Tokenization of natural resources: oil & gas, gold, copper, and more
The prices of natural resources have soared during the last year, increasing by 50%-75%. This creates a significant interest from investors and makes businesses very attractive and profitable. On the contrary, the possibility to invest in commodities companies is very limited, so raising capital to start or grow your natural resources business is challenging.
Models of how tokenization can be implemented for commodities
Tokenization is a series of technical and legal procedures to transfer asset ownership to the blockchain. This means that holding a token in your wallet on a smartphone provides you with rights to the underlying asset, such as the full ownership right, rights to cash flows generated by the asset, etc.
There are two models of how the tokenization of natural resources can be implemented.
Tokenizing the commodity itself
The first model suggests tokenizing the commodity itself — a piece of gold or oil and gas. In this case, a token holder owns a fraction of, let’s say, the barrel of oil or gold bar.
To implement the first model, you need to segregate assets into a special purpose vehicle. Investors will hold tokens that represent shares in that company, and when the assets rise in price, investors receive returns. Tokens can also represent other contractual relationships with the company holding assets — the flexibility is high, and creativity is the limit.
The process is similar to the tokenization of real estate. If you are interested in learning more about real estate tokenization, check out our article “How does real estate asset tokenization really work?“
Natural resources on the blockchain: the tokenization of oil and gas, gold, copper, etc.
The second model suggests tokenizing the natural resources business. In this case, the investors acquire securities issued by the company involved in extracting, processing, and selling natural resources and will have a right to share its profits.
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What are the direct benefits of tokenizing natural resources?
There are many specific business benefits a business gets from tokenization. The principal one among them is access to global capital.
Most natural resources companies currently raise funding only from large institutional investors or banks because there is no technology to conveniently onboard smaller investors. Furthermore, a lion’s share of such businesses is concentrated in developing countries, most often in Latin America or Africa, where the inner market capital is very insignificant. Because of the last, it’s practically impossible to get bank financing — either due to the lack of collateral or banks not being sufficiently capitalized — because the banking system overall is underdeveloped. As a result, a lot of potential business opportunities merely can’t be developed here. Tokenization is a solution as it is not bound to national borders and makes the investment process convenient for people from any part of the world.
The problem with bank financing is that their interest rates are often too high, or the loans may be not available at all due to the increased risk. An issue about institutional investors is that the terms they offer are very unfavourable because they have high bargaining power.
With tokenization, on the contrary, a company gets a convenient technology platform to onboard different investors with checks starting from $10,000 or even less, which gives you higher bargaining power and better investment terms.
We have a video “How to raise capital without banks and venture funds?” devoted to bargaining power, cost of capital and tokenization as a way to raise financing in a more thoughtful way, which will be helpful to watch.
Another essential benefit is reduced risk. Commodities business can bring you excellent profits, but the risk is relatively high, mainly if you invest in yet-under construction mines or geological research. Because of this risk, it may be challenging to raise capital from more traditional and conservative investors. Tokenization allows reaching out to a significantly more comprehensive range of investors, particularly those who have more appetite for aggressive and risky investments, with investing experience, among other things, in crypto coins.
Lastly, you can improve the brand image. Being engaged in blockchain technology makes your company look exceptionally modern and creates a picture of a progressive business taking advantage of disruptive technologies. Such an image is quite helpful in terms of getting global exposure, which, in turn, will win you better contracts, better suppliers, and better investors.
Tokenization: a path to enhanced liquidity
Another important benefit of tokenization is enhanced liquidity. It’s much easier to trade stocks on the blockchain. This makes business even more attractive for the investors because they can make an exit easier in case they are not satisfied with the performance or merely need to lock profits.
Liquidity brings a lot of benefits to your business. If you want to learn more about how to achieve it, read our article “How asset tokenization brings liquidity to equity crowdfunding”.
What is market traction and how to use it in tokenizing natural resources
To seize these advantages, you need to move fast. Currently, the timing for an entry is the most convenient because not so many companies have ventured into tokenization of commodities so far, and the market is evolving every second. People are tokenizing gems, mining facilities and commodities themselves. The most famous case is Paxos — the issuer of stablecoins (a commodity-backed cryptocurrency) backed by gold. The market capitalization of PAX is more than $1 billion. This is a powerful illustration of how big the demand is.
Stobox specialists provide a turn-key service for tokenizing assets and offering them to a wide range of investors. If you’d like to learn more about the advantages of natural resources tokenization and how to build a subsequent business model, schedule a free 30-minute consultation with our in-house experts.