Last updated: 01.02.2023
Asset Tokenization Guide
Asset Tokenization has been keeping the financial industry busy as they explore new ways to unlock the potential of assets and bring more liquidity to capital markets. This revolutionary concept is reshaping the traditional financial system by digitizing assets, therefore improving their accessibility to investors. This article will dive into the basics of asset tokenization, how the tokenization of securities works, present some of the benefits and risks, as well as how it could impact the future of finance and investments.
What is asset tokenization?
Asset tokenization is the process of issuing a digital representation of a real tradeable asset on blockchain or DLT. In other words, it consists of converting assets into digital tokens, allowing them to be traded and sold on blockchain networks. Basically, issuing a tokenized security (aka security token).
Asset tokenization market has been growing significantly and is proving to be a way more efficient process of security issuance. The daily trading volume in digital assets is continuously growing. See our 2022 digital assets report for more insights and data on the current state of tokenized securities. Tokenization of assets enables investors with access to a wider range of investment opportunities alongside reducing the barriers to entry for investing in traditional assets such as real estate, art, and collectibles.
Asset tokenization offers the potential to democratize finance and investments, making it easier for people to invest in and own a portion of assets that were previously only accessible to larger investors. At Bitbond we strive to making tokenization more accessible, with our tokenization platform, users can effortlessly create tokens and launch token presales.
We believe that in the coming 5 to 10 years, most conventional asset classes will be tokenized, and will exist in some way on a blockchain or DLT. This shift in markets is the most exciting time in the blockchain space, which is among the reasons Bitbond decided to focus on asset tokenization in general.
Regulatory environment is slowly maturing enabling financial institutions with the possibility to start exploring the utilization of such cutting-edge innovation. In Germany for instance, the eWpG consists of making electronic securities possible, allowing most financial securities to be tokenized. Additionally, the provision of custody services for 3rd parties is financially regulated and became part of the German banking act.
How does asset tokenization work?
We mentioned above that asset tokenization works by creating digital tokens on DLT/blockchain. These tokens represent the full or fractional ownership of a real-world asset. Recorded on a blockchain network, it is made transparent and secure as they can be bought, sold, and traded on blockchain exchanges, making it easier to transfer ownership of assets.
Benefits of Asset Tokenization
The numerous benefits offered by asset tokenization include:
- Increased Liquidity: asset tokenization facilitates selling and trading of assets. This increases the liquidity of the assets while reducing the barriers to entry for investors.
- Lower Costs: Tokenizing assets reduces the costs associated with traditional investment methods, such as fees charged by intermediaries involved in the asset trading process. For instance transferring ownership and storing assets is done directly on a DLT record keeping system, eliminating the need for traditional CSDs as we know them.
- Fractional Ownership: it also allows for fractional ownership of assets. It is possible for investors to own a piece of an asset without having to buy it entirely.
- Improved Transparency: The use of blockchain technology makes it possible to record all transactions and ownership records, improving the transparency and security of the investment.
Risks involved in Asset Tokenization
Some of the risks involved in asset tokenization are:
- Lack of Regulation: The regulatory framework for asset tokenization is still in its early stages, and there is a lack of clear guidelines on how it should be governed. Some jurisdictions offer better clarity than other. One thing for sure, is that the regulatory landscape is slowly being established by the governing bodies.
- Cybersecurity Risks: The use of blockchain technology makes it possible to store and trade digital tokens. On the other hand it exposes the investment to cyber risks such as hacking and theft.
- Volatility: Depending on the base currency tokenized assets are denominated in, they may be subject to crypto market volatility, making the price of digital tokens subject to high rapid price fluctuation.
How does asset tokenization solve pain points present in capital markets?
On May 28th, we decided to host a webinar with prestigious experts addressing the practical application of asset tokenization for financial institutions. The online event had the aim to help provide a practical insight from 3 different perspectives: Investor, Issuer and Bank.
Meet our panelists:
- Bank perspective: Philipp Doppelhammer, Managing Director at Bankhaus von der Heydt, one of the oldest banks founded in Germany, since 1754. It is a privately owned bank that comes from a traditional wealth management private banking background. In 2017, they decided to switch and move into institutional business, focusing on institutional as a servicing, therefore maintaining their Luxembourg based management company, in charge of setting up and administering investment funds. Another core of their business is also based in Luxembourg: white-labe securitization platform. It consists of setting up real bankable assets, hence they started looking into asset tokenization, as it is a very good way to enhance their securitization process and gain digital traction. Von der Heydt has partnered with Bitbond in order to acquire our bank-grade solutions in asset tokenization and digital asset custody.
- Issuer perspective: Rose Carmichael, Chief Strategy Officer of IQ international: her background is mainly in corporate finance and M&A. She worked for Siemens and now at IQ International, a multinational sustainable technology company headquartered in Switzerland.IQ International is a company that has a portfolio of 66 international patents and 31 patent pending technology designated to change the traditional industry in batteries and power storage, both for automotive and industrial. Interested in the asset tokenization vehicle as a way to raise money for expansion, they aim to switch from licensing to other battery manufacturers to becoming their own producers, therefore they aim to raise funds through asset tokenization.
- Investor perspective: Paul Mehta, Global Head of Loans at Aberdeen Standards: his background is in credit markets focused around loans, high yield bonds, leverage finance… Aberdeen standards is an investment house with around 500 billion assets under management, of that 100 billion are in fixed income, and 5 million in private credit. Through asset tokenization solutions, they are looking to improve the process of handling that amount of assets.
– Introduction to the topic by Radoslav Albrecht (CEO Bitbond):
– Panel discussion “Issuing Real Securities on Chain: Practical Insights of Tokenization“
Hosted by Michael Pinkus (ex-CFO Bitbond) with three panelist perspectives:
- Investor: Paul Mehta, Global Head of Loans at Aberdeen Standard
- Issuer: Rose Carmichael, Chief Strategy Officer of iQ International
- Bank: Philipp Doppelhammer, Managing Director at Bankhaus von der Heydt
Philipp Doppelhammer: “2018 was the first time we got in touch with that topic, we set up a vehicle for a customer that asked us to issue a simple crypto tracker certificate. We weren’t really able to pursue public sales as there was no regulatory framework in Germany and Luxembourg yet. We kept following that technology mainly because we are a small bank and our pain points are that we are dependent on intermediaries such as clearing houses. This slows down the process. Usually, we aim to have a standard security rate to invest within 4 weeks, however, in practice it can take double or triple that time. This costs us a lot of money and even our clients on some occasions. We always looked for new ways to replace such intermediaries, in order to act as one stop shop issuance and do everything ourselves.This is not done by other banks in the traditional world. Consequently, we desire to substitute our securitization as a service product, with a tokenization as a service product. Therefore, we partnered with Bitbond to set up a tokenization module. We then saw a lot of demand for other services, and decided to rebuild the bank to become a full service provider in custody solutions, tokenization solutions, payment and settlement solutions. As a 4th pillar, there will be a token sales platform that we plan to launch at the end of this year.”
Paul Mehta: “One of the main pain points is settlement of trades, it is an unnecessary pain when it comes to trading loans. Asset tokenization could definitely help improve that side of the business. Loans are not a security, they don’t trade through an exchange as an OTC product. In our case for example, a billion size euro loan could go to 300/400 institutions. Now the process is very manual: it can start with a voice trade, then transferred to an agency that would check the transfer (almost like stamping and sending it off). The lack of identifier (ISIN) contributes to that manual process. The process has a very elongated settlement time, in Europe it is t+10 and in the US t+7, ordinary cash settlements are delayed and KYC check usually delays it even more. If I sell a european leveraged loan today, I will probably not get cash before t+22, it is a significant drag on the ability to deploy cash and there definitely is a counterparty risk alongside a market risk. People in charge looked to improve that process in the past, but maybe the wrong way, as they want the traditional set up to speed up. I believe it needs innovative solutions like the ones offered by Bitbond or DLT in general. When you look at the identifier, you can quickly reference it and proceed. With asset tokenization and the solutions provided by Bitbond, it could be a great way to standardize to respond to these pain points and drastically improve the process.”
Rose Carmichael: “A lot of corporate issuers try to go to market and deals aren’t pulling through. A “Roadshow” is a process corporations go through, where they are represented by an investment bank, then visit a lot of institutional investors, have meetings in large conference rooms, present the strategy, the financials and the reason for raising money. It is more or less the same across different markets, that’s what corporations have to go through when publicly traded, they have to inform the market about what they do and plan to do. It is very challenging and a lot of rules to follow, in terms of info to share. Our roadshow got cancelled due to corona and having a new norm for roadshows would be interesting. Will there be a need for roadshows? Is it going to be bridged with digitalization, however, can we replace that element of trust knowing it brings us greater speed to market? The core concept might remain, but it will definitely adapt. With solutions like Bitbond’s asset tokenization platform, such pain points can be addressed and taken care of to provide a better speed to market.”
Asset tokenization – the future of financial instruments
Asset tokenization has the potential to contribute a lot in efficiency to capital markets. It eliminates many manual processes and provides faster speed to market when it comes to investment and securitization.
Through this webinar, we learned from 3 different perspectives how asset tokenization helps these businesses achieve their goal in a way more cost effective and fast process. In a world where digitization is becoming more indispensable, a need for trusted technology to handle our financial infrastructure is on the rise.
Therefore, with solutions such as the asset tokenization technology provided by Bitbond, you can ensure easier, more secure, cheaper and faster transfer of funds. Just like sending an email.
Are you interested in asset tokenization? Learn more about Bitbond and the technology we provide, or register check out Token Tool and try creating tokens yourself