For some time now, the concepts of asset tokenization and digital tokens have been gaining much traction in the FinTech industry with the latter being used to represent various assets on a blockchain. Organizations across the planet are increasingly embracing digitization with more and more countries, especially in Europe, adopting a pro-crypto stance for financial services. Malta, the first one to adopt a legal framework that regulated cryptocurrencies and blockchain, is an excellent example of these countries. Other nations include Estonia, France, Switzerland, Germany, and the UK.
In this post, we will define digital tokens, tokenization, and highlight the benefits of this trend in financial services. In addition to that, we will examine what prevents financial institutions from adopting this technology and give excellent examples of digital tokens in use.
What exactly are digital tokens? They are a type of crypto asset, commonly referred to as cryptocurrencies, that act as a tradable item for a digital representation of a particular asset. With that said, how are assets converted into tokens? Here comes assets tokenization. Simply put, it refers to the process of subdividing huge assets, for example, real estate, into smaller parts. Each part is then represented by a specific token with its ownership stored on a blockchain ledger system. Tokens are traded on a secondary market.
That said, what is a cryptocurrency token? It is an item on a DCL (distributed consensus ledger) which acts as a mode of exchange and a unit of account. Cryptocurrency tokens can be obtained, transacted, stored, and accessed electronically. They facilitate peer-to-peer exchange without the need of going through a third-party intermediary. You can learn more about the different types of cryptocurrency tokens here.
CFOs should adopt this technology in everyday financial activities to take advantage of the many benefits of blockchain tokenization. Some of these advantages are:
Improved liquidity and accessibility: Tokenised assets are more liquid given that they can be traded even where specific assets, for example, artworks, are seldom traded. Apart from that, they are highly accessible because tokenised assets can easily be split into smaller parts, which are more investable. Here is an expert’s opinion on blockchain and its impact on liquidity in the real estate sector: “…blockchain has the potential to create a globally liquid secondary market for real estate. Properties could become tradeable investments freeing up much-needed capital in an otherwise illiquid market.” Matthew Sullivan, a Columnist at BlockTelegraph, and founder of QuantmRE, a cryptocurrency startup.
Lower transaction fees: Tokens work on blockchain tech, and trades are done using smart contracts. As such, the administrative cost is way more economical when compared to normal financial functions that involve counterparties. Also, asset-backed tokens can be traded as parts of larger assets, thus making them cheaper than selling high-value and illiquid assets. Blockchain means good for banking too. According to Accenture, investment banks can save up to $12 billion in matters concerning “costly reconciliation processes and systems” by leveraging blockchain technology.
Improved transparency in transactions: Blockchain tokenization usually adopts the principle of immutability. As such, the transactions conducted are more transparent as both the seller and the buyer know who they are dealing with, and everyone is aware of their rights. On the contrary, traditional financial services often include intermediaries and some who may not be entirely transparent.
Given that the finances sector is heavily regulated, tokenization has to overcome several impediments before it is accepted widely. Integrating and aligning with the current regulations is the essential thing because these laws exist to protect property owners. Therefore, asset-backed tokens will only be widely accepted when existing financial laws wholly incorporate blockchain platforms.
Apart from regulatory problems, tokenization has to clarify how tokens are connected to various assets. And last but not least, token network governance is yet another issue that needs to be addressed to ensure wider adoption of this technology.
The first example is Vaultoro. It is a platform that enables users to purchase tokenized parts of gold using bitcoin. The precious metal is safely stored in Switzerland, while the platform allows users to trade directly with other members.
Maecenas’s attempt to safeguard fine art using an open blockchain platform makes another excellent example. This platform enables users to invest in art through a financial instrument while avoiding expensive auction processes. As such, it allows people to get stakes in pricey artworks easily.
To conclude, we would emphasize the importance of using tokenization in the FinTech industry. With this technology, companies can quickly achieve better competitiveness by tapping into the transparency, liquidity, and accessibility provided by asset tokenization. To get the best results out of the digital token system for your company, contact inVerita, a trustworthy software company experienced in asset tokenizing procedures.