The Transformational Potential of Asset Tokenization
Apr 07, 2021
Did you hear about the 10-second video clip that sold for $6.6 million despite being free to watch on YouTube? This is just one of many examples of asset tokenization, a trend attracting huge sums of money, attention, and optimism surrounding the future of capital management and creation.
Tokenization involves linking an asset — a piece of art, a baseball card, a commercial property, anything of value — to a digital asset represented as a token. The token can then be bought, sold, or logically divided into pieces (i.e., fractionalized).
Blockchain makes the entire process work by tokenizing the asset (representing the asset as a token on the blockchain, thus embedding ownership, rights, and other property within the system). Tokenization takes something of value and makes it simpler to buy and sell since the transfer can be automated through a smart contract. Yes, it’s really that basic.
It’s also worth noting that blockchain is used to administer the underlying details of tokenization to facilitate business and create trust in these transactions. This might be a novel concept, and it might rely on blockchain use cases that feel too technical and inaccessible. But in reality, asset tokenization is something anyone can take advantage of, whether they’re an owner or investor.
Forward-thinking companies are already using tokenization, and in the process, they’re positioning themselves at the head of the pack to earn an oversized share of the opportunity.
Tokenization as a Startup Strategy
Asset tokenization will factor into more and more business strategies, especially with startups driving innovation across industries. After all, young companies have a mandate to innovate: disrupt industries, raise capital, and operate lean. To that end, tokenization can assist across the board.
For one, asset tokenization will give rise to entirely new business models that will let investors put up small stakes of ownership in larger assets (such as art, commercial properties, sports cards, precious metals, cars, or industrial machines), which helps level the playing field for smaller investors across the world.
A resulting wave of new startups will challenge our assumptions in every industry as they experiment with ways to tokenize assets and employ new business models. Likewise, tokens will also streamline how companies raise capital to fuel growth. Historically, funding has moved slowly because of due diligence, paperwork, and investor uncertainty.
When blockchain is backing up the exchange of private equity, though, the details surrounding deals are completely secure, transparent, and automated. It accelerates raises by issuing security tokens and eliminating the middleman. With private equity (as with all other assets), turning items into asset tokens makes it simpler than ever to exchange value among trusted parties — increasing the liquidity of the underlying assets.
Companies can also rethink how they allocate capital when tokens are an option. For example, if a company needed an excavator, it could purchase tokens to own a percentage of the equipment and pay rent to use it whenever necessary. As an owner, the company would then earn back some of its excavation expenditures through rent money, making this option more economical and flexible than buying or leasing equipment and improving cash flow.
For startups trying to make the most of limited resources, tokens truly maximize the value of every asset and investment.
Is Tokenization Right for You?
There’s a lot to love when it comes to tokenized assets, but that doesn’t mean all assets should become tokens or that all investments should go toward tokens. Keep these considerations in mind before diving in:
1. The investment strategy: Some companies see amazing results with their existing investment strategy. Others, however, feel limited by the options at their disposal. Tokens give investors a way to diversify their portfolio and spread risk across different types of asset classes, including classes that might have been inaccessible otherwise. At the very least, every investment strategy deserves a close look to see where and how asset tokens might fit in.
2. The alternative financing options: Venture capital or an initial public offering are two ways to raise capital, but they’re also slow, expensive, and restrictive. Companies that need other avenues should consider selling security tokens. Token sales are simple to set up, bring capital into the company more quickly, eliminate underwriters, and potentially broaden the investment base (opening the door to more investors).
3. The compliance risk: Regulations apply to all aspects of tokenized assets (e.g., what you can tokenize, who can invest, how the token sales work). With this, learn about all applicable regulations before tokenizing anything — especially if foreign investors will be involved. Fortunately, blockchain makes compliance with regulations easier because it can prevent noncompliant actions, and it keeps a highly visible and immutable record of everything that happens.
4. The token choices you have: There are many types of tokens available for interested parties to choose from, and each one is designed for a specific business use case. Some of the most popular options include:
· Cryptocurrency tokens: In general, these refer to a type of cryptocurrency that has an underlying blockchain and decentralized ecosystem.
· Utility tokens: These tokens represent specific services (or fractions of those services), meaning they must be used within a specific blockchain system for a particular purpose. · Security tokens: Security tokens are “digital, liquid contracts for fractions of any asset that already has value.” Security tokens became famous when security token offerings (in which tokenized digital securities or equities were traded at crypto exchanges) provided an alternative to IPOs.
· Security tokens: Security tokens are “digital, liquid contracts for fractions of any asset that already has value.” Security tokens became famous when security token offerings (in which tokenized digital securities or equities were traded at crypto exchanges) provided an alternative to IPOs.
· Non-fungible tokens: This token type represents something that is completely unique, meaning it can’t be replicated. For instance, bitcoin would be a fungible trade (because you can mint more), but an oil painting or song would be a non-fungible one (since there can be only one original). You might also see non-fungible tokens referred to as NFTs.
It’s tempting to say that asset tokenization changes everything. However, it’s more accurate to say it changes very little but improves upon a lot. Imagine if assets could be transacted automatically — without delay, confusion, or unnecessary friction — with a global reach. That’s the future that asset tokenization offers, and everyone should be excited about the possibilities.