It’s been a good few years now since the sphere of cryptocurrency and the likes of Bitcoin permeated the public consciousness. In the years that have followed, those who’ve kept a finger on the cryptographic pulse will have undoubtedly felt the palpations erupting around the notion of tokenization.
In the world of crypto, the likes of ‘utility token’ and ‘initial coin offering’ have risen the vocabulary ranks to become some of the most prolific pieces of sector-specific lingo. It’s no surprise these two terms in particular caught fire recently, with 2017 serving as a spotlight year for both ICOs and digital tokens alike. We’re not talking about a short-lived hype, either. As 2017 gave way to 2018, digital tokens and all their intricacies were locked firmly in the limelight. Asset tokenization and its lucrative potential was piquing interest from some big players, with established investment capitalists getting behind emerging tokenization platforms.
While this lucrative first rush into utility token investment played out with American backers for the most part, the United States wouldn’t be sitting on a secret for too long at all. Recently, there’s been a distinctive upward swing in interest in the potential of tokenization platforms in Asia. Significant investments by serious capitalists have already occurred, demonstrating investor confidence in this latest crypto phase is certainly not lacking.
To anyone with a decent foundation knowledge of the crypto world, tokenization as a concept might seem relatively straightforward. All that’s apparently involved is the issuance of blockchain tokens, associated token ownership rights and legal aspects, along with the freedom to trade said tokens with relative ease.
However, it would be a mistake to write things off with as simple specs as those mentioned above. Let’s investigate the detail of those key ingredients. The rights issues alone are complicated enough. There’s a difference between ownership rights and claim rights, for example. Ensuring these differences are realised and the types distinguished as distinct entities is a must. Delving deeper still, we find more complexity when it comes to asset classes. In the context of tokenization, comprehension of the varying differences that are present between asset classes is another need-to-know, not nice-to-have.
While more of the general population might have heard of the blockchain and key crypto terms than a few years ago, this doesn’t equate to a sprawling network of users clued-up on crypto. When it comes to tokenization, a foundation knowledge base is simply not enough to wrap one’s head around all the individual elements involved. A solid comprehension of blockchain technology will certainly boost that basic insight up a tier, while a sound grasp of smart contracts will also help. Relevant insights into associated legal areas, financial matters and economic considerations round off the key set of topics anyone serious about succeeding with tokenization needs in their arsenal.
Those looking to enrich their insights further are in luck when it comes to resources available. It might be a new and emerging branch on the crypto tree, but there’s plenty of useful and relevant information that’s easily accessible to all. Getting to grip with the idea of tokenization as a concept is no big ask thanks to exhaustive definitions that not only lay out the unique characteristics. What’s more, the chief differences between tokenization and securitisation can be defined at this foundation stage, offsetting confusion later.
Both the committed crypto capitalist and relative rookie alike seek to understand the benefits of tokenization. After all, if it’s not bringing about a quantifiable return, it’s not something anyone is going to engage with. It might be early season in the overall timeline of tokenization, but there’s plenty to get excited about when it comes to potential benefits. Those with a checklist of what they’re looking to get out of an investment or engagement with tokenization can cut straight to the chase in this respect.
Not every would-be investor who makes time to fact-find takes the information they’re presented with the level of seriousness they should. While the best practice brigade considers all facts and figures with the bigger picture in mind, the less meticulous investor with a short-term mindset doesn’t. When preparing to plunge into a new venture, this second type of investor isn’t really seeking to take stock of all information available to them so that they can make the best decision possible for their specific circumstance. Often, their ultimate next step has been pre-determined. They have a strong enough feeling as to whether they’ll invest or not, and are simply shopping for findings that make them feel more comfortable in their decision. Big figures, upswings and limitless potential quickly engage their emotional approach to the investment game. Uncertainties, threats to success and comparable case studies that pick holes in potential success might make for a gut-turning moment, but these can be quickly cast off in favour of the more favourable forecast. Investors need to rely on reliable information in their personal forecasts. Too often, baffling campaigns have been making speeches in recent years. A fundamental principle of UnitedCrowd in therefore the protection of investors. Through our platform, we offer only those options that have withstood a comprehensive due diligence review. Investor also get reliable and understandable information to make informed decisions.
Any investor worth their salt needs to take such warnings seriously, working them into their overall assessment of an investment and its potential. One key area that requires attention is the future obstacles that await. When it comes to tokenization, one needs to look ahead and utilise all insights available to them to best forecast for likely (and less likely) challenges that could be encountered. Even an enticing prospect has question marks and uncertainties marring the overall appeal. With tokenization, one only needs to consider the delay in adoption of it to see the journey to success is always staggered with rocks in the road.
At a distance, even the most adept mind skilled in fiscal matters can have a hard time differentiating between tokenization and securitisation. Admittedly, there are some superficial similarities that cloud things somewhat.
To get a better idea of how the two stand as their own distinct entities, it’s worth taking a moment to reconsider the signatures of securitisation. In a securitisation context, you begin with the so-called originator. The originator maintains ownership of assets at this point and, after bringing said assets into one centralised pool, instructs the assets to be transferred to a third-party. In this instance, that party would be one of the legal entity variety. The results of such a transfer and the legal structure that is put in place means the assets in question remain sheltered from financial risks. These risk factors could include nefarious third-parties, as well as things like a bankruptcy proceeding against the originator.
The question of whether securitisation or tokenization should be used should not be taken lightly. UnitedCrowd offers its clients in-depth consulting support to identify the appropriate concept. Our portfolio includes both tokenization and securitisation. In this way we can implement optimally adapted concepts.
Financial entities who receive asset transfers from originators are almost exclusively a so-called special purpose vehicle (SPV). When it comes to securing assets, the SPV deploys some very savvy structuring. The various assets within the larger pool are arranged into numerous smaller pools. These pools are made up of assets that share similar characteristics and are potentially vulnerable to the same types of risks. Once risk levels have been determined and the overall asset pool portioned into specific tranches, securities can then be issued. These securities are made possible and upheld by the revenues produced by the assets in the original pool themselves.
Once the SPV has completed the detailed work outlined previously, it can then move to sell the securities created around underlying assets to interested investment parties. This fuels the essential cash flow of the structure, with revenues created from the sale of securities directed back toward the originator.
When it comes to defining tokenization as its own distinct concept, let’s consider the process of taking an asset and then converting it into something else. In this instance, the converted result is a digital token that lies within the blockchain. Looking at that, tokenization and securitisation still seem superficially similar. However, in digitising an asset, the opportunities programmability present begin to change things completely. With a tokenised asset, programmability can be used to streamline essential business requirements and largely eliminate the hindrances that arise in manual contexts. Smart contracts alone revolutionise the playing field, with innovative functionality that delivers automation of transactions, reliable calculation of asset prices, and much more besides. By using individually programmable smart contracts, we at UnitedCrowd make these benefits available to companies.
When discussing the concept of tokenization and the signature benefits it provides, it’s perhaps best to segment benefits into three distinct categories. The first these key areas are programmability, as outlined above. Along with this, tokenization has a raft of refinements in regards to liquidity. Finally, tokenization provides those in possession of any involved assets a sense of confidence and peace of mind, with digital tokens offering immutable proof of ownership as a standard.
Some never thought they’d see the day when digital currency would occupy a significant slice of the overall GDP. However, it’s highly likely that we’ll see such a situation within the next decade if predictions from the World Economic Form are anything to go by. In fact, if you accept their calculations and forecasts, as much as a tenth of the global GDP might be cryptographic in nature. The potential to unlock liquidity premiums, not to mention more investment from those opting for fractional ownership of assets, are just some of the reasons why experts are confident a crypto-heavy GDP is a given.
Let’s take a deeper look at the allure of fractional ownership. As a general concept beyond the cryptocurrency sphere, fractional ownership offers up an accessible and affordable way for would-be investors to start investing. When applied to cryptocurrency, all those key selling features come into play. Unlike conventional investments, there’s a significantly reduced-price tag attached to breaking past that first barrier and into actual investment. While it’s true an investment made in a fractional ownership context will ultimately make for a fractional return, this needn’t deter investors with less in the kitty to kick things off.
For one, a more accessible market with fractional ownership opportunities allows an investor to spread a modest pot of capital across a broader portfolio. A more diverse portfolio made up of many fractional ownership ventures means an investor can experience the diversity of the market without having to have laid down a significant amount at the possible detriment of their financial well-being. Many stokes in many fires doesn’t just give a better chance of experiencing some success while investing, it also means the fractional ownership entrepreneur has the benefit of a diverse investment portfolio. Those keen to hone their investment activity into a more professional vocation should look to such a varied portfolio as both a credential to capitalise on and a resource to reap in order to gain a more accurate impression of the overall market.
As liquidity increases, liquidity premiums come into play and provide a way for investors to unlock the value associated with their initial investment. At a certain point of liquidity, premiums starting at a rate of around 20 percent can become available. Depending on the exact market, this percentage rate can equate to some seriously significant figures. Tiny upswings in the overall sales price of a given investment can generate huge values for both issuers and resellers alike, with said values equating to billions of pounds in traditional fiat currency.
Thanks to the nature of blockchains, investors can take comfort and speculate with an added confidence. Why exactly? Well that’s down to the neat little detail that blockchains maintain a thorough and immutable record of all transfers. The owner associated with any given token is thereby also traced meticulously. There’s more to be thankful to the trace for than maintaining an oversight of ownership, too. Because of such measures, the whole ecosystem is less vulnerable to criminal third-parties looking to commit fraudulent activity. One key detail that defines this brilliant tokenization benefit is that it is impossible for a token to be sold more than once. As such, the holder of a token could never successfully sell a tokenised asset to two different buyers and profit by accepting a transfer from more than one distinct source.
In regards to safeguarding against fraudulent activity, the structure of this digital transaction tracing means that there’s zero opportunity for details of a transaction to be meddled with after it has been made. To put it another way, an investor can rest assured that once a transaction has been carried out, there’s no worry of a falsified account of the specifics rearing its head to cause trouble and claim assets.
When we talk about programmability in regards to tokenization, we’re talking about the various strands of business logic that can be introduced into play. Chief amongst these are smart contracts, which allow for automation to enter the fray and iron out the kinks caused by inefficient manual responsibilities and poor management.
In the financial sector, the lengthy process attached to settlements is notoriously frustrating. The reason for drawn out delays that can push back completion of settlements by months, and in some instances derail them entirely, is down to little else but the ineffective and time-consuming practice of documenting asset ownership transfer events prior to any actual transfer being carried out. With programmability, backwards business practice is done away with. Instead, business logic bright ideas like compliance can be worked into the tokens themselves, with the potential for a dramatic increase in proficiency of the asset ownership transfer process.
For the investor, programmability has the added perk of allowing the individual to be fully aware and confident in their respective rights. Anything classified as a secondary transaction that needs to be tracked can be, with nothing more than straightforward engagement with a third-party exchange required from the investor. In doing so, the investor can look forward to receiving distributions, while also getting familiar with additional rights as an active investor in the market. Another significant right investors can be entitled to is the right to vote on relevant outcomes via the blockchain. For an established authority with plenty of experience in investment, this allows them to bring their own insights and opinions into play, with the potential to steer conversation within the community, as well as helping shape the development of the crypto landscape.
We’ve looked at what sets tokenization aside from securitisation and defined the most significant strengths of tokenization that can bring the typical investor real benefit. Now it’s time to take the plunge into more problematic waters as we consider more complicated issues that can arise around tokenization and how significant a hurdle these challenges pose.
An accurate perspective on the scope of potential problems is a must when it comes to preparing for future challenges. We’ll kick off here at the beginning of the tokenization process. A good way of identifying all possible problems that might rear ugly heads is to deconstruct the tokenization process and considering all the individual elements required for any specific step. When we consider what is required for tokenization to occur in the first instance, we see that there are three core requirements that need to be fulfilled.
Firstly, any rights associated with an asset need to be able to be digitally stored on the blockchain. Being able to record immutable evidence of ownership to an asset on a token ensures that no other entity, including a regulatory body, in ownership of another token will be able to claim ownership rights on the asset the original token is tied to.
Expanding upon this first requirement, the second essential element dictates that rights can be transferred via blockchains. Furthermore, these transfers must be carried out in a wholly legal manner. The stress on legality is important here. With transfers carried out over the blockchain, situations may arise where one party wishes to transfer tokens to another that are not just representative of a value, but also confirm ownership rights. When legal best practice has been followed and all procedure conducted in adherence with regulatory requirement, there should be no obstacle to such transfer of tokens and ownership rights.
The third main requirement that must be realised is that it should be straightforward to take a token and then exchange it for quantifiable value. It’s not just about being free to cash in a token for fiat currency, but rather a more reliable way to attribute value to an associated asset that’s in keeping with wider market trends.
Beyond these key requirements, further legal considerations need to be considered. It’s of paramount importance that the individual asset that is being tokenised is considered carefully. Make sure there’s no uncertainty surrounding what the token represents, with clear indication as to whether the token is representative of ownership of the asset it is tied to, or is simply serving a proxy for an asset claim. Nobody looking to do well in the crypto markets can risk leaving a question mark hanging over queries like these.
When tackling tokenization topics, many stumble in making sense of the various rights implications associated with tokenised securities. You needn’t fret, however, as there’s only three major categories of rights to clue yourself up on.
Firstly, there’s claim rights. The small print here? Respective claims allow for only certain uses and levels of use of the tied asset. Anyone holding one of these types of tokens will receive remuneration from associated revenues, but any notion of ownership and equity is absent in day-to-day proceedings.
Ownership rights are a little more conventional. If you hold ownership rights, you own the equity associated with the asset. Regulatory restrictions allowing, you also maintain full freedoms and control of your asset. Depending on the type of underlying asset, the token holder can implement their ownership rights by making decisions directly affecting potential cash flow.
Lastly, there’s the slightly more complex category of governance rights. This structured model usually means a group of individuals are required to reach a consensus together before decisions relating to tokenised assets are finalised and actions taken.
As it stands, the future seems bright for tokenization, although the road forward is lined with potential pitfalls. Key challenges that tokenization faces going forward include the need for real standards to be put in place relating to tokenization, with a solid legal infrastructure in place to complement these standards.
Such standards would help establish more clear definitions when it comes to areas like incentives and how they relate to various types of rights. Establishment of standards for best practice could also iron out specifics on how an asset should be managed from initial issuance, right up until final withdrawal of accrued returns. Furthermore, security assurances put in place to uphold set standards could encourage more confidence in the market where tokenization is involved.
Despite the obstacles that tokenization faces, there has so far been plenty in the way of enthusiasm and action to overcome these. It’s also easy to see how easily tokenization could become adopted on a wider scale. Today, there are many private businesses and government agencies joining forces to design and develop suitable infrastructure for tokenization. As adoption becomes more widespread, compliance also becomes more crucial a consideration. Projects underway today are tackling issues with automated compliance and developing innovative solutions to overcome them. Although it’s a relatively new concept, tokenization has enjoyed the benefits of forward-thinking dialogue and active development to bolster it against the challenges of tomorrow and beyond.