Tokenization of Real-World Assets: A Game-Changer in Digital Finance

On April 14th, according to a research report by Bank of America (BAC) cited by CoinDesk, the pace of tokenization of real-world assets is accelerating. Last month, the value of the tokenized gold market exceeded $1 billion.

Bank of America: Tokenized gold market value exceeded $1 billion in February

There has been a rapid acceleration in the pace of tokenization of real-world assets, leading to the creation of a new market worth over $1 billion as reported by Bank of America (BAC) citing CoinDesk on April 14th. This article will delve deeper into tokenization, its workings, benefits, and the potential it has to revolutionize the traditional finance sector.

What is Tokenization?

Tokenization involves converting real-world assets such as stocks, bonds, gold, real estate, and other assets into digital tokens on a blockchain. These tokens represent ownership of the physical asset and can be traded, bought or sold much like stocks. Tokenization provides investors access to markets that were previously hard to invest or trade-in, making assets tradable round the clock and lowering transaction costs.

Working of Tokenization

Tokenization involves three parties. First, there is the issuer who issues tokens on a blockchain. Second, there is a custodian who holds the physical asset and validates the issuance of tokens. Finally, there are the investors who purchase the tokens representing ownership of the physical asset. The tokens are backed by the value of the underlying asset and the custodian ensures that every token issued corresponds to a physical asset. Investors can sell their tokens on exchanges that support them or can use them as collateral to avail loans.

Benefits of Tokenization

Tokenization has numerous advantages that make it an attractive investment option for both retail and institutional investors. Firstly, tokenization provides liquidity for traditionally illiquid assets such as real estate, art, and other assets. Tokenization also enables fractional ownership, meaning investors can buy and sell a portion of the asset that was previously unavailable. Secondly, tokenization eliminates intermediaries such as brokers, brokers, and banks, reducing transaction costs and increasing the accessibility of the assets. Thirdly, tokenization ensures transparency and reduces the risk of fraudulent practices since transactions are recorded on a blockchain and don’t require intermediaries. Lastly, tokenization makes it possible for retail investors to access high-value assets, which were previously beyond their reach.

Tokenization in Practice

The value of the tokenized gold market exceeded over $1 billion in March 2021, as reported by Bank of America citing CoinDesk. Several companies, such as Paxos and Digix, have already launched tokenized gold products. Additionally, it’s expected that more assets such as real estate, art, and even intellectual property will be tokenized in the future.

Potential of Tokenization

Tokenization provides investors with more available options of previously illiquid assets in the market. In addition, tokenization removes intermediaries and reduces transaction costs, ultimately making investments affordable and accessible to the public while increasing transparency, accountability, and protection. Digital securities are growing in popularity and have the potential to become more common as the market evolves.

Conclusion

Tokenization is revolutionizing traditional finance by providing an alternative investment option to retail and institutional investors, allowing access to otherwise illiquid assets. Tokenization offers multiple benefits, including fractional ownership, transparency, and the elimination of intermediaries, all while reducing transaction costs. As digital assets continue to increase in popularity, it will be interesting to see how technology will further change the financial market.

FAQs

1. Is tokenization safe?
Tokenization is secure since all transactions are recorded on a blockchain, which means that it’s transparent, fraud-resistant, and protected from hacking.
2. Can retail investors invest in tokenized assets?
Yes, retail investors can invest in tokenized assets. Tokenization has enabled retail investors to access high-value assets at a lower cost.
3. What are the future possibilities of tokenization?
Tokenization has potential applications in various fields, such as real estate, art, and even intellectual property. It is expected that tokenization will continue to grow while revolutionizing traditional finance.