Tokenization of assets
Blockchain is the biggest opportunity set we can think of over the next decade or so.
Bob Greifeld, Nasdaq Chief Executive
What's the process of asset tokenization?
Tokenization is the process of transferring ownership rights into digital versions of an asset that can be split up, sold, and kept track of using decentralized ledger technology (DLT). Theoretically, a token can stand in for any asset, but most people think of them as either native to the blockchain and not existing in the real world, like Bitcoin, or not native to the blockchain and standing in for something in the real world, like corporate shares
Most people think that tokenized assets, in which a digital token stands for real security, are the next step in book entry processing. Even though both book-entry assets and tokenized assets are digital representations of value, the way they are checked and how they are centralized are very different. A transfer can only happen if the central security depository (CSD) can prove that the account holder is a direct participant. In contrast, a digital token's permission relies on a distributed ledger technology (DLT) or a blockchain to check if the public and private keys match up.?
With traditional security, only the CSD can make changes to a central ledger, and it is up to the CSD alone to keep track of the history of all transactions. Accounting for tokenized assets and moving them from one place to another is entirely decentralized, and different network participants verify ownership. But to make sure that regulatory requirements for "know your customer" (KYC), "anti-money laundering" (AML), and "cybercrime" are met, most tokenization systems today are not entirely open. They have had to put in place different restrictions.
The use of tokens also modifies how payments are made for the delivery of assets. A single-ledger transfer can happen through a procedure known as an atomic settlement if the securities and the money needed for the transaction are both located on the same DLT and are already connected to an account on that ledger. But in the future, we should expect that tokens will also be needed to represent cash in order for payments to be made between different DLT platforms. Smart contracts, which are transaction protocols that automatically run based on a sequence of processing steps, will probably be needed to conditionally process both transaction legs across platforms where actual atomic settlement is not possible because the order and timing of these transfers are so important. Many tokenization platforms use a particular type of token called a "stablecoin," whose value is pegged by a stable real-world asset like the US dollar or gold. In this case, money can be transferred on a blockchain without the additional volatility of cryptocurrencies. In the near future, the sector might also be able to use digital currencies issued by central banks (CBDCs), which the government's monetary authority would back.
What is the processing of book entries?
Securities used to be issued as paper certificates in the past. Proof of ownership was established by physical possession. But when paper certificates were bought and sold, it took a long time, cost a lot, and was risky to give to new owners. For example, the central security depositories (CSDs) were set up in all major markets to hold paper certificates in a single place so that trades didn't have to be settled by physically moving the papers. Later, technological advances enabled security to be "dematerialized." This means that most of the actual certificates are no longer around, and ownership is now only shown by an electronic book entry in an account at a CSD.??
Digital assets are transforming the world and becoming increasingly mainstream in our financial ecosystem.
Roman Regelman, Chief Executive Officer of Asset Servicing and Head of Digital
Which assets are capable of being tokenized?
Any asset can be turned into a token since a token is just a digital copy of the asset and not the item itself. Today's typical examples include:
Micha? Jackowski, sculptor, Poland, "Empty Gold"
A token is typically merely a digital representation of the underlying asset in question. The following are some examples of token kinds and usage patterns:
Central Bank Digital Currencies (CDBCs) are digital copies of the fiat money that central banks create. For example, the Chinese Central Bank made the digital renminbi (e-RMB) an alternative payment method.
Investors are becoming more interested in alternative investments, including hedge funds, private equity, venture capital, private debt, and real assets like real estate, infrastructure, and natural resources. These assets are perfect for tokenization because they tend to be less liquid, easy to get, and clear than traditional assets.