Asset tokenization is changing how people think about future investments, whether planning for retirement or improving employee benefits funds. Ultimately tokenizing assets opens up the potential investor base to a broader market, increases liquidity, and even reduces trading time.
In a report by BGC and ADDX, asset tokenization is projected to expand into a USD $16 trillion business opportunity by 2030. This estimated growth is driven by significant demand from various investors for greater access to private markets.
In this article, you will learn what opportunities exist in tokenization, what assets to tokenize, and how they can impact retirement planning or employee benefits.
What is Tokenization?
The tokenization process digitizes any asset into a token on a blockchain or a distributed ledger to represent tangible, tradable assets. The process varies all sorts of assets, from traditional ones like venture capital funds, bonds, commodities, and real estate properties to exotic assets like sports teams, racehorses, artwork, and more.
However, it is essential to note that two kinds of cryptographic tokens exist; fungible and non-fungible.
Fungible tokens are non-unique, divisible cryptocurrencies and have a clear market value. For example, Bitcoin is a fungible asset; one Bitcoin is equal to all other Bitcoins.
Non-fungible tokens, better known as NFTs, are data units stored and verified on the blockchain, which is non-interchangeable, unique, and irreplaceable.
Let’s explore an example of how asset tokenization works:
Suppose you own property worth $1,000,000. With tokenization, you can convert your ownership into 1,000,000 tokens.
But what does that exactly mean? Each token you own represents a tiny percentage of the property.
In the case that you need to borrow $50,000, selling your property doesn’t necessarily make sense. Instead, you can issue the tokens you own on a distributed ledger for people to buy and sell on different exchanges. And so when someone buys a token, they buy, for example, 0.0002% of the property ownership. Considering it would take a purchase of 1,000,000 tokens to own 100% of the property.
The unique aspect of tokenization is that on the blockchain, no one can change or erase your ownership once you buy tokens, meaning the asset remains immutable.
Let’s dive deeper into how tokenizing assets can create new investment opportunities for anyone.
The major goals of tokenization are to create broader access, a more liquid market, and lower barriers to investment in private markets. Through tokenized and fractionalized assets, people gain more access to potential acquisitions.
Tokenization is most compelling when the value of an asset is high, stable, and difficult to divide. For instance, tokenizing an asset worth just a few hundred dollars isn’t really worth it, and it would be more efficient to sell it as a whole.
On the other hand, an illiquid asset like a Vincent van Gogh painting is a better candidate, which can’t just be cut in half and sold to two different people. But the downside is that the potential market for a painting worth millions is small.
That’s where the opportunity for tokenization to sell partial ownership of assets comes into play. There’s a market of investors who could invest smaller sums or wish to spread their investments across multiple assets and asset classes.
So there are many possibilities for tokenizing assets. Understanding which assets are most beneficial to tokenization is vital to investors and the process as a whole.
Which Assets can be Tokenized?
In theory, any asset can be tokenized. Some key benefits of tokenizing assets include increased liquidity, faster settlement, fractional ownership and proof-of-ownership, lower costs and facilitated risk management.
However, there are clear reasons to tokenize particular types of assets that fall into four categories, including:
Asset: An asset is any item of value that can transform into cash. There are two distinct classes: personal and business. Personal assets are anything from real estate to artwork, whereas business assets include assets on the balance sheet.
Equity: Public and private equity or shares typically remain in the digital form of security tokens stored in a wallet. For investors, this means buying shares on a stock exchange.
Funds: Investors can tokenize an investment fund, with tokens representing a share of their fund.
Services: A business can offer goods or services to raise funds, and investors can use tokens to purchase the goods or services the supplier provides.
While these are the main classifications, each asset has different use cases for tokenizing them. Understanding your options opens the door to a pool of investment opportunities for planning your future, or it can even improve your employment benefits. Let’s explore the benefits of tokenization even further.
The Use Cases of Tokenization for Businesses
As the tokenization market continuously expands and grows rapidly, businesses worldwide are disrupting traditional business models, changing how we think about investments and assets. Here are the many use cases that outline the benefits of tokenization for businesses.
Alternative Asset Class
Tokenization allows people to be a part of financial investments that wouldn’t typically be within reach for many. Whatever the case, these alternative assets give people a chance to own something they’ve never thought of owning on their own, like a sports car or a fine piece of jewellery. There are two principal reasons why these investment opportunities are sought out by many.
First, their excellent financial performance is systematically better than the stock market and less vulnerable to downturns. The second factor is the emotional essence of owning something like a Vincent van Gogh picture representing a piece of history, giving these assets preciousness or much more.
Fractionalization of Expensive Investments
While it may seem just about anyone can get into the stock market, that isn’t necessarily true worldwide for those in developing countries. Tokenization creates access to expensive investments in publicly listed or pre-IPO shares, even those worth a few hundred dollars.
Let’s take Amazon, for example, who split their stock in 2022, giving more access to people to own a piece of the company. The total market value stays the same whether you slice a company’s ownership up to 5 million or 500 million shares.
For a regular investor, tokenized investment funds can help make valuable investment decisions. Doing so eliminates the time spent researching multiple companies and projects–especially vital to private companies that are not listed on an exchange. This leads investors to not invest at all or miss out on significant returns.
To solve this issue, investment funds act as a middleman between the project and the investor, helping to choose the right business and ensuring that portfolio companies are managed accordingly. Overall, tokenization is crucial to upgrading the outdated manual process to a scalable and efficient digital flow.
Expanding Existing Businesses
Acquiring scale-up capital for a business is easy for some, but it can be quite difficult for others that are smaller companies, especially with high-interest rates. Or if you want to avoid going to a bank, you can choose a private equity investor that would want the entire business.
Tokenization opens up the possibility of the investor pool to a global community of investors interested in moderate risk and return companies with growth potential. Not only does this help acquire capital, but it also builds loyal communities, improves the brand, and often leads to new clients.
It is important to note that whatever investment strategy or tokenization approach you choose for your business, seeking professional advice and assistance will be essential to your success.
Benefits for Employers vs. Employees
Tokenizing real-world assets can benefit employers and employees by creating new opportunities for investment and raising capital, leading to economic growth and increased financial stability.
Tokenization can provide a way to raise capital quickly and efficiently without going through the traditional financing process. This can be especially beneficial for small and medium-sized enterprises (SMEs) needing help accessing funding through conventional channels.
In turn, this can enable employers to invest in their businesses, expand their operations, and create more jobs, potentially benefiting their employees.
One of the vital tokenization use cases is giving access to assets people want to invest in but often are out of reach for many. Tokenization allows employees to diversify their investment portfolio, potentially leading to higher returns and greater financial stability.
Additionally, tokenization gives employees more flexibility to buy and sell their investments on a secondary market. Investors typically don’t receive dividends, so this allows employees to gain more capital appreciation after assets rise in price and the ability to exit their investments quickly if needed.
What’s Next for Tokenized Assets?
Tokenization is a big part of the logical progression of asset management and securitization through blockchain technology. However, there are still some concerns to consider—the idea of regulation and how it would apply to liquid, private securities.
Yet, the potential exists to enable more transparency, improve efficiency, and implement better risk control with tokenization.
In the digital assets space, people can expect an increase in innovative tokenization applications, especially for the assets previously unavailable or only available to some investors. To be a part of the future solution, as a multi-asset custodian, First Digital already offers custody for real-world assets with their specialized expertise, experience and proper licensing.