Several inventions occur in a fast changing corporate environment, some of which are instantly valuable while others go away. Tokenization, on the other hand, is no longer a buzzword but a reality that requires further investigation.
Despite the fact that TrustCommerce pioneered tokenization in 2001, the majority of the general audience is unaware of the subject. Tokenization was first used in the digital domain to replace sensitive data (e.g., credit card information) with a digital equivalent known as a token in order to protect credit card details against data thefts and cyberattacks.
The worldwide tokenization sector has been seeing phenomenal development, which might have a significant influence on the global economy. According to Markets & Markets, the tokenization industry will expand from $2.3 billion in 2021 to $5.6 billion by 2025, at a 19% annual growth rate.
Tokenization has enormous potential today, and it is constantly evolving with blockchain technology. It extends far beyond cybersecurity to include the transfer of tangible assets (such as real estate, precious metals, art, and so on) into a digital counterpart (token) via a blockchain, providing better tradability and liquidity.
The Advantages of Tokenization
Tokenization may safeguard both traded and non-traded assets by employing blockchain technology. Additionally, the benefits of tokenization include increased liquidity, faster settlement times, lower costs, and greater risk management.
The following are some of the advantages of tokenizing physical assets that market players can enjoy:
• Security: When a token is produced, blockchain technology provides a unique address, which ensures robust data security via access control, automatic rights transfer, and distant decentralised file storage. Tokenization indicates that only authorised users will be able to access the system using unique tokens. Administrators, in turn, may cancel or update them as needed, giving them total control over data access. Automatic rights transfer using tokens requires providing certain rights, such as read or write access, to ensure data is treated in accordance with previously set rights.
•Efficiency: By allowing 24×7 trading and executing smart contracts based on preset parameters, tokenization reduces transaction time. As a result, settlement times are reduced from their current maximum of T+2 to near-real-time transactions. As a result, counterparty risk is reduced during transactions, and trade break odds are reduced. Tokenizing assets allows for transactions to be conducted without the dreaded red tape because all necessary data is contained in a smart contract. Transactions are faster while remaining unfiltered in this manner.
• Flexibility: In the actual world, assets cannot be broken into smaller pieces. Selling a portion of a corporate share or one-twentieth of a flat, for example, is not practical. Nevertheless, when assets are tokenized, this limitation is removed since tokens represent pieces of ownership that can be traded, making them available to a larger range of investors. In 2021, the Zurich-based Swiss crypto bank made history by registering the legal ownership rights of Picasso’s 1964 masterwork “Fillette au béret” on the blockchain. Almost 50 investors purchased 4,000 tokens of the artwork for 1,000 Swiss francs ($1,040).
• Convenience: Before, physical presence was frequently necessary to execute transactions. Assets may be sold or purchased at any time and from any location via smart contracts. Furthermore, public blockchains are intrinsically available to users all around the world, with no external obstacles to entry. Nevertheless, in the institutional sector, compliance with AML (anti-money laundering) and KYC (know your client) rules and processes is essential, restricting the wider deployment of public blockchains. Yet, some public blockchains now include KYC and AML safeguards, which have enhanced confidence and broadened the use of tokenized digital assets.
Blockchain And Tokenization
Blockchain is a decentralised data system that simultaneously belongs to everyone and no one. It comprises an online record of transactions that is perpetually replicated across multiple computing stations in a secure ledger system, eliminating the slightest risk of data theft. The blocks in the blockchain represent permanent file pages, making any manipulations impossible without the consent of the other participants or making a retroactive change.
When combined with blockchain, tokenization, a strong method for protecting payment card information, becomes even more formidable. The payment industry has grown quicker, safer, and more efficient as a result of tokenization, with tokens reflecting the value of trade assets such as a fiat currency, stock, or commodity. Tokens may now be exchanged directly between parties without the use of a bank, lowering transaction fees and shortening settlement times.
Finally, this decentralised system creates a transparent and tamper-proof record of token transactions that anybody with a set of rights may view. Ultimately, blockchain technology implies that all transactions are recorded on an immutable and transparent ledger, removing the possibility of mistakes, fraud, or the necessity for manual monitoring.
The Potential of Tokenization
Tokenization has enormous potential and may be used in a variety of sectors.
• Real estate: Real estate is a massive and expensive business, making it difficult for new investors to engage in large-scale projects. Many investors can own a portion of a property through tokenization, making real estate contributions more accessible to a larger audience. Moreover, tokenization simplifies automated revenue distribution among stakeholders, addresses property-related rights like as inheritance, and improves liquidity for real estate businesses.
• Asset management: Assets may be tokenized and divided into smaller pieces, allowing potential investors to purchase even a portion of a single share. By splitting securities, commodities or other financial assets into smaller denominations, investors benefit from greater affordability and flexibility in managing their portfolios.
• Contracts: Contracts and agreements can be managed more efficiently through tokenization. In such a system, digital tokens represent contractual obligations or terms, ensuring more efficient agreement management by automating the contract execution, verifying real-time obligations and extending existing agreements.
Tokenization has expanded dramatically since 2001, powered by blockchain technology, generating new opportunities across numerous tech fields. Presently, the possibilities for tokenization are many and far-reaching, as the technology improves transparency, immutability, and security. Its applications are limitless with ongoing development and integration with other upcoming advancements like as AI and IoT.
Source: Forbes Technology Council
