Tokenization of Assets:
All you need to know in simple words
Asset tokenization became an incredibly popular concept in 2017, along with the rise in smart contracts’ popularity. As mentioned in a recent report, the global tokenized assets market size will grow from $2.3 billion in 2021 to $5.6 billion by 2026. It is projected that in 2022, the market size will count for $4 trillion.
Right now, asset tokenization is a vast area of crypto economics, which is developing every year. Tokenization of real assets helps to increase their liquidity and is a tool for attracting investments for businesses in the early stages of development.
In this article, we will explain in simple terms what assets can be tokenized, how to tokenize physical assets, and what advantages this technology can bring.
What is asset tokenization?
Traditional asset tokenization means creating a record on the blockchain for a particular asset. The token’s value corresponds to the real asset’s value or its fraction to which the token is connected. When the introductory asset price goes up, the token price also rises. When the cost of an asset falls, the same thing happens to its token.
Asset tokenization has two main functions:
- Minimizing the number of intermediaries;
- Increasing liquidity.
The first function is a default good brought by security tokens. A company that wants to receive investment issues tokenized securities and sells them directly to those interested in purchasing them. Unlike the issuance of assets in the traditional finance market, tokenization requires neither a paying agent bank, a depository, nor other intermediaries.
The second function of asset tokenization concerns the ability to make illiquid assets liquid, that is, to prepare them for easy and fast trading. For instance, a physical gold bar or shares of an apartment building are more difficult to trade than a digital token.
It is crucial to choose the right token type. In the US and Europe, a unified taxonomy has been introduced that divides the tokens into three main groups:
- Security tokens are used to receive dividends.
- Utility tokens give the right to access a specific product, object, or service.
- Payment tokens have similar features with cryptocurrencies but differ in a limited scope.
Also, there are two terms that relate to the process of offering tokens to investors: STO and ICO.
- STO (Security Token Offering) is a distribution of security tokens. STO suggests that a token is backed by an investment asset (bond, stock, real estate investment trust, fund, etc.).
- ICO (Initial Coin Offering) is used to identify the offering of utility tokens. In this case, a company offers tokens with proven (or unproven) intrinsic utility. The tokens give their owners some benefits, like the right to use some services or get a subscription to an exclusive platform.
How to tokenize an asset
The tokenization of real assets can be divided into four stages:
1. Selection of assets. You need to decide what you want to tokenize and among whom you will distribute asset tokens in the future.
2. Legal stage. The two most important responsibilities you will encounter at this time are establishing a corporate structure and compiling documents.
3. Determining the token type. It largely affects aspects of token regulation. All tokenized assets are divided into utility, commodity, and security tokens. You also need to choose a token standard – usually, it’s ERC-20, but there may be other options.
4. Token generation. You issue a token on the blockchain of your choice. The most popular options for this are Enterprise Ethereum and Stellar. Also, some companies launch their own blockchain.
5. Distribution stage. A company that wants to distribute its asset tokens launches an STO and enables secondary trading by listing on specialized security token platforms or exchanges.
To tokenize physical assets, one can use an asset tokenization platform like Stobox. Contact our experts to get a consultation and make the right choice.
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Regulations & law
Many companies and ordinary users ask how tokenization and sale of tokens are regulated and whether it is legal. If you plan to issue your token, then the first thing you should determine is whether it will be a security token, since the SEC (in the USA), SFC (in Hong Kong), and similar government regulators have stricter rules for such tokens than for any other types.
In short: if a token behaves like a security, then it’s a security, no matter in which form it is presented. Here’s a basic checklist to define whether a token is a security:
- Its owner is expecting to get income from investing;
- It’s an investment of money;
- The investment is made in a joint enterprise;
- The profit will come from the efforts of a third party.
As we have mentioned before, if your token is considered a security, its issuance, distribution, and trading will be subject to much stricter rules and control. For example, in Hong Kong, you’ll need a license and registration within the Securities and Futures Ordinance. The SEC has a fairly complex system of regulations for different types of asset tokens with various conditions.
It is also essential to know that if you are going to run an STO, you must be guided by the regulations of the country serving as your dominant market.
However, in many countries, the rules and principles of control over tokenized assets are still unclear. Thus it’s necessary to consult with a reliable company engaged in asset tokenization before issuing and trading tokens.
What assets can be tokenized?
It is possible to tokenize all business assets, from the production base and premises to goods and services. In fact, you can tokenize any object that can be stored on the blockchain. This could be ownership of a physical object or some kind of service, such as a consultation.
Conventionally, assets subject to tokenization can be divided into four groups:
- Physical assets. These include cash and property (cars, real estate, art, etc.).
- Stocks. They can be turned into security tokens.
- Investment funds. In this case, the investor receives their share in the fund, and the token confirms this share.
- Business services. You can quickly turn your activity into a digital asset and trade asset tokens on the exchange, directing the profits to new projects or covering current expenses.
Examples of tokenized assets
One of the most striking examples of the tokenization of physical objects (and digital as well) is NFT tokens. The volume of this market exceeded $750 billion. Any work of art can be turned into an NFT, from the simplest pixel art to Banksy’s works.
Real estate asset tokenization is also a growing trend. By 2026, the volume of this market could reach $1.4 trillion. For example, in the summer of 2020, the sale of security tokens which confirmed the fractional ownership of a luxury resort in Colorado, began on the Overstock tZero exchange. In September 2021, an Indian fintech company launched a blockchain-based ledger to enable fractional property ownership in India.
From the world of tokenized shares of large companies, TSLA.CX can be cited as an example – the Tesla token is connected to the value of the company’s shares.
Also, tokens can be used as digital sovereignty, for example, in projects like CryptoKitties, which once blew up the crypto community. In this case, the tokenized assets provide proof of authenticity and cannot be reproduced.
Why tokenize assets?
Asset tokenization is gaining popularity among businesses of all sizes due to a number of benefits:
- Increased management efficiency – tokenized assets and their accounting in the blockchain guarantees full transparency.
- Ownership protection – unlike conventional approaches, data on a blockchain cannot be changed without the owner’s permission or the fulfillment of the terms of a smart contract.
- Entering new markets – it’s easier and cheaper for many businesses to distribute and promote a token than a physical product or service with traditional advertising tools.
- Increased liquidity – thanks to asset tokens, it is possible to “split” the value of objects such as real estate without dividing the object itself, making it faster and easier to attract investments.
Tokenization takes asset management to a new level. It helps businesses to fundraise easier, faster, and on better terms. Moreover, it simplifies access to liquid markets greatly; with tokenization, anyone can become an investor.
Nevertheless, there are still nuances with state regulation of some types of asset tokens in various jurisdictions, so qualified assistance is indispensable here. If you are interested in tokenizing physical assets or shares, entering new markets, and opening investment opportunities, our experts will be happy to help you with this. Just leave a request for a 30-minute free consultation.