Tokenization enables the conversion of all the sensitive information of a tangible asset into a blockchain token, which is the digital representation of that asset. Experts predict that in under ten years, asset tokenization will exceed USD 16 trillion and account for 10% of global GDP.
Despite its seemingly complex nature, tokenization is in fact a straightforward process. And most importantly, it is set to change the world and the way we interact with the buying and selling of goods. Tokenization is the process of converting a physical or intangible asset into a digital token through blockchain or a similar platform. And a token is a digital representation of an asset or right that can be securely transferred, stored, and managed within a digital environment. For instance, real estate can be tokenized, thereby allowing its ownership to be shared on the network, enabling multiple investors to hold stakes and receive a portion of the rental income or benefit from appreciation upon sale.
In less than a decade, asset tokenization is expected to exceed 16 trillion dollars and will represent 10% of global GDP by 2030. This is, at least, the projection made by the consulting firm Boston Consulting Group (BCG). The reasons can be attributed to the time and cost savings afforded by blockchain technology, which would impact bank transfers, stocks, and investment funds. The World Economic Forum anticipates that this 10% threshold will not be reached in 2030, but rather earlier, by 2027.
Practical applications
An example of how tokenization can affect the world of real assets can be found in the case of Swiss bank Sygnum, which transferred the legal ownership rights of the 1964 Pablo Picasso painting Fillette au béret to the blockchain. The digital asset was divided into 4,000 tokens that over 50 investors acquired at a price of $1,040 each. This instance illustrates the tokenization of the use of intellectual property rights.
Earlier this year, Win Investments began operations, a venture founded in Spain by a group of young Argentinians aiming to "democratize the football industry" through the digitalization of player training contracts from various clubs. Thus, anyone can invest in a footballer's career by purchasing tokens. Essentially, these investors become shareholders, earning profits when the athlete is transferred to another club. During the initial pre-sale, 47,000 tokens were marketed at a total value of 47,000 euros.
In finance, the tokenization of stocks allows investors to buy and sell fractions of a share, not just the entire share, enabling a broader range of participants and providing companies with the opportunity to raise more capital —resulting in a more diverse investment landscape.
As a result, the tokenization of both listed and unlisted stocks is expected to surge from nearly zero to €1.5 trillion within the next seven years. Similarly, investment funds will make a leap from zero to €0.4 trillion, following predictions by the Boston Consulting Group. Particularly noteworthy among financial assets is the increase in tokenized bonds, a segment typically more conservative and less inclined towards change.
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Real estate tokenization
Tokenizing real estate has emerged as a distinctive method of investing in property. This approach entails multiple investors purchasing a property via tokens, with each receiving subsequent yields from the property's sale or rent. Essentially, ownership rights of the property are 'fractionalized' among the token holders.
The reasons behind tokenization's surge
The statistics and projections clearly indicate tokenization's burgeoning popularity, but the underlying reasons for this trend may still need to be spelled out. The primary drivers are savings in both time and costs. According to Invesco’s latest report, transactions on the blockchain —tokenized assets— are completed in a matter of seconds, while the current Swift system takes up to three days.
Here are some advantages of tokenization:
- It provides greater liquidity for any asset since it can be more easily bought and sold.
- Token transactions are recorded on a decentralized blockchain, enhancing transparency and trust in the system.
- Digital tokens offer enhanced security compared to physical assets as they are stored on a secure and encrypted blockchain.
- Tokenization obviates the need for storing and transporting physical assets, streamlining their custody while reducing associated costs and risks.
