There is no doubt that blockchain technology will continue to play a major role in the future of capital markets. For starters, Decentralized Finance (DeFi) protocols are setting the stage for permissionless and globally accessible market ecosystems. But more importantly is the integration between traditional assets and on-chain economies through asset tokenization. So, what exactly is tokenization and why is it a major theme in the blockchain and crypto industry?
Simply put, asset tokenization is the process of representing real-world assets on a blockchain network, through the use of cryptographic tokens. These tokens are essentially digital representations of an asset or security, allowing the asset to be traded in a secure and transparent manner via on-chain economies. Tokenization can be used for a variety of assets, such as real estate, art, commodities, stocks, and other financial instruments.
How Tokenization will expand access to capital markets
For a long time, capital markets have been inaccessible to small-time players, who, in most cases, are the ones in dire need of financing and liquidity options. But with the emergence of modern-day technologies such as blockchain and crypto, the landscape is gradually changing. Let's deep-dive into how tokenization, in particular, will expand access to capital markets.
· Increased liquidity
Tokenization offers a new way for investors to buy and sell assets, increasing liquidity and potentially making it more attractive to a wider range of investors. For example, by tokenizing a piece of real estate, investors can buy and sell fractions of the property instead of having to purchase the entire property. This could lead to an increase in demand for the asset and make it a more viable option for investors.
· Enhanced accessibility
Tokenization also has the potential to revolutionize how investors access traditionally difficult-to-reach financial instruments, such as stocks and commodities. By tokenizing these assets and selling them as cryptographic tokens, both local and international investors can access global capital markets through on-chain economies. A game-changer in an ecosystem that has, in the past, been limited by geographical borders.
· Improved transparency:
At the core, blockchain technology provides a transparent and immutable record of transactions, which can increase trust and confidence in the asset being tokenized. For instance, if a particular market instrument is tokenized, the blockchain can provide a record of who owns what fraction of it, as well as any changes in ownership. In doing so, it becomes much easier to prevent fraud or mismanagement of the given financial asset.
· Increased efficiency
Last but not least, tokenization can streamline and automate many of the processes involved in buying, selling, and owning assets, making the process more efficient and faster. The process of transferring ownership can be completed almost instantly using smart contracts, rather than taking weeks or months to complete as is often the case with traditional market transactions. This can save time and improve the overall efficiency of the process.
Traditional Assets Meet On-chain Economies
In order to fully take advantage of asset tokenization, the next generation of asset owners will need to have options to integrate blockchain-based technologies frictionlessly into their existing workflows. This means having compliant Web3 integrated solutions for accounting, management, and governance. For existing assets, there is a cost incurred from migration, but the payoff is the potential to achieve real transparency, and thus, ability to access capital in new ways.
But how exactly can organizations and individuals tokenize their assets? While there are only a handful of service providers in this niche, Oraichain Labs US is one of the emerging Next-gen Infrastructures for asset tokenization that is currently providing a suite of solutions for stakeholders to integrate their assets with on-chain economies. The services offered include asset tokenization, data management and secure access control. With these features, even asset owners with little to no technical knowledge can leverage the power of blockchain tech to expand their market horizon.
Such blockchain-based management systems are not only designed for big corporations, but every business owner, regardless of size, will have access to these tools to improve their operations, governance, and capital management while taking advantage of the liquidity in on-chain economies. In addition, creating a robust infrastructure for on-chain business management and next-level transparency can also lead to clear third party audits and valuation marks, making the due diligence process more efficient for potential investors.
Collective Intelligence for Trust
The ability to extract an accurate asset value for private assets in real time is revolutionary, not just for primary issuance, but also for secondary trading. By tokenizing assets, this can be achieved in a decentralized manner: collective intelligence can remove single-party failure in data validation and add new value dimensions to give a more complete snapshot of an asset before purchase.
In order to validate the accuracy of data and provide valuation insights, the individual or entity auditing the data must be trusted. This brings in the importance of credentials: whether discussing home appraisals or financial audits, the data validator must be qualified to give their professional opinion on the documents reviewed. This qualification needs to be verified both on-chain and from the traditional records kept by oversight bodies.
While there is a significant place for licensed validators, data validation does not need to be strictly professional in nature. For instance, in the housing market there are many factors that play into the overall decision to invest: school district performance, neighborhood conditions, crime statistics, and living expenses can all contribute to an investor's decision to buy; to contribute these types of data points, one might need only to live in this geographic location.
These data points can add new value dimensions to better understand and predict trends. The ability to aggregate such information in one place and verify that the contributor is giving a qualified opinion will significantly enhance trust in the capital markets.
Hurdles to Asset Tokenization
On the downside, prospective investors should temper their expectations; as most tokenized real-world assets are likely to be considered securities, the regulatory pathway for issuers is quite clear. Security token offerings will have to comply with the SEC's rules, and most of them will only be available to accredited investors. And while the Jobs Act of 2012 introduced Reg CF as a viable alternative to invite retail participation, it still placed significant limitations on crowdfunded raises, capping both total and individual contributions.
These initial offerings are only a part of the equation; liquidity is mostly defined by the market for secondary trading. For private assets that are already traditionally opaque, on-chain asset trading could easily continue to run into the same problem of obscure and inaccurate valuation. In other words, there is a strong and serious demand for high-quality and trustworthy data, which creates inflection points that encourage more trade executions. This data must be available in real-time, with auditable and cryptographic proof, including third-party validation, for on-chain economies to be market efficient.
Lastly, migrating to a set of blockchain-based systems will also require some serious upfront labor. Private markets cannot move from paper-driven processes to "trustless" technology overnight, but by creating a clear pathway for asset managers to leverage blockchain-based middleware, it stands that there is still a huge knowledge and service gap that needs to be addressed for asset tokenization to fully transform the nature of existing capital market infrastructures.
