Everything Will Be Tokenized is Wrong: Digitizing vs. Tokenizing Real World Assets

Despite the regulatory uncertainties surrounding blockchain tokens, the concept of asset tokenization is growing in popularity as blockchain continues to advance.

When we started down the path towards transforming market infrastructure in 2017, we envisioned the end state, where more efficient markets could leverage the underlying opportunity of blockchain and cryptocurrency networks.

After being in the market for seven years, our view has evolved. Quite frankly, you don't need a token on a blockchain for everything. In fact, there are many instances where tokenization itself is not only not appropriate, but detrimental. Tokenization introduces complexities that aren’t always necessary or beneficial.

Yes, I said what I said.

In fact, there's a superior approach that still future-proofs for tokenization when it is needed, but doesn't lock an asset into any specific technical architecture.

Data flexibility and portability is foundational, and creating a data silo of a specific blockchain and token creates as many problems as locking your data inside of a specific vendor platform within a specific institution.

One common misconception is that tokenization is required for fractionalization of assets—this is not the case. Fractionalization can be an inherent feature of digitization without needing blockchain tokens.

Conduit Network addresses this by providing a unique solution where assets can first be digitized, fractionalized, and managed without tokens, while retaining the option to materialize tokens on any supported blockchain.

Conduit Network is a decentralized physical infrastructure network (DePIN) that not only decentralizes fundamental cloud computing services, but has some other, very powerful native features. It uses a highly-secured, hardware-based key store that enables seamless cross-chain, multi-chain tokenization for assets, allowing flexibility in how assets are managed and transferred across platforms.

What are Digitized Assets?

Digitizing assets involves converting a physical or financial asset into a structured digital format. This process enables organizations to manage, track, and transfer ownership, usage rights, or other attributes of an asset in a secure digital environment. Critically, digitized assets can be fractionalized—dividing ownership or rights into smaller parts—without requiring blockchain tokens.

Key features of digitizing assets include:

• Digital Recordkeeping: Ownership and other rights related to the asset are recorded digitally, providing a transparent and accessible record.
• Fractionalization: Digitization allows for the division of assets into fractions, enabling multiple stakeholders to hold varying shares of an asset without the need for tokenization.
• Rights Management: Ownership, usage, and other rights associated with an asset are digitized, enabling easy management and transfer through digital systems.

What is Tokenization?

Tokenization is a specific method of representing asset ownership through a digital twin record represented by tokens on a blockchain. Tokenization allows for tradability and immutability, but it is not required for fractionalization, which can already be achieved through digitization on an appropriate ledger alone.

Key features of tokenization include:

• Blockchain-Based Representation: Tokenized assets are represented as digital tokens on a blockchain, providing transparency and immutability.
• Tradability: Tokens can be transferred, traded, or exchanged on blockchain networks, allowing for enhanced flexibility in asset ownership transfers.
• Immutable Records: Once an asset is tokenized and transferred, the transaction history is immutable, ensuring that the record cannot be altered.

Digitizing Assets vs. Tokenization: The Distinction

While digitization focuses on converting an asset into a digital format for tracking and management, tokenization takes this further by placing the asset or its fractionalized parts onto a blockchain as digital twins represented by tokens. However, fractionalization is not exclusive to tokenization; digitizing assets enables fractional ownership without the complexities and challenges introduced by tokenization.

For many organizations, digitization alone provides the control, transparency, and flexibility needed to manage assets. Tokenization, on the other hand, is primarily beneficial when assets need to be traded across a blockchain or require immutable records. The key point is that tokenization is not always necessary—and in some cases, it may introduce challenges, such as regulatory or technological incompatibilities.

Why Tokenization Isn’t Always Necessary or Beneficial

1. Regulatory Considerations

• Legal Uncertainty: Tokenizing assets can raise legal questions, particularly in jurisdictions where blockchain-based ownership is not fully recognized or tokens are outright banned. This can create challenges in terms of ownership rights, taxation, and compliance.
• Compliance Complexity: Tokenization can increase the difficulty of complying with regulations such as Know Your Customer (KYC) and Anti-Money Laundering (AML). Digitizing assets first, without the complexities and risks of tokenization, offers a simpler, more streamlined approach in heavily regulated industries.

2. Technological Compatibility

• Legacy Systems: Many organizations still rely on legacy systems that are not designed to integrate seamlessly with blockchain technology. Digitizing assets without moving to tokenization ensures that assets can be managed within these systems as traditional data, without requiring a complete overhaul.
• Interoperability Issues: Blockchain platforms aren't compatible with each other without specific middleware layers that are usually rigid and not easily adaptable once established. This creates barriers to transferring tokenized assets across different systems. Digitization without tokenization allows for easier integration across platforms and legacy systems.

3. Cost Efficiency

• Reduced Costs: Creating and managing blockchain tokens incurs extra costs, such as transaction fees and gas fees. Digitization provides a more cost-effective solution for managing assets while ensuring the function of tokenization is supported if it ever becomes needed.
• No Need for Immediate Tradability: For assets that do not require frequent trading—such as long-term real estate investments—digitization without tokenization provides the transparency and security needed without introducing unnecessary complexity.

4. Information and Data Challenges

• Ambiguity of Rights: A basic token in a wallet on a blockchain doesn't indicate the status of fundamental property rights of the asset. It just shows the token in a wallet. This is problematic because in real world assets, there's no indication of the nature of the possession of the token as it relates to the represented asset. Is the ownership of that token implied by the possession? Was a conveyance of the token a purchase? A transfer? Does possession equal ownership or right of use? Native blockchain doesn't expose the states of these rights, which is one of the fundamental issues with the present regulatory challenges.
• Privacy: It may not be desired for every holding of every asset to be made public. Privacy conscious investors and institutions want control over the provenance of their data - particularly who can see what, when, and how.

Conduit Network: The Best of Both Worlds

Conduit Network bridges the gap between digitization and tokenization with its unique temporal ledger system. The platform allows organizations to digitize assets first, maintaining full flexibility to manage and fractionalize those assets without the immediate need for tokens. Importantly, Conduit Network also enables cross-chain, multi-chain tokenization through its hardware-based key store, allowing assets to be materialized as tokens on any supported blockchain when needed.

Temporal Ledger System: Flexible Digitization

Conduit Network’s temporal ledger records all aspects of an asset—its past, present, and future states—without requiring immediate tokenization. This offers organizations full control over asset ownership and rights while keeping the option open to tokenize assets on-demand when necessary.

Key Benefits of Conduit Network’s Temporal Ledger System:

• Fractionalization Without Tokenization: Digitized assets can be fractionalized directly within the system, allowing ownership or rights to be divided and managed without needing blockchain tokens.
• Cross-Chain, Multi-Chain Tokenization: When tokenization is required, Conduit Network’s highly secured hardware-based key store enables the creation of tokens on any supported blockchain. This allows assets to be materialized as tokens on the most appropriate blockchain for the use case, providing flexibility and future-proofing the tokenization process.
• Rights Management: Conduit Network supports the separation of ownership, usage, possession, and other rights in a digitized format. These rights can be managed and transferred as needed, and tokenization can be applied when and where it adds value.
• Regulatory Flexibility: Digitizing assets without immediate tokenization allows organizations to navigate regulatory requirements more easily. Tokenization can be implemented later, in compliance with relevant legal frameworks.

Use Cases for Digitization with Fractionalization (Without Immediate Tokenization)

• Real Estate: Digitizing the property allows for clear management of ownership and fractionalization between multiple stakeholders. Later, if tokenization is needed—whether for asset sales or further fractional distribution—Conduit Network enables this in a cross-chain, multi-chain manner.
• Supply Chain: In complex supply chains, digitizing assets (such as inventory or materials) allows for transparency and fractionalization at different stages without tokenizing every asset. Tokenization can be applied later if assets need to be transferred across platforms or integrated with other blockchain-based systems.
• Private Equity: Private equity investments often involve fractional ownership among multiple parties. These assets can be managed digitally without requiring tokenization. If tokenization becomes beneficial in the future—for example, to enable trading of equity stakes across platforms—Conduit Network enables seamless cross-chain tokenization when needed.

A Flexible, Cross-Chain Approach with Conduit Network

Conduit Network’s temporal ledger system offers organizations the flexibility to digitize assets and fractionalize ownership without immediate tokenization. This approach provides greater control, transparency, and efficiency, especially for organizations navigating regulatory, cost, and technological challenges.

When tokenization is advantageous—whether for cross-platform transfers, immutability, or blockchain-based transparency—Conduit Network’s cross-chain, multi-chain tokenization feature allows for assets to be materialized as tokens on any supported blockchain. This ensures that tokenization is applied strategically, adding value where needed without introducing unnecessary complexities.

With Conduit Network, organizations have the tools to manage digital assets dynamically, unlocking the full potential of both digitization and tokenization in a secure, scalable, and future-proof manner.