In the last 20 years, the world has fundamentally changed. Technological advancements are often relied heavily upon by businesses. The more technologically forward the business is, the higher is the chance for success.
In this day and age, money, company shares, and even a parcel of real estate can already be represented by a token recorded on a blockchain. This process is called tokenisation. Tokenisation is a vital feature of blockchain technology that some claim that it can radically change the economy. Would tokenisation change the way people do business? First, have a quick rundown of what tokenisation is about, its uses, and its difference with tokenisation.
What Is Tokenisation?
Tokenisation is the process of transforming things to become digital assets. One way of putting it is assuming you have a farm worth about US$2 million, with barns filled with cows, horses, pigs, ducks, etc. Suddenly, you are in need of money. You can choose to sell the farm the traditional way – do the paperwork, list it, wait for an acceptable offer, close the deal, and encash your money. This is ideal and acceptable. In fact, it is widely practised. However, what if you only need less than US$ 2million? Would you still consider selling your property?
This is where tokenisation comes in. Just imagine printing about 1 million tokens with the symbol “HORSE” or “COW,” with each token worth 1% or 2% of your property. With tokens, you can place whatever value for as long as each token represents a particular share in your farm. In technical terms, you could develop an algorithm which can be interpreted as a smart contract within the blockchain. This particular algorithm will define all the features of your future token including its name, denominations, value, and quantity, among others.
To sell these tokens, these tokens must be within a platform that supports smart contracts. These platforms will be used along with a wallet address to keep the tokens in circulation. If these tokens use the Ethereum wallet address, they can be called ERC-20 tokens, which means they use the Ethereum blockchain. Since these tokens are now in the market, their value can rise or fall depending on the demand.
In plain terms, the farm was represented digitally via the blockchain. The farm is now a tokenised asset.
What Are The Other Uses of Tokenisation?
A token on a blockchain does not only represent a digital asset, it can also be a real-world asset. However, tokenisation can have other uses. Different kinds of tokens have different uses. These tokens can be categorized as:
Payment Tokens: These tokens, as its name implies, can be used as a form of payment over the internet. It can be a bitcoin or other cryptocurrencies.
Utility Tokens: These tokens allows owners to have access to products or services of a blockchain platform or blockchain-enabled application. These tokens are similar to arcade tokens in which holders are allowed to operate gaming machines. Much like arcade tokens, utility tokens can only be used within the establishment or blockchain application.
Asset-Backed Tokens: These tokens are the ones that represent digital or real-world assets. They are the representation of ownership of personal property, real estate, and business equity.
Tokenizing Real-World Assets
In an ideal set-up, many would prefer to have real-world assets guaranteed by blockchain technology. However, several issues must first be tackled before blockchain can successfully tokenise real-world assets.
The main issue here is that no country yet exists that has a solid cryptocurrency regulation. Investors have too much to lose if these are unregulated. For instance, what would happen to the investors should the company decide to sell the tokenised property. Note that investors only have tokens, which do not represent any legal rights on the property. The law cannot protect them.
Another issue is centralisation. In blockchain, smart contracts are made to build a trustless environment. This is easy for tokenising digital assets. With real-world assets, this is difficult to achieve.
Still, it is not far from happening. Regulatory frameworks, once in place, can already pave the way for tokenisation to become widely recognized. More recently, EY has initiated tokenising eggs, chickens, and wine through its blockchain platform.
Notably, lawmakers and regulators are now considering dealing with some of the issues commonly associated with blockchains and its digital assets. The Securities and Exchange Commission has already begun with defining tokens which need to be regulated.
Tokenisation vs Securitization
The main difference of tokenisation from securitization is it is on a blockchain. Again, a token is a mere representation of an asset or utility.
Securitization, on the other hand, is a process in which assets with predictable cash flows and comparable features are combined into interest-bearing securities with marketable investment features.
Is Tokenisation Best for Your Business?
It could be. The proliferation of businesses using tokens can significantly uplift the economy. An EU form report claims that tokenised physical objects can enhance trust. Blockchain is crucial in the digital transformation by enhancing trust and providing an avenue for identification and tokenisation of physical objects. The report furthers that blockchain-based smart contracts also provide an imperviable computational environment and automatic execution of financial decisions via the use of trusted cryptocurrencies.
The use of blockchain and the Internet of Things (IoT) can provide businesses with improved supply chain management and increased trust that proposes a sharing economy to further grow. It also provides monetization, automatization, and identity management. When combined with Artificial Intelligence, it can assure data authenticity and audit smart contracts.
Monetizing through Tokenisation
Looking ahead, the DLT or Decentralized Ledger Technology including blockchain will be much more than merely tokenising assets from various classes. It can help investors to form a new super asset class of Influence Capital. The blockchain can be used to tokenise influence, useful for building quantifiable capital assets where investors can profit.
All in all, tokenisation is disrupting the economy by changing the way people do business. It offers both business owners and buyers more leeway on how much they are willing to invest.