Many of us have dreamed of owning a famous painting or a fabulous sports car but for most the cost of doing so is prohibitive.
However, all that is changing with asset tokenisation (or tokenization if you wish!) – the ability to own a small piece of said painting or car in an easily tradable, liquid form.
This fractionalisation of high-end real-world assets is creating an entirely new investment asset class which is open to everyday consumers.
What is asset tokenisation?
Asset tokenisation is a way of converting physical assets into digital tokens. These tokens represent the underlying asset and can be freely traded on the blockchain network.
The tokenised assets can be pretty much anything but are often valuable items that would otherwise be beyond the reach of the average investor.
Investors can buy small amounts of the tokenised items to take advantage of any price appreciation they may enjoy. Of course, the assets can go down in value as well!
What are the benefits of asset tokenisation?
A Picasso or rare Ferrari might be out of most people’s reach when it comes to investing, but not if these prized objects are tokenised.
Enabling a far greater section of society to invest in high end art and collectables (along with practically anything else) with fractional ownership could:
- Democratize investment opportunities in high-end objects by lowering the barrier to entry.
- Create a highly liquid market for these investments, making them easier to trade.
- Provide greater access to previously illiquid assets which could benefit the owners.
Looking at these advantages, which I’ll expand on later on, it becomes clear why asset tokenisation has the potential to revolutionise the way people think about investing.
It also brings a greater degree of transparency and security to trading as transactions are stored on a blockchain which is decentralised, immutable and viewable by anyone.
The Importance of Asset Tokenisation
As I’ve already mentioned, asset tokenisation provides a range of benefits for both the owners of the asset and investors.
Here, I’ll look at these benefits in more detail:
1. Asset tokenisation and increased liquidity.
Tokenisation of assets enables fractional ownership, making it easier for investors to gain access to high-value assets and trade them, as they can purchase small portions of the item.
This increased liquidity helps draw in a wider range of investors, which can ultimately help to increase the value of the asset.
2. Lower Costs
Utilising the power of blockchain technology can reduce transaction costs as it eliminates the need for intermediaries such as brokers and custodians.
This can help reduce transaction fees and other costs associated with buying and selling assets.
Again, smaller investors will benefit as they may have been priced out of the market in the past.
3. Improved Transparency
The use of blockchain technology means that all transactions involving tokenised assets will be entered onto a tamper-proof and transparent public ledger.
This should give investors greater confidence in the accuracy and integrity of the data and reduce fraud.
It also allows for real-time updates on the performance of the asset, which can help investors to make more informed investment decisions.
Types of asset tokenisation
Asset tokenisation can be used to convert pretty much any asset into blockchain-based tokens which can then be freely traded.
I’ve already mentioned art, cars, and property, but there are many other utilities for the technology as well, such as converting the equity of a company into tokens.
As long as there is agreement between all parties, pretty much any object or asset can be subject to asset tokenisation.
Challenges surrounding asset tokenisation
As with any new technology, there are several challenges that come with asset tokenisation.
These include:
1. Regulatory challenges
Financial products are subject to a raft of regulatory compliance that needs to be navigated before they can enter the market.
The regulatory landscape surrounding tokenised assets is constantly evolving meaning there is some uncertainty about the long-term future of fractionalised assets.
2. Technical Challenges
Another challenge of asset tokenisation is the technical complexity surrounding use of blockchain technology.
The security of tokenised assets is paramount which is why the technical implementation and maintenance is still a developing technology.
3. Liquidity challenges
At the moment, liquidity is still a significant challenge for tokenised assets as they are currently traded on decentralised exchanges (DEXs), which have lower trading volumes than traditional exchanges.
Centralised exchanges (CEXs) and Decentralised Finance (DeFi) platforms will need to create an environment to enable tokenised trades to take place.
4. Valuation challenges
Tokenised assets are difficult to value because they do not have a track record of trading in the market.
5. Custody issues
Custodians are responsible for holding and safeguarding traditional assets on behalf of investors.
However, custody of tokenised assets is more complex than traditional assets because they are stored on a blockchain and require specialised custody solutions.
6. Legal ownership
There are various legal hurdles to overcome with asset tokenisation as well.
The legal ownership of the asset may not be clear in some cases, ie if an asset is jointly owned.
Also, asset tokenisation utilises smart contracts, the legal enforceability of which is a matter of debate.
7. Data Protection
The tokens created when an asset is tokenised contain personal information about the owners of the tokens.
Therefore, data protection is a critical legal issue in asset tokenisation. The General Data Protection Regulation (GDPR) requires that personal data be processed lawfully, fairly, and transparently.
The future of asset tokenisation
Asset tokenisation is a rapidly growing trend in the financial industry, and its future looks bright.
As more companies and investors recognise the benefits of tokenisation, I’d expect it to become a mainstream investment option in the future.
As the technology continues to evolve, it’s likely we’ll see more innovative use cases emerge, such as hybrid investment products containing elements from different markets and sectors.
This would be great for diversifying a portfolio and would open up a whole new area of investing to the average person.
- In 2023 HSBC became the first bank in the world to offer tokenised gold by tokenising ownership of the precious metal held in its London vault using distributed ledger technology.
