What are Tokenised Assets?
Tokenised assets are digital representations of real world assets. Real assets, through the process of tokenisation are turned into tokens, which can be fractionally held in a manner similar to the shares of a company or other security. A tokenised asset could represent a share in a company, real estate or any other asset. The tokens can be bought and sold, thereby providing liquidity to both liquid and illiquid assets.
What is Tokenisation?
Tokenisation is the process through which real world assets are converted into their digital representations as tokens. The digital representation (tokens), may represent an asset or ownership of an asset. Tokenisation is therefore the process that converts the rights to an asset into a token.
What is Blockchain?
Blockchain is a very specific type of database, which differentiates itself from ordinary databases in the way it stores data. Data in a blockchain is stored in “blocks”, hence the name blockchain. Every time a data is added into the system, it gets sorted into one of the blocks. Once a block has reached its capacity for storing data, it is chained with the preceding block, hence the name “blockchain”. The blocks of data in a blockchain are arranged in chronological order.
Blockchain operates on the “Distributed Ledger Technology” (DLT) which means that the users can access the data on blockchain from anywhere in the world. Blockchain is a shared ledger technology, where data can only be entered once. There is no duplication of data or transactions.
Records kept in a blockchain are “immutable” which means that they cannot be changed or altered in any manner after they have been created once. The immutability of the blockchain platform makes it safe and secure.
How tokenised assets are different from other tokens and cryptocurrencies like ETH/XRP/BNB?
There is a difference between tokenised assets and tokens like Etherium, XRP or Binance coin. It is a common misconception to consider both as the same.
Tokens and cryptocurrencies like ETH/XRP/BNB do not have any underlying asset. Their value is generated through demand and supply, which is controlled by a set of protocols. Coins exist in the digital sphere along with their value.
tokenised assets on the other hand are backed by the underlying assets which are digitally represented in the form of the token. The value of a tokenised asset is therefore generated by a tangible or intangible asset that is present outside the digital realm.
Can you claim the underlying asset when you purchase a tokenised asset?
Tokenised assets represent ownership in any asset and this ownership can be fractional or whole. It is possible to claim the underlying asset upon the purchase of a tokenised asset but the practicality of doing so depends on the type of the underlying asset.
If a person for instance purchases the tokenised shares of a hotel building, then claiming the underlying asset would not be technically possible, as the underlying asset is a building in this case. Instead the token holder may be compensated with the monetary value of the security token.
If a person purchases tokenised gold or a collectable item for example, then it is possible to claim the underlying asset if the token issuer allows it.
What are the benefits of tokenised assets over assets found in traditional exchanges?
Some of the benefits that tokenised assets have over assets found in traditional exchanges are as follows.
- Removal of middleman: Assets in traditional exchanges require an intermediary, which increases the time and cost. tokenised assets do not require any intermediary.
- Interoperability.
- Globalised access: Tokenised assets can be accessed from anywhere in the world.
- High volume liquidity: Tokenised assets are highly liquid assets.
- Quick settlement: Tokens can be settled faster than assets in any traditional exchange.
- Ownership: The majority of traditional exchanges do not allow ownership of the assets, instead the investors buy a stake in the value of the underlying asset and then trade it. This too at times comes with strings attached, such as when exchanges place withdrawal and profitability restrictions where investors cannot withdraw before they have made a certain level of profit.
- Tradeability: Most tokenised assets are tradeable on the secondary market. Other exchanges do not have this element of tradeability. For instance any token bought on an exchange has to be traded with that same exchange instead of having a sort of universal tradeability.
Why tokenise real world assets?
Tokenising real world assets will allow illiquid assets to become highly liquid assets.
Tokenising real world assets would also democratise finance allowing better investment portfolio diversification. Any asset can be tokenised from buildings to supercars and works of art.
Why would investors want to invest in Tokenised Assets?
Tokenisation has its advantages for investors such as:
- Direct ownership of assets, which means that by owning the tokens the investors own the proportional share of the underlying asset.
- Investors benefit from increased liquidity. Tokenised assets are highly liquid as they can be accessed and traded on the blockchain from anywhere in the world. Furthermore even illiquid assets become highly liquid as the larger and unaffordable assets get broken down into smaller shares that are affordable and easily tradable in their tokenised form.
- Tokenised assets allow the addition of assets that could previously not be added into the portfolio of many investors, thus tokenised assets can help in the diversification of an investors portfolio.
- The future potential of the tokenised assets market is very profitable. Tokenised assets are getting traction in the market and being discussed at forums like the World Economic Forum. According to CISCO by 2027, almost 10% of the global GDP will comprise Tokenised Assets.
What assets can be tokenised?
Any asset can be tokenised. The following list shows the diverse range of assets that can be tokenised:
- Real estate
- Precious metals
- Works of art
- Physical and digital collectibles
- Sukuk
- Bonds
- Equity
- Collectible items
- Intellectual property – patents
- Sports teams, athletes and their contracts
- Music - Contracts of performing artists
- Commodities such as oil
- Licenses
- Certificates
How does an asset get tokenised?
The process of tokenising an asset in very simple words is as follows.
There are 4 stages of getting an asset tokenised.
- Deal structuring
- Digitisation
- Selection of exchange
- Primary distribution
The deal structuring phase deals with the financial, legal and technical aspects of tokenising the asset. This stage deals with creating the business plan, liquidity and compliance procedures.
The digitisation deals with uploading the relevant data to be converted into smart contracts. Once this is done, the third process of selecting the exchange can be initiated. Once a licensed exchange has been chosen then the tokenised asset is ready for its token offering.
The tokens must be in compliance with local laws that deal with securities. The regulators have the duty of making sure that the smart contracts are enforced in a manner that the contracts for any other security are enforced. Which essentially means that the tokens are seen as any other security from the compliance and legal perspective.
The relevant securities and exchange control authorities regulate the tokens which makes them not just compliant but also legally safe for investment.
Is it legal to invest in tokenised assets?
The legality of investing in the tokenised assets depends on the country one is looking to invest in. Investment in tokenised assets is legal in Europe and many parts of Asia and North America. There are however certain countries that have not yet developed the legal framework to support tokenised assets. Which is why the question of legality of investment in tokenised assets maybe a grey area. It is therefore always a good option to check the local regulations of a country about tokenised assets and digital assets before making any investment decision.
Is tokenisation legally compliant?
Yes, tokenisation is legally compliant. In order to be legally compliant, tokenisation must follow the financial and legal regulations set in any country. As long as the country in question recognises and allows blockchain based contracts and ownership of assets, tokenisation should be legally compliant.
What are Token Offerings / Security Token Offerings (STOs)?
A token offering or STO is similar to an IPO where tokens of the underlying asset are sold to the general public.
How does token swap work?
A token swap works by exchanging the ownership of the token with another in a decentralised manner. The functionality can be also applied to tokenised assets (similar to bartering) where an ownership of an asset represented by a token gets swapped with another.