Tokenization is the process of transforming ownership and rights of particular assets into a digital form. As pointed out, it is helpful to keep the difference between fungible and non-fungible assets in mind. Fungible assets are not unique and can therefore be replaced by a similar item.
During the rapid development and increased interest in the blockchain during the last few years, different processes that benefit from the fact that they are being implemented with blockchain technology have gained attention. Tokenization is one of the processes by which the spotlight of blockchain popularity has landed. This topic is becoming increasingly frequent in the context of financial services, real estate, and other aspects that involve traditional assets.
One of the key advantages of tokenization is that it allows for assets that are non-fungible and hence indivisible in the analogue world to be divided into fractionalized digital tokens. Examples could be real estate property or artworks. In contrast to traditional processes, multiple people can own an asset through fractional ownership. The value of an asset is broken into fractions representing a certain percentage of the total value, which allows the possibility of having multiple owners of the asset through fractional ownership.
Not only does this lower the barrier to investments in this kind of assets – but it also increases global access to investment opportunities, which promotes financial inclusion and contributes to the democratization of investment. Regarding real estate ownership, this offers a potentially considerable advantage as it lowers the barrier for people to invest in properties. Tokenization of real estate assets makes it possible for people lacking a large amount of capital required to invest in a whole property to invest in a fraction of the property and enjoy the yields of the investment.
Amid these discussions and deliberations a panel on the economics of tokenization met at the World Token Summit 2023 event hosted in Dubai, participants in the event discussed how tokenization adoption could be scaled further through tools like address tracking and forensics analysis. The event led to the evaluation of various topics related to tokenization, including the benefits brought about by digitizing assets and the challenges organizations may face in navigating the realm of tokenization.
The panelist present emphasized that tokenization’s benefits are found in utility creation; it further brings value by providing a tool for access, fund distribution and fragmentation of assets. Another executive highlighted that tokenization’s main benefits are transparency and security, which are embedded features of blockchains.
While discussing the benefits the panel significantly mooted the lying loopholes in the technology. In addition, it further delved into measures such as Know Your Customer (KYC) and Know Your Transaction, which ensure that funds don’t come from illicit sources, and add another layer to the various challenges the space has to deal with. Despite this, the executive still believes that tokenization offers a big opportunity for many industries.
The process of tokenizing real-world assets is complex and requires a significant amount of legal and technical expertise. This includes the regulatory and legal framework for tokenized assets which is still under development and non-standardized regulations across various jurisdictions. Uncertainty about regulations may deter some investors and developers. Furthermore, blockchain technology is also not immune to cybersecurity risks, and the security of the tokens and underlying assets must be carefully managed to avoid fraud, manipulation and hacking.
The tokenization of traditional assets brings a new universe of possibilities for investment opportunities to enhance and accelerate financial inclusion. Tokenization can generate asset liquidity which increases market movement by creating accessible ways for selling and buying while also expanding the number of people that can participate in the market.