Asset tokenization is rapidly gaining popularity. It makes the investment process more accessible, which is beneficial for both investors and companies in need of raising funds and more liquidity. This article will tell you what has to be considered before tokenization, how tokenization of tangible assets is conducted, and what support can be transferred to blockchain.
What types of assets are subject to tokenization?
We can divide assets that can be tokenized into two large groups – tangible and intangible assets. Let's consider real-world asset tokenization and intangible assets in more detail.
An intangible asset is an asset that does not exist in physical form. Intangible assets include, for example, trademarks, patents, and copyrights.
As a rule, such assets are stored in paper or digital form. As a result of tokenization, data about them is recorded in the blockchain, from where it cannot be deleted or changed. Tokens receive a unique identifier that confirms the asset's authenticity and ownership of a particular object. Thanks to tokenization, it becomes much easier to trade such assets.
On the other hand, tokenization of intangible assets still has several problems. The first one is the complexity of the assessment; thus, professional third-party advice is required. The second difficulty arising with such operations is the differences in complying with the legislation of different countries. Not all countries regulate digital assets in the same way, and not all countries have similar patent policies. These nuances are essential to consider.
A tangible asset exists in a physical form and can be used in real life. For example, it can be money, valuables, ownership of any property, etc. Tangible assets can be divided into two large groups.
- Fungible. These include non-unique products that can be easily interchanged with each other. For example, these are oil, coal, and securities backed by some physical resource. For such goods, fungible tokens are used, where each tangible assets token can refer to a unit or a certain number of units of a product. For example, one token = 1 barrel of oil. Investors can buy as many tokens as they need. At the same time, information about the shipment, delivery, and storage of goods will be contained in the blockchain.
- Non-fungible. These are unique products or tiny groups of goods: for example, an individual diamond or a painting. It can be difficult for a retail investor to invest in such an asset due to the high cost. However, tokenization allows for the concept of fractional ownership. For example, a diamond worth $1,000,000 can be tokenized, and 1,000 tokens can be issued. Each will be only $1,000, which is much more affordable for investors. At the same time, the investor can sell their share for a higher price or receive dividends from it in the future.
Real-world asset tokenization makes investments in all kinds of assets much more convenient and affordable for traders. The same refers to intangible assets that do not exist physically but still have value.
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The most popular areas for asset tokenization
If the regulatory framework allows it, asset tokenization can be applied in almost all areas. At Stobox, we identify five main segments where tokenization is used most actively. These are the following areas:
- Real estate. Real estate objects can be divided into square meters or separate plots with a specific space. Every square foot or plot turns into a token, becoming available for trading afterward. One of the most famous examples of such tokenization was the East Village complex in New York. Twelve condos, each with 1700 square feet of space, were tokenized and sold as tokens.
- Goods. A tangible assets token acts as a contract or security. At the same time, each token has a specific value, and the seller undertakes to deliver this or that product in the appropriate quantities within the established time frame. In this case, tokens can be used like futures contracts.
- Services. The service sector can also be tokenized, and this process is similar to the tokenization of goods. After purchasing a digital asset, the holder becomes entitled to certain services of the issuing company for a certain period. For example, it is beneficial to use tokenization in cargo transportation, where digital assets can be used to reserve a usable area for transporting goods.
- Shares. This niche is associated with several legal nuances. To tokenize shares, security tokens are issued, and the placement is called Security Token Offering (STO). It is an analog of an IPO in digital format.
- Art and luxury items. Tokenized paintings, vintage wine bottles, and other collectibles presented in the form of non-fungible tokens are traded on many major exchanges. NFTs are extremely popular right now and have become a real trend over the last two years. In 2021, trading in NFTs reached $22 bln.
What should be considered before tokenization?
Tokenization is a promising technology, but it is not widespread so far. There are a large number of nuances that are important to consider. The first of them lies in the peculiarities of international law. Each jurisdiction has its requirements for digital assets. In many countries, they are not regulated at all; where legislation already exists, it can vary greatly. It is essential to know that when conducting an STO, you should comply not only with the laws of one country in which the STO is registered but with the laws of all countries where tokenized assets will be offered.
For example, in the US, STOs follow similar rules to IPOs. In the EU countries, Singapore and Switzerland, a prospectus approved by the local regulator is required. An alternative may be a private placement or the placement of unregistered securities for an unlimited number of persons. However, such methods can work only in certain countries, where this is provided for by law.
Another influential nuance faced by companies wishing to conduct tokenization of real assets is the difficulty of implementing blockchain in particular jurisdictions. The solution to the problem can be the registration and tokenization of shares of a legal entity registered in the form of a special purpose vehicle (SPV). At Stobox, we assist our clients and help to understand all the legal peculiarities in selected jurisdictions.
Even though asset tokenization has not yet gained mass adoption, it is becoming more and more popular. Both tangible and intangible assets are subject to tokenization. The transfer of assets to the blockchain simplifies investments greatly for companies that need funds and potential investors. In addition, tokenization makes many assets more liquid and easier to trade.
According to experts, the market capitalization of tokenized assets may reach $5-10 trillion by 2025. If you are interested in getting into stride and tokenizing your company's assets in any industry, we will be happy to advise you. Feel free to contact Stobox specialists right now.