decentralized, transparent, and secure databases that ensure the integrity of transactions and asset ownership records.

Benefits

• 1. Fractionalization

  • For assets that traditionally have large upfront capital requirements, tokenization lowers the barriers to entry for investment by enabling interests in the asset to be more readily divided across a wider pool of investors, democratizing access to the asset. Fractional ownership is securely managed by a digital register of members (ROM) on blockchain. New financial products could be distributed to a wider pool of investors at a lower per unit cost, with a fee structure inclusive of an access premium for the previously inaccessible investment opportunity.

• 2. Operational Efficiency

  • Smart contracts are programmable actions on the blockchain that facilitate the automation of processes such as compliance checks, investor whitelisting, and post-issuance matters including dividend distribution. Smart contracts also enable the programming of tokens with unique qualities, such that characteristics of each share class and customizable fee structures could be created for tokenized assets at a relatively low operational cost.

• 3. Reduced Settlement Time

  • Transactions in tokenized products can be settled almost instantly, unlike the days or weeks that it can sometimes take to settle traditional finance transactions.

• 4. Data Transparency

  • Blockchain as a distributed ledger technology is known for its immutability and resistance to cyber-attacks, as data is distributed across a network of participating nodes as opposed to a single centralized database. While transaction information is made trackable and visible on blockchain, data anonymity of blockchain transactions are preserved by cryptographic hashes.

• 5. Flexibility

  • The above elements enable flexibility in investment: fractionalization enables flexible portfolio construction and diversification; operational efficiency and reduced settlement time allows faster transfer of investment interests; and data transparency brings updated information for investment analysis.

• 6. Liquidity

  • Tokenization enables liquidity by enabling the secure transfer of shares between investors, with every transaction reflected on the digital ROM. With regulatory regimes worldwide embracing, and establishing frameworks for the regulation of, digital securities exchanges, global public market liquidity for tokenized securities is also well on its way.

• 1. Deal Structuring

  • In the initial deal structuring stage, crucial decisions need to be made regarding the terms and conditions of the security token. Deal structuring is an integral part of any securities offering, irrespective of the technology employed. Tokenization is not meant to be a way of avoiding compliance with applicable legal and regulatory requirements; rather, the use of technology is intended to fundamentally improve operational processes to enable innovative financial solutions. The stages in the diagram shaded in blue are where technology can bring significant benefits.

• 2. Digitization

  • The digitization stage is where information traditionally stored in paper or document form is uploaded to the blockchain and coded in smart contracts, and security tokens are issued.

• 3. Investment Management

  • Primary distribution is the process where tokens are distributed to investors in exchange for investment capital, and the investors’ information is recorded on the digital ROM.

• 4. Corporate Action Management

  • Post-tokenization management involves corporate action management processes including dividend distribution and shareholder voting, many of which can be automated by smart contracts coded on the token. Post-tokenization management will continue throughout the life of the token until maturity or redemption.

• 5. Secondary Market Trading

  • The final stage, and where the value of tokenization in enhancing liquidity is realized, is secondary trading. This is where a token holder can trade tokens with another investor in an over-the-counter arrangement or on an exchange.

Benefits for Investors

• 1. Increased Liquidity

  • By tokenizing assets investors can trade tokens on digital asset exchanges, providing them with greater flexibility and access to liquidity. This enhanced liquidity can help investors manage their portfolios more effectively and take advantage of investment opportunities as they arise.

• 2. Fractional Ownership

  • Tokenization enables fractional ownership of high-value assets, making it possible for investors to purchase smaller portions of assets that were previously out of reach. This democratization of investing allows a broader range of investors to participate in asset classes such as real estate, fine art, or collectibles, potentially leading to more diversified portfolios and reduced risk.

• 3. Enhanced Transparency and Security

  • Blockchain technology, the foundation of tokenization, ensures heightened transparency and security. Each transaction is logged on an immutable ledger, guaranteeing a clear and unalterable ownership record. This transparency fosters trust among investors and mitigates fraud risks. Smart contracts, coded agreements that self-execute terms, streamline investment procedures, bolstering security and minimizing intermediary reliance.

• 4. Accessibility and Global Reach

  • Investors from anywhere in the world can participate in tokenized assets, providing access to markets that were previously inaccessible. This global reach can help investors build more diversified portfolios and take advantage of opportunities in different regions and markets.

• 5. Potential for Increased Returns

  • By tokenizing real-world assets, investors can potentially unlock new sources of value. For example, tokenization can lead to more efficient markets and price discovery, potentially resulting in higher returns for investors. Additionally, tokenization can enable the creation of new investment products and markets, further expanding the opportunities for investors to generate returns.

Understanding the tokenization landscape

The transition from traditional fractionalization to on-chain tokenization is imminent, broadening the range of asset classes, stakeholders, and regulatory considerations. Understanding the additional benefits of blockchain-based asset fractionalization is essential.

Source: BCG

Projections

Illiquid assets face several challenges: high entry costs, difficulty in fractionalizing utility, lack of information and expertise among investors, restricted access, regulatory hurdles, complex user processes, and the absence of scaled technological solutions to unlock liquidity. By 2030, the global market for illiquid asset tokenization is projected to reach $16 trillion.

Source: BCG