FinTech Trends, Will Asset Tokenization Change the World?

Tokenization,?the process of converting assets into digital tokens, is gaining traction in the business world. The?World Economic Forum?(“WEF”) recently held a?panel discussion?on the topic, featuring industry leaders such as Jeremy Allaire, CEO of Circle, and Jirayut Srupsrisopa, CEO of Bitkub Thailand. During that panel a wide range of?applications of digital tokens were discussed?such as Tokenization of electricity units, Central Bank Digital Currencies (“CBDCs”), investment tokens, tokens representing real assets etc. The?flexibility of tokenization?is?immense, but?so are the challenges?arising from?legal, compliance, potential regulation?etc.

Srupsrisopa, Bitkub's CEO, discussed?Thailand's?efforts to create a?separate license for investment tokens, allowing entities to tokenize a variety of assets,?including?bonds, carbon credits, and foreign exchange markets. In addition,?Thailand's?central bank is developing a?CBDC?that will be integrated into the?Thai baht wholesale market?in?Q1 2023. These are just two major initiatives to promote Blockchain technology and innovate financial services.

With all the complexity and challenges coming with these initiatives, it’s very clear?Tokenization?will be a?crucial aspect?of the?digital economy?moving forward. As a result of their discussion, the panelists expressed even greater optimism about the future of Tokenization, predicting that?a majority of real-world assets?will be?traded on Blockchains?by the end of the decade.

In this newsletter, we will cover several topics related to Asset Tokenization i.e.:

• The History of using Tokens
• What is Asset Tokenization?
• The Benefits of Tokenization
• Market Size of Asset Tokenization
• The Future of Asset Tokenization

Asset Tokenization?is a very important?building block for innovation?in?financial services?and?financial markets?and can be utilized for a vast range of tasks. Over the coming weeks, we will continue to discuss Asset Tokenization and related topics in our newsletter, including the process of Asset Tokenization, the asset representation models, risks associated with Asset Tokenization, comparison of Asset Tokenization versus Securitisation, the leading Asset Tokenization platforms etc.

This article is also available on QIDS Venture Partners' website.

The History of using Tokens?

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In fact, tokens have been used for a long time prior to the invention of Blockchain technology. Throughout history,?tokens?have been used for a variety of purposes, including?currency, identification, and?accessing goods and services.

Tokens were used as a form of currency in ancient times. The ancients traded goods and services using shells, beads, and precious metals as currency. Tokens were also used for identification purposes in the early days. During medieval Europe, people carried tokens or seals that identified them as members of a particular guild or a profession. These tokens were used to gain access to goods, services, and privileges that were only available to members of that guild or profession.

More recently, tokens have been used in a variety of ways, including:

• Tokens or cards are used to pay for rides in public transportation systems.
• Tokens are used to play games in arcades.
• Tokens are commonly used in theme parks to gain entry to rides and attractions.

In the digital age, virtual tokens are also used in online systems such as video games and online communities, where a token represents a unit of value or access to certain features. With the?invention of Blockchain technology, new types of tokens have been created, as well as?new use cases?for tokens identified. Examples include?cryptocurrency, utility tokens, and?security tokens.

In this article, we will focus on security tokens, which are financial instruments representing ownership interest in a specific asset.?

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What is Asset Tokenization??

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The Tokenization of assets allows for the creation of?security tokens, the?digital representation of the assets, making it?easier to transfer, trade, and?record ownership.

The Tokenization of real-world assets is now attracting industry attention with increasing use cases. Fundamentally,?Tokenization?is the process of?converting?rights – or?a unit of asset ownership?– into a?digital token?on a?Blockchain.?Tokenization?can be applied to?regulated financial instruments?such as equities and bonds,?tangible assets?such as real estate, precious metals, and even to?intangible assets?including copyright and intellectual property. The?benefits of Asset Tokenization?are particularly?apparent for assets?not currently traded electronically?like real estate or fine art, as well as those requiring increased transparency in payment and data flows to improve their liquidity and tradability.?

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The Benefits of Tokenization?

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Tokenization?of assets can facilitate the creation, purchase, and sale of assets by?reducing friction?between issuers and investors.?Fractional ownership?and?simple transfer?are 2?key features?of tokenized assets. With the?reduced minimum investment amount?through Tokenization, a?broader range of investors?is expected to?invest in tokenized assets. Moreover, due to the fact that?security tokens?are more?liquid, investors may exchange them on the global secondary markets at any time.

The secondary token marketplace can provide?increased liquidity?especially?for illiquid tangible assets?such as real estate, fine art or?intangible assets?like intellectual property. As an example, let us look at commercial real estate. The investment of commercial buildings was previously limited only to financial institutions, family offices, and ultra-high net worth individuals as the transaction value is usually in the millions of dollars.?Tokenization?provides a way for?a wide range of investors?to have?fractional ownership?of a commercial building for just a few thousand dollars. Also,?Tokenization?will facilitate?fast settlements, eliminating all the complicated paperwork by using?smart contracts. In summary,?fractional ownership, small minimum investments, and?simpler transfers?will result in?illiquid?or?complex tangible?or?intangible assets?becoming?tradable?and?accessible?with?improved liquidity through Tokenization.??

In addition, an?immutable record of ownership, as well as the rights of the interested parties, is?embedded directly into the token, allowing sellers and investors to identify information such as the original owner, the current dealer, etc. Therefore,?Tokenization?will enhance?transparency, making it easier to?track?and?verify the ownership?of the assets, and?reducing the risk?of fraud or errors.

Also,?transaction costs?for traditional assets can be very?expensive?and at times complex (for example real estate), but?Tokenization?will come with?automated smart contracts?which help?decrease transaction costs?and enable?faster settlements. Therefore,?tokenized assets?will enjoy better?market efficiency?and optimized exchanges of goods and services.

In summary,?Asset Tokenization?offers a broad range of benefits, including enabled?fractional ownership, increased liquidity, reduced minimum investment amount, improved accessibility, reduced transaction costs?and?enhanced transparency.?

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Market Size of Asset Tokenization?

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Research and surveys from institutions such as the World Economic Forum (“WEF”), Deloitte, or McKinsey project that up to?10% of the global Gross Domestic Product?(“GDP”) will be?stored and transacted?with the help of?Blockchain technology?by 2025–27. The leading digital asset custodian Finoa estimates that?US$24 trillion?of?financial assets?will be?tokenised?by 2027. Finoa calculated this number?by running a bottom-up market simulation which includes financial assets as well as real assets, such as listed equity, unlisted equity, bonds, home equity as well as other financial assets.

Market growth?will be driven by?different asset classes to be tokenised?and the?growing value?of various assets?stored and transacted on the Blockchain. Aside from real estate and fine art,?Asset?Tokenization?is expected to have a significant?impact on collectibles, commodities, and other?physical assets. In addition, the?increasing acceptance?of digital assets?by regulators, stock exchanges, and?banks?is expected to contribute to the growth of the market.?

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The Future of Asset Tokenization?

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With the?advent of Blockchain technology, the?Tokenization?of assets is a natural progression in the?growth of securitization. The use of?distributed ledgers?allows for unprecedented levels of?transparency, transaction efficiency, and?risk management. Additionally, it can?facilitate?the?trading?of previously?untradable asset classes, which can lead to a significant increase in financial involvement and information efficiency in such markets.

Future Tokenization?applications are likely to be more?innovative?and?value-creating, particularly in assets that were previously unavailable or only available to a limited number of investors. Due to the power of?Tokenization, virtually?any asset?can be?‘digitized and recorded on the Blockchain’, enabling the?automatic, transparent, and?transaction cost-effective?division of?cash flows?or?future appreciation?in a?regulated?manner.

Larry Fink, CEO of BlackRock and a respected industry leader, addressed the current state of crypto and the future of Tokenization during a recent New York Times DealBook event. Larry Fink states that the utilization of?Tokenization?in conjunction with a?distributed ledger?holds significant potential for the?future of markets and securities. This technology would enable the?tracking?of?ownership?and?transactions, as well as facilitating?instantaneous settlements, thereby?revolutionizing?the?financial ecosystem.

QIDS Venture Partners?is dedicated to supporting and catalysing the developments in FinTech by sharing with our audience FinTech trends and interesting FinTech business ideas. You may forward this article to other investors who are interested in FinTech as well. If you need more information or would like to arrange a meeting with us, please feel free to contact our Managing Partner Edward Shen via?LinkedIn?or?email.