What Is Tokenisation in Crypto?

In 2021, the blockchain technology market had a value of $5.85 billion, a figure expected to catapult to $1,235 billion by 2030 at a compound annual growth rate (CAGR) of 82.8%. Part of the appeal of this technology is its potential for innovation. 

Just a decade or so ago, the world was sceptical of Bitcoin, but with advancements in the cryptocurrency space, digital currencies, decentralised apps, and DeFi protocols have become a reality. Even more interesting is tokenisation, a way to convert an asset's ownership rights to a "token". 

Hailed as a way to improve security, facilitate transparency, provide seamless transactions, and open up new avenues for investment, tokenisation is widely seen as a gateway to the future of finance. 

What Is Tokenisation?

Tokenisation is a process that converts an asset or its ownership rights into a digital form called a token, which can represent ownership of both tangible and intangible assets. 

For example, you may own a token of a company's shares, which would be an intangible asset. Some examples of tangible asset tokens include art and real estate. 

Example of Tokenisation 

An investor owns a property worth £400,000 and uses asset tokenisation to convert the property's ownership into 400,000 tokens. Every token represents a small percentage of the property share, which is 0.00025% or £1, in this scenario. 

The investor needs £30,000 for something, but they can't sell their property because they have no other place to live. Instead, they can issue tokens for their property, allowing people to buy a token or share in it. For example, if someone buys one token, they get a 0.00025% stake in the property, while the investor gets £1. 

As evident from this example, the main advantage of tokenisation is that it allows fractionalised ownership. For instance, instead of buying the whole artwork that costs £60,000, an investor can simply buy tokens and share the asset with other token holders. 

Benefits of Tokenisation for Investors 

The Boston Consulting Group (BCG) Relevance of on-chain asset tokenisation in the 'crypto winter' report found that the tokenisation of illiquid global assets can become a market worth $16 trillion by 2030. That figure might seem a bit far-fetched to some. However, the benefits of tokenisation for investors are too strong to downplay its potential. 

Asset Fractionalization 

One of the main advantages of tokenisation is that it facilitates divisibility of real-world assets like real estate. Fractionalization facilitates the purchase of assets, even with small sums of money. It is especially useful for investors who may not have the capital to make large investments in real-world assets such as commodities or real estate. 

For example, 20 investors can buy a vacation home in the Bahamas, split in 20 tokens. They can then come to an agreement on how to use the property. That's just one example of how tokenisation can revolutionise asset ownership. 

Investor Access 

The World Bank reports that 1.4 billion adults around the world are unbanked. Since these people do not have access to a bank account, they're often denied opportunities for investing in traditional financial instruments like stocks, bonds, and funds. 

Owning a token on the blockchain is much more accessible. The blockchain is not restricted by borders, nor does it require you to go through hours of paperwork to buy an asset like a traditional bank does. A laptop and an internet suffices. 

Benefits of Tokenisation for Society 

New Markets

Investors are not the only entities who can benefit from tokenisation. The technology provides a way to monetise things that were previously difficult to quantify, giving people access to more sources of income.

Faster Transactions

As there's no bank involved, tokenisation saves users a ton of time. You don't have to go back and forth, fill in paperwork, meet requirements, wait for processing times, or face delays due to bank holidays. 

Everything is done digitally, saving time and money. Also, there are many investment opportunities, giving users more options. On the contrary, a bank would often limit your options due to your credit or income history. 

Fraud Prevention 

Since there's no sensitive information, such as credit card details, being transferred, tokenisation is a safe way of transacting. There's also no risk of fraud, as stolen information cannot be used in fraudulent transactions. 

Efficient Recordkeeping 

The blockchain has a record of any and every transaction conducted on it. If someone wants to dispute a token's ownership, they can check the blockchain to verify the transaction. 

Types of Tokenised Assets

There are two types of assets that can be tokenised: fungible and non-fungible. To differentiate, "fungible" is any mutually interchangeable item. It's something you can replace with another identical item. The difference between both terms is as follows. 

Fungible Tokenisation 

Fungible tokenisation is interchangeable, since every unit has the same value. A good example of a fungible token is Bitcoin, as the value of every Bitcoin in circulation is the same, regardless of who you buy it from. 

If you purchase one-third of a Bitcoin and swap it with one-third of a Bitcoin from someone else, your Bitcoin will still have the same value, even though it's not the same one-third you had earlier. 

Non-Fungible Tokenisation 

Non-fungible tokens do not have the same value. They commonly represent an asset's ownership, so their value depends on the underlying asset. 

These tokens cannot be replaced with "other tokens of the same type as each represents a unique value and attribute (E.g., vintage paintings or vinyl records, housing property, collectors' cards)," as explained in the BCG report mentioned earlier. 

Applications of Tokenisation 

Once tokenisation becomes a norm, there will be no limit to what you can buy. Here are some applications of this technology. 

Real Estate Purchases 

Tokenisation will allow individuals to invest in high-value properties without spending massive amounts of money. Traditionally, the smallest real estate unit you can purchase is an apartment. In the commercial space, it would be a building or a warehouse. With tokenisation, you can buy 1/100th of a house and then sell it for a profit. 

Besides fractional ownership, tokenisation also allows easy and swift transactions. The absence of a centralised authority means you spend less time and money on buying property. 

Art Ownership 

Tokenisation also facilitates art ownership as multiple individuals can purchase an expensive artwork together. Since the blockchain records all transactions, there's no risk of individuals falling prey to forgery or reproductions. 

The blockchain serves as the documented evidence of provenance for an artwork. Thus, if there's a dispute or concern, you can always consult the ledger to verify ownership. 

Estate Planning 

Tokenisation makes it easy to distribute assets among family members while ensuring they adhere to your wishes. You can also program compliance checks in the smart contract, such as KYC (Know Your Customer) and AML (Anti Money Laundering) regulations. These protocols ensure that an estate is distributed according to the law.

Venture Capital 

Startups can tokenise their equity to raise funds, allowing investors to buy the Security Token Offerings (STOs), getting a share in the company. 

A recent study on venture capital tokenisation says that it will increase liquidity and user engagement. The authors also report that tokenisation will simplify investor participation, facilitating startups to raise capital from a global market. 

Energy Infrastructure 

Private and government sector energy infrastructure projects, like wind turbines and solar farms, can also be tokenised to boost funding opportunities. Instead of waiting for billions to pour in from a handful of entities, these projects can benefit from a wider investor base. Individuals interested in supporting renewable energy initiatives can purchase tokens to fund these projects. 

The Future of Tokenisation 

There's enough evidence to support that tokenisation is bound to stay and have a profound impact on asset ownership and management. A Markets & Markets report says that the tokenisation market will have a value of $5.6 billion by 2025, growing at an annual rate of 19%. Most of the applications of tokenisation are forecasted to be in payment security, compliance management, and user authentication. 

It would be wrong to ignore the challenges associated with tokenisation, though. The most pressing of these challenges is the unfamiliarity of people with technology. In an interview with Coin Desk, Vogelsang, Centrifuge's CEO, said that the "big work" is to get people comfortable with the technology. Once they understand it, ''they'll start using it.'' 

Conclusion 

There's no denying that tokenisation will only get more accessible and mainstream with time. It was only a few years ago that a Swiss crypto bank recorded the ownership rights to Picasso's "Fillette au béret'' on the blockchain ledger. Now, we have real estate and a host of other assets being tokenised. 

Tokenisation represents a whole new world of opportunities, and it'll be exciting to watch how developers use this technology in the future. The next wave of asset ownership is here, and it's best if you join. 

At moreliquid, we bridge the gap between you and your next digital investment. We provide end-to-end services for your digital tokenisation needs. 

Whether you want to tokenise your asset for the blockchain or want to invest in our digital securities, we help you do it all. Reach out to us today to set up your digital asset portfolio.

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*Disclaimer: This blog post provides general information and should not be considered as financial or investment advice. Always conduct thorough research and consult with professionals before making investment decisions.*

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