Asset tokenization enhances financial development
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The global tokenization market size is expected to grow from $ 1.9 billion invested in 2020 to $ 4.8 billion by 2025, at a CAGR of 19.5% over the forecast period (Markets & Markets).
The main factors fueling the tokenization market include the growing need to comply with regulations and continuously improve the customer experience, as well as the benefits that Blockchain technology offers in the face of fraud prevention, as well as the permanent search to optimize the cost efficiency ratio.
Asset tokenization refers to the process of issuing a token within a blockchain. This token digitally represents a real negotiable asset, such as gold, oil, cattle, stocks, real estate and everything that, in short, has an exchange value.
What are its benefits of tokenization?
A digitized economy offers the potential to achieve a more efficient and fairer financial system by greatly reducing the friction involved in creating, buying and selling securities. We see four key benefits that tokenization offers for both investors and sellers:
Increased liquidity: By tokenizing assets, especially private securities or typically illiquid assets such as fine arts, these tokens can be traded at any time immediately from anywhere and at any time.
Faster and cheaper transactions: The token transaction is completed with smart contracts (software algorithms embedded in a blockchain with activation actions based on predefined parameters). This automation reduces the administrative burden involved in buying and selling, with fewer intermediaries required, leading not only to faster execution of deals, but also lower transaction fees.
Greater transparency: A token is able to have the legal rights and responsibilities of its holder embedded directly in its token, along with an immutable property record. These features provide transparency to transactions. And this makes it possible to know who you are dealing with, what their rights are and who has previously owned this token.
Greater accessibility: Tokenization could open up investment in assets to a much wider audience thanks to reduced minimum investment amounts and periods. The tokens are highly divisible, which means that investors can buy tokens that represent incredibly small percentages of the underlying assets. For example, a tiny fraction of a real property or a share of a company can be represented in a token.
Likewise, the greater liquidity of the tokens could also reduce the times, since investors can exchange their tokens in the secondary markets, which are theoretically global and available 24 hours a day, 7 days a week.
These advantages apply most clearly to asset classes that are normally considered illiquid, such as real estate or a work of art, and can benefit from greater transparency, efficiency and lower minimum investments, but as we said, they are extensive to almost any area, mainly financial.
According to Deloitte (2021, March) "tokenization could make the financial industry more accessible, cheaper, faster and easier, potentially unlocking trillions of dollars in currently illiquid assets and vastly increasing trading volumes" .
The greater liquidity of the tokens could also reduce the times / Image: Depositphotos.com
What should financial institutions take into account when adopting blockchain solutions
The token-based economy represents a remarkable power shift, where much of this shifts from centralized fiduciary agents to the individual. Cryptography replaces external intermediaries as guardians of trust, and participants in a blockchain run complex algorithms to certify the integrity of the transaction ledger.
Given this, financial institutions must choose where to play in the value chain. For example, they could choose to advise issuers on how to structure their token or they could act as safe custodians of the tokenized asset (art, real estate, luxury car, etc.). They could also leverage their experience as custodian banks or paying agents to create lifecycle event transactions (an event that results in a change in derivative data previously reported to a designated trading repository with respect to a transaction) in the distributed ledger or, in a more advanced model, implement lifecycle processing in smart contracts and deploy them on a public blockchain platform. At the other end of the value chain, they could offer services to maintain customer accounts in cryptocurrencies and tokens or prefer to act as central distributors and facilitate access to their customers to transact on various tokenization platforms or token exchanges.
Thus, depending on the business model that financial institutions adopt, they will implement different operating systems. They will have to choose, for example, with which platforms they will work or collaborate. This will depend on the regulation that they must follow, the type of products or services that they will offer to their clients and other factors more related to the platform itself, such as its product strategy, and its potential in terms of the type and size of the community. of users.
Institutions must take into account an infrastructure that provides technical and economic solutions to their business model and that, in turn, consider the effect it will have on subsequent systems and developments. In addition to this, it is necessary to foresee the integration of the new platform to the legacy systems, so that no information is lost.
To conclude, tokenization makes it possible to promote the development of a more democratic, efficient and vast financial system than anything we have seen. Tokenization is already a reality.
New players are rapidly building their own infrastructure, while traditional market infrastructures are also showing signs of paving the way for mainstream adoption.
In sum, only institutions that engage with technology, plan for the future, and adapt to realities will prosper.