From art to buildings, the way we invest in assets could be about to fundamentally change with the arrival of tokenization – The Token market. The act of tokenizing assets threatens to disrupt many industries, in particular the financial industry, and those who are not prepared risk being left behind.
What is tokenization?
The tokenization of assets refers to the process of issuing a blockchain token (specifically, a security token) that digitally represents a real tradable asset—in many ways similar to the traditional process of securitization, with a modern twist. These security tokens are created through a type of initial coin offering (ICO) sometimes referred to as a security token offering (STO) to distinguish it from other types of ICOs, which can produce different tokens such as equity, utility, or payment tokens. An STO can be used to create a digital representation—a security token—of an asset, meaning that a security token could represent a share in a company, ownership of a piece of real estate, or participation in an investment fund. These security tokens can then be traded on a secondary market.
A new “token economy” offers the potential for a more efficient and fair financial world by greatly reducing the friction involved in the creation, buying, and selling of securities – token market. We see four key advantages that tokenization provides for both investors and sellers:
• Greater liquidity
By tokenizing assets—especially private securities or typically illiquid assets such as fine art—these tokens can be then be traded on a secondary market of the issuer’s choice. This access to a broader base of traders increases the liquidity, benefiting investors who consequently have more freedom and sellers because the tokens benefit from the “liquidity premium,” thereby capturing greater value from the underlying asset.
• Faster and cheaper transactions – token market
Because the transaction of tokens is completed with smart contracts (software algorithms integrated into a blockchain with trigger actions based on pre-defined parameters), certain parts of the exchange process are automated. This automation can reduce the administrative burden involved in buying and selling, with fewer intermediaries needed, leading to not only faster deal execution, but also lower transaction fees.
• More transparency
A security token is capable of having the token-holder’s rights and legal responsibilities embedded directly
onto the token, along with an immutable record of ownership.
These characteristics promise to add transparency to transactions, allowing you to know with whom you are dealing, what your and their rights are, and who has previously owned this token.
• More accessible
Importantly, tokenization could open up investment in assets to a much wider audience thanks to reduced minimum investment amounts and periods. Tokens are highly divisible, meaning investors can purchase tokens that represent incredibly small percentages of the underlying assets. If each order is cheaper and easier to process, it will open the way for a significant reduction of minimum investment amounts. Moreover, the higher liquidity of security tokens could also reduce minimum investment periods since investors can exchange their tokens on the secondary markets, which are theoretically global and 24/7 (subject to regulatory limits).
These advantages most clearly apply to asset classes that are typically considered illiquid and can benefit from improved transparency, efficiencies, and lower minimum investments. Two areas are particularly interesting when considering the possibilities of tokenization: real estate and fine art. Rather than requiring very large investments, or tying up your money for extended periods with your investment split across a number of other assets in the fund, tokenization could permit you to invest €50 in the piece of art or specific building in which you are interested, and then easily sell the token at your discretion. This ability to freely choose where you invest will open up a new era of much greater personalization and customization in investment—an area that is increasingly relevant as investors now look beyond just returns and pay much closer attention to where their investments are made.
There are already a number of companies helping to build the infrastructure to support the growth of the token economy. Companies like CoinDeal is always thinking about their users first. The popularity of this exchange is growing very fast, which is confirmed by the number of more than 350,000 satisfied users of the exchange, gathered in less than 2 years. For now on, the exchange is opening its platform for users from the United States of America. The platform ensures that no one else will provide such high-quality services to the Americans as they do.
CoinDeal is available in the USA now with its own CDL Token market – trading on 13 crypto markets in 13 States announced! – CoinDeal in the USA – milestones become a reality.
We foresee that tokenization could make the financial industry more accessible, cheaper, faster and easier, thereby possibly unlocking trillions of euros in currently illiquid assets, and vastly increasing the volumes of trades.
Some obstacles need to be overcome, however, if tokenization and the broader token economy are to take off. A big problem revolves around regulatory alignment, especially considering the fact that blockchain-based platforms are de facto decentralized. Security regulations are typically technology agnostic, meaning that security tokens, depending on their exact features, can fall under the full scope of relevant security regulations, which can vary significantly from jurisdiction to jurisdiction. This is true not just for the creation and initial sale of the tokens, but also for trading them on secondary markets. Consequently, many of the advantages of tokenization are undermined if regulations prevent the free and international exchange of security tokens.
What is needed are compliant methods of creating and exchanging tokens in a domestic and, ideally, international scope. International regulatory alignment is an unlikely milestone in the near future, but adding clarity to the regulatory environment for security tokens and facilitating compliant involvement in the token economy is a possible and necessary path forward if the opportunities are to be realized.
Some companies are already helping to solve the compliance issue. Harbor, for example, aims at embedding compliance at the token level, thereby checking if a trade is compliant, taking into account who the buyer and seller are, and where the trade occurs. If it is compliant, the trade can happen on any token exchange. More development in this area to facilitate the easier creation and sale of tokens is needed to move forward.
Additionally, regulations specific to tokens or, at the minimum, clear guidance from regulators would be welcome, since there is often uncertainty as to how a security token should be considered within the law. While it may seem counterintuitive to encourage regulation of a technology with decentralization and independence as some of its core characteristics, it is important to consider the risks of not providing a legal and safe framework in which the technology can thrive. A lack of scrutiny can allow scams and open the door to hacking—something particularly relevant for a relatively nascent technology. Scams and hacks not only harm investors and the broader economy, but enough of them could discourage investors and cripple the token economy completely.
There has been a considerably uneven approach so far to regulating and accepting tokenization, but there are signs that
the traditional market infrastructure is adapting to the token economy. For example, both the US SEC and EU’s ESMA have made comments, albeit generic, in this area. Meanwhile, Malta and Switzerland have made more progressive plans to accommodate new marketplaces for tokenized securities1. Having a clear regulatory framework is of vital importance for the safe development of the token economy. In the meantime, a set of common good practices and rules would be a good foundation.
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