Concept

Crypto tokenization refers to the process of creating digitized or tokenized assets out of a tangible or intangible asset. Tokenization capitalizes on the capability to use and leverage blockchain technology to securitize assets, both traded and non-traded. A tokenized asset represents a divided share in the ownership of real, financial, or digital assets that is recorded on a blockchain in the form of digital tokens. By means of an asset tokenization, an issuer creates digital tokens on a distributed ledger or blockchain, which represent. The ownership share (the tokenized portion of the asset in question) is, per se, digital and tradable. Like an initial coin offering (ICO), the tokens are issued via a security token offering (STO) process, through which investors can buy different types of tokens (payment, equity or utility tokens.) Blockchain guarantees that the tokens issued and released represent an asset, that is immutable.

Subject matters of tokenization

Tokenization is a widespread technique that may encompass multiple asset classes (debt tokenization, equity tokenization, etc.) or processes (IPO tokenization). For example, a tokenized security is a type of digital twin token (DTT) that represents an underlying security or financial instruments issued on a different platform (such as a traditional CSD or registrar), where such representation itself meetings the applicable definition of a security/ financial instrument under relevant laws. By nature, a tokenized security is a financial digital asset that is a virtual representation of a financial asset (a security). In the context of cryptocurrency and the broad category of digital assets, digital twins include tokens that represent financial assets such as stocks, bonds, and similar securities, but are traded via a tamper-proof and decentralized blockchain network, providing for higher levels of efficiency, transparency and cost savings compared to traditional issues.

As a process tokenization, tokenized IPOs involve issuing security tokens on a blockchain, with the aim to reduce downtime when transacting or trading in such digital assets. As long as the security tokens are not issued to public users and investors, they can’t be easily exchanged with other cryptos. A tokenized IPO is subject to relevant security regulations in the place where the tokens are being transacted. Such regulations include disclosure, transparency, and user protection. The token offering involves issuance of multiple types of security tokens, particularly equity tokens, debt tokens, and asset-backed tokens.

Benefits

Tokenization comes with a set of benefits including lower costs, increased liquidity, faster settlement and bolstered risk management. In addition to that, tokenization dramatically enlarges the investor base for tokenized assets. By enabling fractional ownership, tokenization reduces the entry barrier for different types of investors, particularly small investors. This helps diversify the investor pool and increases the potential funding resources for market participants (for more, see: benefits of tokenization).