There is no doubt that blockchain is one of the hottest and trendy topics in the world of technology and most especially the world of finance. The components and properties of the blockchain such as decentralization, transparency, and immutability are bringing about benefits to the world of finance also causing innovations for financial solutions, and asset tokenization is one of the notable innovations that the blockchain has brought this industry.
The financial markets are still in the early stages of adopting blockchain and the distributed ledger technology into their major market processes and protocols. The aim is to take advantage of the decentralized nature of the blockchain to transform the traditional methods of finance. A very broad category of the use cases of the technology is the establishing of tokenized assets where a token represents a property or financial instrument that exists in the blockchain.
The capital market has already taken the action of assets tokenization for example some company stocks have been tokenized and listed off the stock market, giving more people access to buy into it.
Although asset tokenization through blockchain is being adopted by the financial markets, other industries involved with asset management are not exempted from the benefits of asset tokenization as there are various setbacks in the existing systems like forgery, limited market accessibility, limited access to liquidation, etc.
What is asset tokenization?
Fundamentally, tokenization is the process of converting rights or a unit of particular asset ownership into a digital token on a blockchain.
Tokenization can be applied to regulated financial instruments such as equities, stocks, and bonds, tangible assets such as real estate, precious metals, and even to copyright to works of authorship e.g., music intellectual property which has already been done and referred to as NFTs. The major benefits of tokenization are apparent for assets that are currently not being traded electronically, such as works of art or exotic cars, houses, and materials including those that require better and increased transparency in payment and data flows to improve their liquidity and tradability.
Asset tokenization is tailored for different reasons, but here it is implemented with strong attention to financial inclusion alongside advanced business processes.
Asset tokenization on the blockchain aims at capitalizing on three prominent traits, Distributed Ledger technology, immutability, and transparency.
Benefits of Asset Tokenization
One of the major benefits of asset tokenization is the fact that it gives the public greater access to buy assets than the traditional forms of operating with assets. Being able to access a particular asset e.g houses or cars traditionally is almost impossible, and this fact brought about intermediaries who have no access to the assets but yet claim to. It is fraudulent and thereby has brought disbelief to the system but with a token that is made accessible to all, there is no doubt and disbelief that anyone can access the right of ownership to any asset of choice.
Also in terms of financial instruments, tokenization helps the issuers to reach other markets of investors on other platforms.
The distributed ledger technology aims to enable every person involved in a project, space, or industry and with an asset is allowed access to the data records in that regard. Blockchain keeps a record of the assets (token) movement on the chain and every necessary data.
In the case of financial instruments, investors and issuers of the token are given access to what happens within themselves on the chain. This keeps the members accountable for all that happens with the stocks and bonds bought and held by investors.
The advanced features of tokenization can enable regulatory enforcement as it could be programmed into the smart contracts, notifying regulators when restrictions are violated in a financial market.
Asset tokenization on the blockchain has automatically eliminated the traditional processes for dealing with that asset. If a party is interested in the token, all protocol has already been implemented into a smart contract that will only be executed with a few buttons. Smart contracts enable efficient settlement of contracts digitally and it is one of the benefits for assets that exist off the blockchain (cars, houses, art, etc..)
All other processes that had to be done for transfer of ownership to another, are cut short through tokenization.
One of the best advantages of tokenization in the financial markets is the fact that tokens can be traded easily and liquidated according to need.
If an asset’s token is listed on a blockchain-based exchange platform, it gives the asset the advantage of tradability and liquidity. Traders have access to trade the token peer-to-peer and liquidate for cash immediately thereby increasing the market capitalization of the asset by tradability.
Tokenized assets and securities could improve the efficiency in traditional financial markets, as it enables faster execution in addition to increased involvement from more entities.
written by Joy Abia