How tokenization is changing the financial system
It all started with ICOs when many projects began to raise funds for development by distributing their coins. Many of them did not turn out to be successful; the market slowed down due to many scammers, but crypto enthusiasts did not abandon the fundamental idea. Tokenization has become the next trend that has gained momentum and has been developed in the field of finance. This article will look at how tokenization is changing the world of finance right now and what prospects there are for blockchain for finance.
What is tokenization in finance?
Tokenization is the process of transferring an asset to the blockchain. The token that the company issues is associated with the asset and represents some part of its value. In finance, this applies to money, stocks, and so on.
Let’s say you want to tokenize 1 million USD. To transfer assets to the blockchain, you must first obtain permission from the regulator and deposit this amount into a bank account. After that, you can transfer assets to the blockchain and issue 1 million tokens. In this case, one token will be equivalent to 1 dollar. These tokens can be traded on exchanges, and the physical asset will remain in the vault. However, upon request, the token holder can request the physical asset. In the same way but with some nuances of regulation, other types of assets can be tokenized and traded, including stocks, currencies, real estate, etc.
Benefits and pitfalls of tokenization
Tokenization for finance institutions has several significant advantages:
- Increased liquidity thanks to lowered entry threshold and democratizing investments. You can start investing with $1,000 from anywhere in the world.
- An opportunity to attract private investors who previously did not have access to the market for expensive and low-liquid assets.
- The presence of a regulatory system for tokenized assets simplifies interaction with the authorities and reassures investors.
Regulatory uncertainty is among the major blockers in blockchain for finance, as many countries still lack clear rules for regulating security token offerings. Also, so far, there are no common technical standards for trading platforms. However, work in this direction is already underway, especially in the USA and the EU. More and more countries offer favorable conditions for companies that tokenize their assets and investors.
Below we will consider the nuances of tokenization of various assets.
Currencies and securities
One of the most popular examples of the result of tokenization for finance institutions is stablecoins. These are the equivalents of traditional currencies transferred to the blockchain and used for payments. Stablecoins are backed by a real currency reserve in a bank account, equivalent to the number of issued tokens.
There are about a dozen stablecoins, four of which have good liquidity and are pegged to the US dollar. The most popular tokenization use cases in this field are:
- USDT. Tether released its stablecoin in 2015, which is linked to four blockchains: TRON, EOS, Ethereum, and Bitcoin. USDT currently has a capitalization of over $80 billion at the time of this writing. This places the stablecoin in third place among all tokens. However, Tether cannot prove that dollar reserves fully back all issued tokens.
- USDC. This stablecoin is the result of a collaboration between Coinbase and Circle. The current capitalization of USDC is more than $52 billion, thanks to which the stablecoin is on the 5th line of the Coinmarketcap rating.
- TrueUSD. TrustToken launched the TrueUSD stablecoin in mid-2018. At present, its capitalization is slightly more than $1 billion.
- Paxos Standard Token (PAX). Paxos is the world’s first regulated token under the control of the DFS. The capitalization of the coin is 946 million dollars at the time of writing.
Another area of tokenization for finance institutions is precious metals, particularly gold. In modern realities, gold trading has long been virtual – physical bars are stored in a bank vault, while the owners have only documents that confirm ownership. Tokenization makes trading gold even easier because investors of any scale from anywhere in the world can invest in gold.
With gold tokenization, each token is backed by a physical gold bar and corresponds to the market price of gold. In some jurisdictions, individuals can trade such tokens through decentralized exchanges.
Given that gold prices are rising, tokenized gold is also gaining more popularity. Here are just a few of the tokenization use cases with gold-backed tokens:
- DigixGlobal. This project from Singapore issued DGX tokens. Each token represents 1 gram of a gold bar, which is kept in Singapore and Canada. Tokens can be cashed out; one can exchange tokens for real gold, but DigixGlobal charges a 1% commission.
- Gold Coin. This project offers fractional ownership, which provides the lowest possible entry threshold. 1 GLC is equal to 1 gram of gold bar.
- Perth Mint Gold Token. This token is backed by real gold bars from the Perth Mint in Western Australia. The Perth Mint also issues digital certificates that back PMGT tokens. There are no fees for storage or insurance.
- Tether Gold. XAUt is the token of another Tether project, along with a USD-pegged stablecoin. 1 XAUt token corresponds to 1 troy ounce of gold on a London Gold Delivery bar of gold. All gold reserves are stored in a Swiss vault.
Low liquid assets
Any tokenized asset can be divided into many fractions. Thus, blockchain for finance opens up excellent prospects for developing markets for low-liquid assets, such as real estate and art.
Commercial and residential real estate is expensive, and not every investor can afford to invest even in an average apartment, not to mention a luxury resort. Thanks to fractional ownership and tokenization, investors worldwide are getting more investment opportunities. They can collectively buy a property and earn a steady income from exploitation, resale, or rental. Income is distributed in proportion to each participant’s investment, and each investor can exit at any time.
A few years ago, real estate tokenization seemed just a promising concept with no practical application. Today, Stobox already has several large real estate tokenization projects in its portfolio.Related: Three inspiring fundraising cases that will encourage to consider tokenization
Any value asset can be tokenized: from a gold bar to a luxury resort. In finance, tokenization plays a significant role, making investments much more democratic and easier. Also, tokens, backed by real currency reserves, are becoming a popular payment method and thus solve one of the main problems of cryptocurrencies – volatility.
If you are interested in the tokenization of your business, our experts will be happy to advise you and tell you about all the nuances of tokenization in finance. Contact us to schedule a free consultation!