Tokenization Beyond the Hype- Benefits, Challenges and Real-World Use Cases
2019 has seen the rise of tokenization – from equity to idea, every single thing is rumored to be tokenized, revolutionizing finance and investment as we know it. While industry optimists are buzzing with opportunities, some take a more cautious approach to tokenization.
In this article we are cutting through the hype, and examining for ourselves the benefits of tokenization, see real examples, and the challenges ahead.
Tokenization vs. Security Token Offering
While many use these 2 terms interchangeably, it is imperative to understand the difference between tokenized assets and security tokens.
Tokenization refers to existing real-world assets being reshaped into a digital token format. This could mean any existing assets, starting with real estate, stocks, bonds, etc.
Security token offerings are a new approach to fundraising, established with the help of blockchain and tokenization. This means that instead of holding a traditional IPO or fundraising round, young companies can issue security tokens and sell them to investors.
Tokenization opens the door to global secondary markets, with a 365/24/7 access raising largely the liquidity of assets. This benefit both investors and sellers; as investors have more freedom to trade tokens, and sellers as they can obtain a “liquidity premium” – a higher valuation thanks to the token being easily tradeable.
Decreased transaction costs
Transactions of tokenized assets are performed with the help of smart contracts on the blockchain. This means that certain parts of the process can be automated, requiring less administrative effort and intermediaries. This makes transactions more efficient both in terms of cost and speed.
Blockchain grants its traditional benefits to tokenized assets. This means that the information on the shared ledger, such as token holder rights, previous owners and a pool of investors is easily available and transparent to each party.
Tokenization also allows the distribution of traditionally high-valued private securities and illiquid assets into smaller valued tokens. This fractionalization opens investment in these assets to a much larger pool of investors, as transactions and entry costs are significantly lower.
Leveraging the capabilities of blockchain technology and smart contracts can open the doors to novel methods of financing and investor benefits, such as profit shares, perks and exclusive offers to token holders.
Tokenization Use Cases and examples
1. Real estate
The real estate market, both commercial and private, is a rapidly growing industry, tied up already $8.5 trillion dollars in 2017 and growing continuously.
One of the first examples was completed in October 2018, when Elevated Returns, an asset management company focused on hospitality, has raised $18 million dollars by tokenizing the St. Regis hotel in Aspen.
The token sale was performed through the Indiegogo platform, selling Aspen Coin from $1 dollar each, with a minimum investment of 10,000 tokens through accredited investors.
According to the Director of Elevated Returns, Jason Kirschenbaum:
“The Aspen Digital closing not only represents a new coin on the market that is asset-backed, it also establishes a blueprint for future real estate tokenization.
The future of real estate investing is one that provides global exposure, transparency, public access and liquidity, all of which are elements that can be delivered through blockchain technology.”
2. Company equity
Shares, stocks and bonds are a key target for asset tokenization. One of the first companies to launch and complete an equity token offering was Neufund at the end of 2018.
The First Primary Issuance of tokenized equity lasted from 27th November to 16th December, and has nearly doubled its soft cap, raising €3 million from prestigious European investors.
Another, more recent example includes the sale of tokenized shares of the blockchain startup 20|30 in April 2019. The sale was completed on London Stock Exchange Group’s Turquoise equity trading platform, which is currently in a test environment.
In addition to the raised funds of £3 million ($3.93 million), this token sale demonstrated that a UK company can be tokenized and issued with a fully compliant custody, clearing and settlement system.
Evaluating and translating to financial assets patents, copyrights or intellectual property has never been an easy feat. Blockchain technology provides a useful tool to patent, mark and track the use of intangible assets.
One of the first examples is the Machi X platform, which lets musicians and listeners sell and buy copyrights. The platform enables musicians to skip traditionally expensive intermediaries and allow listeners to purchase fractionalized ownership of IP rights.
At the moment they have available 8 IP rights from Taiwanese internationally known singers tokenized and available for purchase on the platform. These include songs from Khalil Fong, Stanley Huang and Nicky Lee.
Tokenization did not skip the worldwide massive international market of commodities. Tokenized securities exchange, Currencywebsite, has just launched to the public its trading platform, where amongst 1000 tokenized securities one can trade commodities as well. The tokenized products track and mirror the performance of the underlying assets.
ChainTrade, a platform built purely for trading commodities in the form of tokenized assets, is currently in its prototype phase with the live product launching soon.
Chain trade video:
The art market is looking forward to a new revolution with tokenizing and fractionalizing artwork. This could introduce a new level of liquidity in the art market, access to new investors, and higher efficiency.
The world’s first tokenized art sale was already completed in September 2018 on the Maecenas platform. 31,5% of Andy Warhol’s famous 14 small electric chairs has been auctioned off using blockchain smart contracts for a total value of $17 million, with the biggest bid at $6,5 million. Investors were mainly from Asia and Europe, and were a mix of cryptocurrency enthusiasts, sophisticated investors and fine art professionals.
While tokenization is at full speed to change the investment market, there remain a few obstacles.
One of the key obstacles is the regulatory environment. Regulations need to align with the technology, considering the decentralized nature of the underlying blockchain platforms, and any threats and opportunities included in tokenization. Second, beyond regional regulations, international legislation needs to open the doors to a globalized token market.
Some technical concerns need to be addressed as well: such as how a token can be linked to a real-world asset – for example if an investment includes a 5kg gold bar in the bank of Singapore, or 1% in a famous artwork. Another issue is posed by the huge number of fractionalized owners and governance of a certain asset.
Security risks and stability issues are also not to be overlooked. While the blockchain provides a high level of security against malicious actors, the technology is fairly new, and it could be possible to find loopholes to exploit.
The spread of tokenization will require the joint efforts of government and international organizations, traditional financial institutions and innovators to overcome challenges. Their joint efforts are necessary to speed up adoption and show the real value of tokenization beyond the hype.
DisclaimerThe writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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