Tokenisation is rapidly emerging as a game-changer in the world of asset management and investment. By leveraging the immutable and secure nature of blockchain technology, tokenisation offers a novel approach to representing real-world assets as digital tokens. This shift not only democratises investment opportunities but also introduces a level of liquidity and accessibility previously unattainable with traditional asset classes. In this article, we demystify the basics of asset tokenisation and explore its wide range of benefits.
The articles in this series are extracts from the E-book: Asset Tokenisation unpacked, Now available for download.
What is asset tokenisation?
Asset tokenisation is the process of converting rights to an asset into a digital token on a blockchain. This method enables tangible and intangible assets—ranging from real estate and art to intellectual property and commodities—to be divided into shares that are sold and traded. Each token represents a proportional stake in the underlying asset, providing a bridge between the physical and digital worlds. Blockchain's inherent characteristics ensure that these tokens are secure, verifiable, and easily transferable, which brings unprecedented efficiency to the trading and ownership transfer of assets.
At the heart of asset tokenisation is blockchain technology. Blockchain acts as a decentralised registry for tokenised assets, recording each token's issuance and transaction with complete transparency. The tamper-proof and permanent record instils confidence in the validity and authenticity of asset ownership, which is paramount in a system where assets are bought, sold, or exchanged.
Benefits of asset tokenisation
But what exactly are the benefits of asset tokenisation? Some of these advantages can be summarised as follows:
- Fractionalisation
- Greater liquidity
- Increased transparency
- Lower transaction costs
Each of these benefits will be explained in more detail below.
Fractionalisation
Tokenisation allows assets to be divided into smaller portions which means that investors can buy and sell fractions of an asset, rather than having to buy the whole asset. For example, instead of buying an entire real estate property, investors can purchase a percentage of ownership in the property. This opens up investment opportunities to a wider range of investors, including those who may not have enough capital to buy an entire asset.
Another benefit of the fractionalisation is that it allows for more flexible ownership structures which can be better tailored to the investors, in turn increasing the appeal of the investment.
Lastly, the fractionalisation of assets can also be beneficial for community building, in the case of valuable art for example. Instead of having a single owner, it becomes a community-owned asset which can increase both the appeal and value of a physical asset. Who wouldn’t want to own part of the Mona Lisa?
Greater liquidity
Tokenisation makes assets more accessible and tradable on a blockchain, which can increase liquidity. In traditional markets, it can be difficult to find buyers and sellers for certain assets. However, by tokenising an asset and trading it on a blockchain, investors can quickly and easily buy and sell the tokens without needing to go through intermediaries. This can increase the speed and efficiency of transactions, making it easier for investors to enter and exit the market. And unlike traditional asset purchases transactions are instantaneous and seamless.
Furthermore, given that the asset is split up into smaller portions (represented by tokens) the asset becomes an investment opportunity to a wider range of investors, increasing liquidity even further.
It is important to note though that this is not the case for every type of asset depending on the jurisdiction in which the physical asset resides. Token transactions may still be subject to rules and regulations which can make the buying or transfer process equally inefficient as the regular process, and possibly even more cumbersome in some cases.
Increased transparency
Tokenisation can make it easier to track ownership and movement of assets, as all transactions are recorded on a blockchain. This increases transparency and reduces the risk of fraudulent activity, as ownership of the asset is easily verifiable. Additionally, since all transactions are recorded on the blockchain, it is easier to audit the history of the asset (and tokens). Thus, this can be important for compliance and regulatory purposes.
This can also be beneficial for tracking the provenance of certain assets, as the digital twin can contain the full history of the physical asset.
Lower transaction costs
Generally speaking, tokenisation can reduce the costs associated with buying, selling, and managing assets. By removing the need for intermediaries like brokers and custodians, tokenisation can significantly reduce transaction fees. Additionally, tokenisation has the potential to make it easier to manage assets. All ownership and transaction data is stored on the blockchain, reducing administrative and legal costs associated with traditional asset management.
It is important to mention however that the tokenisation process can also increase costs if the stakeholders want greater trust and transparency before, during, and after the tokenisation process.
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