Tokenization – Myth or Reality?

December 30, 2020

A quick recap on where it all started. 

In this present day, it really takes just one click to purchase a Christmas tree or even to order your mince pies for this festive season, but the opposite is true for purchases like a house or when you take out a car. This is due to the tiresome necessities to be done, such as waiting for documents or settlement offers – a one-click miracle for such transactions is still farfetched. Assets like real-estate and fine arts are still challenging to transfer and often involve both buyers and sellers to go through heaps of paperwork and tedious practices. It will not be long until this one-click miracle becomes your everyday reality by presenting physical assets in the form of digital tokens on a distributed ledger (or blockchain). It is possible to set free the value of real-world assets, and to be able to exchange them in real-time will no longer be something of an imagination. 

International payments still cause headaches. There are still obstacles associated with these types of transactions, such as time delay, hidden fees, etc. These can all be concluded as one word – inefficiency. Despite being the vertebra of global commerce, financial infrastructure has a long bumpy road to restructuring before real-time payments can be made. Whether it is payments or other asset classes, blockchain offers the ability to move real-world assets on a secure and traceable digital platform whilst continuing to preserve all aspects of the asset. The movie “The Big Short” presents the obscurity of the financial instruments that can be exchanged from one form to another, which became one of the biggest historical events in the financial world – the 2008 financial crisis which is commonly known as the Lehman Crisis, which paved the unfortunate pathway to the Great Recession. Despite the name, Lehman Brothers was not the culprit of the story. In fact, the real culprit were the deregulations in the financial industry. Securitization is a process through which legal obligations such as car loans and personal debts are merged and cash flows are marketed as standard units for investors. As time evolves, digital platforms’ emergence enables segments of loans to be digitized and transformed into products that are easier to move on the marketplace and bring about greater liquidity. 

Aren’t they all just cryptocurrencies? 

The automated workflow on blockchain provides heightened efficiency from cost and time reduction and transparency. That is not all. Tokenization goes deeper – it does not just restructure cash flows. The part of the package deal for tokenization is the ability to monetize the ‘right to use’. There is another term that is often used interchangeably with ‘token’ – ‘coin’. However, there are technical differences between the two. One has its own blockchain, and the other operates on blockchain. 

Tokenization is a digital representation of assets. 

You may argue that there already exist many types of financial assets in digital form – especially when you can see your remaining cash balance at the end of the month before you order another t-shirt you clearly do not need. Yes, you felt it. That transfer of ownership is real – the decreasing number in your bank balance in exchange for a t-shirt. But what if you one day would like to become the owner of a piece of ruby or fine art, say the Mona Lisa, for example, but you do not have the funds to support it. Tokenization sets free of this and many limitations as it offers fractional ownership of assets. This removes geographic barriers and opens the borders to trade for assets to move freely and instantly across digital platforms. However, there always exists two sides of the same coin. 

Tokenization – Pros and Cons 

Blockchain is a technology that can be explained as a collection of information – ‘blocks’ connected through cryptography. Each block holds its own unique set of information, including a time-stamp proof-of-work and transaction data. The benefits of tokenization stem from its ability to store data as it operates on blockchain securely. 

Advantages of tokenization

  • Enhances asset liquidity through more effective flow of assets and enables the development of secondary trading platforms 
  • Faster and cheaper transactions as transactions are completed with smart contracts
  • Higher transparency as tokenization allows you access to information for both buyers and sellers (who previously owned then tokens)
  • Better accessibility as tokenization brings about benefit from access to the wider market 

No technology is without its imperfections, and tokenization is no exception to this rule. They are not without their limitations.

Limitations of tokenization

  • Jurisdiction limitations is a natural obstacle for blockchain-based platforms, which are decentralized
  • Risks of being overtaken by new technology put intrinsic value of the token at test 

Despite all its imperfections, tokenization is bridging the gap between conventional investments and the blockchain space. We believe it has a high potential to make the financial industry more accessible at a lower cost and faster – thus, tokenization unlocks an unquantifiable amount of illiquid assets. 

Institution Adoption 

The token ecosystem shows an outstanding shift of power from large, centralized entities to individuals. Such technology disrupts the need for third-party intermediaries with blockchain technology, which operates on algorithms used to verify and to protect the transaction’s integrity in the form of a digital ledger. This imposes as a double-edged sword for institutions – to adopt is to open doors to opportunities, bearing the risks that come with it or not adopt and face the risk of being left behind. This is the race against time. As stated in behavioral economics, consumers will always look for a way to earn a higher yield with the lowest initial principle. The rise of mass adoption shows that institutions that engage with the technology, plan, and adapt to the current waves will thrive – particularly in the case of tokenization. It is not our future – it is our present reality. However, things are not as easy as it sounds for a financial institution – the decision-making is not as straightforward and flat as individuals. Institutions will need to carefully consider the following points before participating in the token economy. 

  • Different jurisdiction has different legislative and regulatory frameworks whereby financial institutions must ensure that tokens will remain compliant across multiple jurisdictions, not just the issuer’s 
  • KYC (Know-Your-Customer) Compliance for financial institutions must implement new operational measures over the digital platform.
  • Security is of concerns when it comes to wallet management and private keys as institutions will have to find ways protect the whole value chain on the blockchain platform 
  • Business model and collaboration are elements institutions must consider – they could take advantage of their expertise to create a life cycle events transaction on a distributed ledger or implement it on smart contract and launch it on a public platform while considering the suitable infrastructure model to integrate with.

Therefore, mass adoption for asset-backed tokens requires the financial measures to be incorporated wholly in the blockchain platforms. Undoubtedly, companies can achieve better competitiveness by tapping into the transparency, liquidity, and accessibility provided by tokenization.

As discussed in our previous articles, there are many types of tokens – for example, utility, security, and currency tokens. To recap, the key distinction between tokens and coin is that a token requires another blockchain platform to operate. A currency token is often referred to as a coin. 

Currency token is a coin. 

Bitcoin (BTC), Ethereum (ETH), and C8 Plus (C8P) are all examples of coins whereby they exist on their own independent ledgers. BTC operates on Bitcoin blockchain; Ether operates on Ethereum blockchain, and C8P operates on ERC-20. ERC-20 is one of the most significant Ethereum tokens which acts as a technical standard and is applied to all smart contracts on the Ethereum blockchain for token implementation. ERC-20 is mostly used to create stablecoins.

In episode 1 of Current Waves by Zipmex, we were joined by Max, Teerachart Kortrakul, Chief Executive Officer and Co-Founder of Carboneum and StockRadars, where we discussed how tokenization is the bridge between CeFi and DeFi. He shed a light that it is not DeFi that lies at the heart of investment, but the fact that people just want to invest money in something that grows. As we all know, the risk exposure with stable coins is associated with price fluctuations in the exchange of the assets they are backed by. Essentially if you hold C8P token, you are exposed to the DeFi market and will receive returns from the DeFi market. Financial inclusion and simple democratic investment lie at the heart of C8P, whereby you can invest with just THB 1. This is applied to across the board such that you get the same ratio of returns as the person who invested in THB 1,000. So, what the platform does is that it creates an even playing field. This is one of the coins that is also available on our platform. C8P aims to become an alternative investment such that Carboneum is also a social trading platform. This creates opportunities for many to invest and a pathway for them to have access to the crypto market. It is clear that the traditional financial model is challenged by the new demand, which we can see that cryptocurrency and DeFi are starting to have a more prominent role in our daily lives. Such changes are acknowledged and recognized by authorities such that many countries have ongoing projects and have braced and are ready for this change. 

Tokenization is our present. 

Asset tokenization offers promising opportunities for financial markets and is the next wave that is here to stay. However, it is still in its infancy process, and mass adoption will take time. The heart of the future of tokenization is to efficiently interoperate the current system to set the grounds for mass adoption as tokenization forces corporations to feasibility evaluate the impact of tokenization on their organization. With the awareness of the importance of international cooperation, stable coins and CBDCs pave a way for better cross-border transactions with limited regulatory arbitrage. Despite the fact that it could take a few more years for the international framework to mature, there is no doubt that asset tokenization will play an important role in the management and movement of illiquid assets in the long run.