As the popularity of blockchain technology increases, the concept of converting real-world assets into digital tokens is gaining more recognition and exploration. Investors and businesses are starting to realize the benefits of tokenization, such as increased transparency, greater access, and the elimination of intermediaries. However, asset tokenization should not be taken lightly and should be approached cautiously! Given the recent buzz around the tokenization of securities and stocks, now is the time to learn more about it.
A large number of companies supporting tokenization were joined this year by the CEO of BlackRock fund, who says that this is the future of financial markets.
What is asset tokenization?
Asset tokenization is an emerging technology that is changing our view of traditional investments.
By issuing tokens that are linked to assets, individuals can divide their investments into fractions, allowing them to buy and sell partial shares of real-world assets such as stocks, bonds, or real estate.
Tokenization is the process of exchanging sensitive data for non-sensitive data, called “tokens,” which can be used in a data set or internal system.
The process of tokenization begins with the digitalization of an asset, which is the process of converting it into a digital form. Once the asset is digitalized, it is divided into tokens and stored in a blockchain, allowing for quick and secure buying and selling. These tokens can then be used to represent partial shares of the underlying asset and can be exchanged on digital exchanges. This technology offers many advantages over traditional investments.
Image: Tokenization of assets from the real world to the digital world
By “tokenizing” assets, buyers and sellers can gain access to liquidity, faster settlement times, and reduced transaction costs. In addition, tokenization can increase the global accessibility of certain investments, allowing more people to participate in markets. Asset tokenization is revolutionizing the world of finance and creating a new world of opportunities for investors and entrepreneurs. With the rise of blockchain technology, we can expect to see more and more assets being tokenized in the near future.
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What is a "token"?
Each issued token can be thought of as a poker chip that has no value on its own but represents more valuable data.
- Tokens are useful only because they have been assigned value, similar to poker chips that must be exchanged for their representative value.
It is important to note that tokens cannot be used as money, so even in the case of sensitive information on tokens, we reduce the risk of theft.
Tokenization is the process that companies use today to exchange sensitive data, such as credit card information, medical data, or social security numbers, with tokens. This allows organizations to use the data for business purposes without having to store it internally and risk any security issues.
Using tokenization to increase system security
Tokenization has many advantages, one of which is that it makes it difficult for system attackers or hackers to steal sensitive information. Tokens cannot be read without the token vault, which means that stolen data would be useless to the attacker. As a result, tokenization has fewer failure points compared to other data masking techniques.
This approach allows for a different way of trading assets such as stocks, bonds, real estate, or even alternative assets such as land, art, or even wine, where transfers will be publicly visible on the blockchain.
Tokenization as an industry standard
The Payment Card Industry Data Security Standard (PCI DSS) requires all merchants handling credit card data to store the data outside their point of sale (POS) systems. The PCI SSC (Payment Card Industry Security Standards Council) has issued guidelines on the use of tokenization as a working and cost-effective way to comply with PCI DSS standards.
It has been proven that tokenization is a better choice than encryption, as encryption configurations are extremely expensive and time-consuming.
How does payment with tokenization work?
You swipe your credit card at the POS device, which passes the PAN (account number) to the tokenization system. This system creates a random string of characters to replace the PAN or obtains a token linked to it if it has already been created. The token is then returned to the POS terminal and used to identify the customer’s credit card in the system.
Image: Example of payment using tokenized data
Examples of tokenization and its potential
Tokenization eliminates intermediaries that are usually associated with post-trade processing, leading to cost savings. In addition, consistent data flow with compliance to certain regulations provides increased transparency. Tokenization also opens up opportunities for fractionalization of assets and increased access to new markets.
Tokenization could make previously inaccessible classes of assets, such as a $110 million Jean-Michel Basquiat painting from 2017, available to a wider group of investors. The owner of the artwork could allow the purchase of partial ownership shares and divide the ownership among multiple people. This would give smaller investors the opportunity to diversify their portfolios into assets that they previously could not afford.
Tokenization of real estate
Tokenization of real estate involves dividing the real estate asset into digital tokens that have the same rights and obligations as the original asset. It works in a similar way to “crowdfunding” or mass financing, where the asset is divided into smaller segments using a smart contract. Whoever buys a token owns a share of the property and is entitled to the underlying asset and the profit and loss associated with it. For example, if someone has a property worth €100,000 and cannot find an investor to buy the entire amount, they may choose to tokenize their asset into tokens worth €1,000.
Photo: Tokenization of real estate opens doors to new customers
As regulations and the overall regulatory framework become more accommodating to cryptocurrencies, the tokenization of real estate, whether commercial or residential, is likely to accelerate. This will lead to a much simpler process for all parties involved, as the technology and clear legal requirements become more defined and thus more attractive.
Tokenization platforms
A platform for tokenization of assets, also known as tokenization as a service (TaaS), is a system for converting real-world assets into digital tokens. This technology allows larger investors and financial institutions to track and manage their investments without the need for intermediaries. In the picture below, you can see some of the main companies that already offer tokenization of assets.
Companies that handle confidential information and data will eventually have to start using tokenization to reduce potential risks and protect their data as well as their customers’ data. It is already being used by various companies, from small e-commerce stores to large international corporations offering mobile solutions, customer service centers, packet processing, and more.
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