What is tokenization and why is it important for the future of finance? Tokenization is the process of converting real-world assets, such as stocks, bonds, real estate, art, or commodities, into digital tokens that can be stored, transferred, and traded on a blockchain.
Tokenization has the potential to democratize access to capital markets, reduce transaction costs and intermediaries, enhance liquidity and transparency, and create new business models and opportunities.
Tokenization is the process of converting real-world assets, such as stocks, bonds, real estate, art, or commodities, into digital tokens that can be stored, transferred, and traded on a blockchain. Tokenization has the potential to revolutionize the financial industry by creating new markets, increasing liquidity, reducing costs, and enhancing transparency.
Tekedia Mini-MBA edition 16 (Feb 10 – May 3, 2025) opens registrations; register today for early bird discounts.
Tekedia AI in Business Masterclass opens registrations here.
Join Tekedia Capital Syndicate and invest in Africa’s finest startups here.
Tokenization can be seen as a form of fractional ownership, where each token represents a share of the underlying asset. For example, a tokenized property can be divided into 100 tokens, each representing 1% of the ownership. This allows investors to buy and sell tokens without having to deal with the complexities and inefficiencies of traditional asset management.
Tokenization also enables the creation of new types of assets that were previously impossible or impractical to trade. For example, tokenization can allow artists to sell shares of their future royalties, or entrepreneurs to raise funds by selling tokens that represent a stake in their projects. Tokenization can also enable the creation of synthetic assets, which are combinations of different tokens that mimic the behavior of other assets.
Tokenization is enabled by smart contracts, which are self-executing agreements that run on a blockchain. Smart contracts can define the rules and logic of token creation, distribution, and exchange. Smart contracts can also automate processes such as compliance, verification, and settlement, reducing the need for intermediaries and increasing trust and efficiency.
Tokenization is not without challenges, however. Tokenization requires a robust legal and regulatory framework that can address issues such as ownership rights, taxation, governance, and dispute resolution. Tokenization also requires interoperability between different blockchains and platforms that can support the exchange of tokens. Tokenization also poses technical and security risks, such as hacking, fraud, or human error.
Tokenization is still in its early stages of development, but it has already attracted significant interest and investment from various sectors and regions. Tokenization has the potential to transform the financial industry by creating new opportunities for innovation, inclusion, and growth.
Benefits of tokenization
Tokenization offers several advantages over traditional methods of asset ownership and exchange. Some of the main benefits are: Fractional ownership: Tokenization allows for the division of large and expensive assets into smaller and more affordable units, enabling more people to participate in the ownership and benefit from the returns.
For example, a tokenized real estate property can be split into 1000 tokens, each representing 0.1% of the property value, and sold to different investors who can then trade their tokens on a secondary market.
Liquidity: Tokenization increases the liquidity of illiquid assets by making them more accessible and tradable on a global scale. Liquidity refers to the ease and speed with which an asset can be converted into cash without affecting its price.
Illiquid assets, such as art or collectibles, typically have high transaction costs, long settlement times, and limited buyers and sellers. By tokenizing these assets, they can be exchanged more efficiently and at lower costs on a blockchain-based platform that connects buyers and sellers across borders and time zones.
Transparency: Tokenization enhances the transparency and security of asset transactions by leveraging the features of blockchain technology. Blockchain is a distributed ledger that records and verifies every transaction in a tamper-proof and immutable way.
Blockchain also enables smart contracts, which are self-executing agreements that encode the terms and conditions of a transaction and execute them automatically when certain conditions are met. By using blockchain and smart contracts, tokenization can reduce the need for intermediaries, such as brokers, custodians, or escrow agents, who often charge high fees and introduce risks and delays in the process.
Innovation: Tokenization creates new possibilities for asset creation, valuation, and exchange. Tokenization can enable the creation of new types of assets that were not possible or feasible before, such as social impact tokens, digital art tokens, or fan engagement tokens.
Tokenization can also enable new ways of valuing assets based on their utility, scarcity, or popularity, rather than their intrinsic or market value. For example, a tokenized artwork can have a dynamic price that changes according to the number of views or likes it receives on a platform. Tokenization can also enable new ways of exchanging assets, such as peer-to-peer trading, crowdfunding, or lending.
Challenges of tokenization
Despite its potential benefits, tokenization also faces several challenges and barriers that need to be overcome before it can achieve widespread adoption. Some of the main challenges are:
Regulation: Tokenization involves the creation and distribution of digital securities that are subject to complex and varying legal and regulatory frameworks across different jurisdictions. Token issuers and platforms need to comply with the rules and regulations regarding securities offering, disclosure, registration, taxation, anti-money laundering, consumer protection, and data privacy.
However, many of these rules and regulations are not designed for or adapted to the characteristics and features of tokenized assets and blockchain technology. Therefore, there is a need for more clarity, consistency, and coordination among regulators and policymakers to create a conducive environment for tokenization.