Tokenization: Alternative investment differently

With potential still poorly exploited, tokenization has revealed another facet of the usefulness of digital assets. They have succeeded in revitalizing the structure of financial markets, strengthening the accessibility of assets and creating new markets and innovative investment vehicles. Even more interesting, we must believe that the next global economic system will be based mainly on the principle of tokenization of bank deposits. What is it actually about? What is tokenization and what advantages does this technology offer to the world of investment. To have the answers to these questions, we invite you to follow us in this mini-file on tokenization and its importance for investment.

Understanding tokenization

Tokenizing a real-world asset or financial instrument means creating a digital representation of that asset on a distributed ledger, i.e. a blockchain. Most of the time, tokens are created on the Ethereum blockchain. Each token therefore grants its holder fractional ownership of a tangible or intangible asset, a financial product or a precious metal.

We can therefore tokenize a work of art, real estate, a bond, private market funds, a property right, etc. Presented in this way, we clearly understand that tokens are instruments with the potential to revolutionize the world of finance and evolve our traditional investment approach. There are several types of tokens. We distinguish :

• utility tokens or utility tokens which confer on their holder the right to benefit from a service or a particular advantage for a service;
• security tokens which are also known as equity tokens or investment tokens which are linked to securities offerings;
• payment tokens, which function like cryptocurrencies and can be involved in transactions.

Tokenization and the creation of new, more liquid markets

In the coming years, alternative investments will undoubtedly experience strong growth. Indeed, tokenization will help revolutionize the world of multi-asset investments and create interest in less traditional assets such as art, wine, natural resources, etc.

We can even tokenize carbon credits. They can therefore strengthen the democratization of access to alternative investments, because tokens are more accessible, more liquid, more transparent and more flexible in asset transactions and exchanges.

Thus, asset management companies, banks and wealth managers will be able to take advantage of this to offer their clients innovative investment vehicles, in particular venture capital, hedge funds, private equity, etc. We remember, for example, how Ripple Labs revolutionized real estate thanks to tokenization.

This is certainly the time to point out that there is a difference between fungible tokens or tokens and non-fungible tokens commonly known as NFTs.

Why is tokenization revolutionizing alternative investing?

In recent years, crowdfunding has proven to be a widely exploited investment model due to its ability to provide access to large pools of investors. However, this method of investment is not truly accessible to everyone. This is what makes the first particularity of tokenization. If leveraged well, tokenization has the potential to significantly influence the financial landscape.

Better accessibility to financing and investment

The main strength of asset tokenization lies in the accessibility it guarantees to all players who do not have access to standard platforms to raise funds and obtain financing using the traditional method. Several startups today resort to issuing utility tokens which they resell on the market at a defined value, ensuring that they sell to a very wide audience in order to raise the capital necessary to effectively start their activity.

In return, investors obtain the right to benefit from or access a service or product sold by the company. While it allows companies to easily access financing, tokenization also offers investors unique advantages. In fact, tokenized assets are actually split into several parts.

This makes them more accessible than the assets themselves which, given their high value, create barriers to investment. With tokens, anyone can invest in any asset, regardless of their savings. Likewise, sellers can more easily sell their illiquid assets, the prohibitive cost of which can prevent them from finding buyers.

More flexibility and security in investments

The other particularity of blockchain technology in a context which makes interoperability possible is that they allow tokens to be exchanged on secondary markets, in complete transparency, instantly and in completely safe. Investors who have purchased tokens can, for example, resell their tokens to other investors when the token has increased in value in order to make capital gains. Exchanges take place instantly thanks to the blockchain.

From this perspective, tokenization becomes an excellent approach for alternative investments. Instead of buying real estate, a work of art, or other expensive property, you can invest in a fraction of this real estate, in a token representing a fraction of this work of art.

Likewise, instead of buying a forest, we can invest together in a forest in order to fight against climate change. Instead of purchasing precious metals which are inherently not easy to trade, one can purchase precious metal tokens which are inherently easier to trade thanks to blockchain technology.

Knowing that alternative investments will represent up to 25% of the global investment market within 3 years, tokenization will be decisive in breaking down barriers to investment.

Don’t forget that we can tokenize everything: patents, licenses, luxury products, etc. these tokens being backed by physical goods stored in physical locations. Besides, tokenization is the BIS vision for finance. In a few years, it will become the preferred investment solution for individual and professional investors. Obviously, security issues will need to be resolved so that the tokens are protected against hacking.