Asset tokenization is the process by which an issuer creates digital tokens on a distributed ledger or blockchain, which represent either digital or physical assets.

Tokenization transforms valuable asset into digital tokens that are usable on a blockchain application (see Figure below). Both tangible assets, such as gold, real estate, or artworks, and intangible assets, including ownership rights, content licensing, and voting rights, can be converted into digital tokens.

At the heart of tokenization is a decentralized financial system (DeFi) based on blockchain technology that enables efficient trading of assets and operates without traditional intermediaries. Through blockchain technology, ownership, rights, assets, and tangible goods can be digitally represented and contribute to an open and interoperable financial infrastructure. Once created, tokens can be sold and purchased in digital marketplaces.

Tokenization creates a broad field of innovative applications and opens up new forms of collaboration.

A concrete use case for tokenization is in its potential to disrupt markets for capital-intensive assets such as equipment and heavy machinery. Rather than customers buying or leasing the equipment required for their business, tokenization allows for pay-per-use solutions. This creates new business models for equipment manufacturers and the financial services sector, while benefiting firms that typically require capital-intensive assets. Advancements in Internet of Things (IoT) technology, hyperconnectivity, and automated payment solutions are accelerating the trend toward tokenization, thus marking the next step in the transition from product to service-based business models.

Steps to Tokenize Assets

Asset Tokenization vendors will often start with an intake process using a web page or a form. This process has 2 goals:

• Learn about client needs and requirements, so they can configure the tokenization setup for the client perspective.
• Make the client aware of the steps in the process, so they can start the compliance and legal work in parallel.

The issuer/client will need to generate the capitalization table that determines the financial structure of the asset. Many companies work with third-party software solutions for this.

Once the vendor has received the cap table, it can generate the tokenized assets on the desired blockchain, and allocate them to the right entities in an automated way.

Some vendors have further developed this intake process to be a self-service setup with an API and/or a user interface. From there, the client can directly start generating tokens, setting up compliance rules and taking care of distribution.

Benefits of Asset Tokenization

The benefits shown in the diagram below mean lower all-in issuance costs for companies. They reduce the time management spends raising capital, lower the fees paid to intermediaries, and minimize losses due to market inefficiencies like deep discounts and high interest rates. Just looking at IPO gross spreads gives us an indication of how costly capital raises are for companies.

How To Decide Whether To Go For Asset Tokenization?

When it comes to deciding if something should be tokenized, there are two important factors to consider:

• What is your end goal? Does it truly need a token and a decentralized model, or could you build this without that, in a more efficient way?
• Does the end user understand the need for this kind of setup if you survey them at scale? Does it solve a problem for them?

Many tokens are launched because the person, group or company needs it for financial reasons, not because the user needs it.

This is the main reason why many token projects fail, they’re not about the user. There may be short bursts of activities and a few enthusiastic people who see an opportunity to make some quick money by being an early adopter, but the fundamental value is lacking.

Not everything that can be tokenized, should be tokenized, but the option being there can be useful to many people. Use it wisely!

Legal Implications of Tokens

You may wonder if all of these tokens are legally supported. Would all activity related to these tokens hold up in court if needed?

The answer depends on the asset and the regulations in your jurisdiction. The legal system in general isn’t there yet in acknowledging tokenization of all assets.

By using tokens in the meantime however, especially in places where the regulation does exist, people are trying to show how it could work, so that in the event that more or new rules are created, there is a basis for them.

Many countries are pushing for clear rules and standards, ever since Liechtenstein first passed its Token and Trusted Technology Service Provider Act in 2019. The companies innovating in this space need them to be able to run their business in a predictable way.

Who are you allowed to sell tokens to?

This is another very important legal aspect that cannot be overlooked.

If you launch a token and start selling shares in something, most countries have laws around what is and isn’t allowed, especially when selling to non-accredited investors. You will likely have to register your token according to the laws in your jurisdiction. We would strongly advise seeking legal advice for these challenges.

Issues & Challenges with Tokenization

Beyond legal challenges, there is an important issue that needs to be addressed: Who links the assets?

If you want to use tokens to represent a physical asset, something needs to link them to their digital representations on the blockchain. This is known as an oracle in the blockchain world.

In practice, this oracle is a person or some automated service. Both of these are corruptible and need to be fully trusted by the user.

If the user trusts this centralized party anyways, then what is the need for a decentralized system like a blockchain? Can’t the centralized party just host a more efficient database in which the tokens are registered?

This issue does not exist for digital assets, as users can typically validate that there is a correct link, assuming the solution provides this level of transparency. This is because for each digital piece of information, we can always generate a unique digital fingerprint, a process known as hashing.

There is no waterproof solution to the problem of linking physical to digital assets today. Barcodes, QR-codes, special seals, and anything you can come up with, have their flaws.

If users want to own and trade tokens linked to physical assets, they simply have to trust the centralized party, in exchange for getting access to the benefits of global trade for these tokens. These are essentially use cases with some, but not all the benefits of using a blockchain.

How to Tokenize Digital Assets?

The easiest way to tokenize digital assets is by using an existing service for it, rather than getting into the code and creating your own solution.

There are various providers that can help you with the process. We compare 9 companies below, which we selected based on funding and publicly available tokenized volume. However, there are many more providers in the industry with various expertises and within different jurisdictions. You can view a complete list of providers here.

In practice, the process of asset tokenization has roughly the following steps:

1. Getting actors across the whole asset lifecycle involved to set up the project.
2. Setting up compliance rules & legal.
3. Creating the token itself through a software solution.
4. Setting up the payment, trading and distribution mechanisms.
5. Enabling automated reporting and corporate actions if needed.

Below we’ll share more details on what this process entails, based on the input from various companies.

How long does it take to tokenize assets?

The technical aspect of tokenizing an asset is actually very quick, it can be done in minutes by a professional partner.

However, the total process takes ~3 weeks to ~3 months, depending on many factors.

Most of the time typically goes towards getting the right stakeholders involved across the entire asset lifecycle, creating documentation, and setting up compliance and legal structures.

As a result, many of the vendors focus on helping you to speed up the time-intensive processes, e.g. by building compliance into the solution, and by working with a network of partners that can help their clients to solve specific challenges.

Asset Tokenization Costs

Asset tokenization solution providers use different business models. Depending on your specific needs, some pricing models may suit you better than others.

Many of the vendors also look at a few different factors to determine pricing, such as:

• The frequency at which the client will issue assets.
• The volume of assets.
• The features the client requires.
• If they prefer SaaS or Cloud deployment.

In practice, this results in examples such as:

• A monthly SaaS fee of $5k, with a setup fee starting from $200k.
• A setup fee of $50-150k.
• A subscription fee based on the total value of the tokenized assets.

Investors’ Perspective on Asset Tokenization

Investors have access to the typical kind of dashboards you would expect, from which they can buy and sell their assets, view statistics and receive communication from the companies they invested in.

Here is a video example from Securitize that provides an example of an investors’ experience.

We Are in a Great Asset Migration Times…

Now that the solutions to tokenize assets are becoming simpler to use, and many countries are looking into creating clear legal frameworks for tokenization, the great asset migration has begun.

Over the course of our lifetimes, an increasing amount of assets will likely start from blockchain-based solutions, rather than starting from traditional infrastructure.

Read further on Asset Tokenization: Asset Tokenization: The Next Mega Crypto Trend

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