What are the Many Applications of Tokenization?

“Tokenization”  is one of the crypto-focused buzzwords that will see the industry grow exponentially next year. Virtually anything on earth can be tokenized and represented on a blockchain. The big question is “how”, not “if”.

Asset tokenization is the phenomenon that will see an increase in the interconnectedness of financial ecosystems and their associated risks. That, however, doesn’t mean it won’t have benefits.

Our team of experts had much to say on tokenization and its applications.

C’est la vie…

Farooq Malik, CEO at Rain Cards

“Tokenization, a transformative concept gaining momentum, holds diverse applications in various sectors, with the financial industry at the forefront of its adoption within the cryptospace. At its core, tokenization involves the conversion of physical assets or real-world items into digital forms. One illustrative example is the tokenization of a mortgage on a house, where a digital token not only represents the individual mortgage but also encapsulates crucial information about underwriting standards and closing documents.

In traditional mortgage trades or securitization processes, the accompanying data packets that travel with each mortgage pose substantial challenges for compliance and tracking purposes. Many banks, seeking relief from the administrative burden, often delegate this task to mortgage servicers, incurring substantial costs. Tokenization, however, offers a substantial shift by digitizing this complex process. This concept extends beyond mortgages to encompass various assets traded between entities, enabling a more efficient and automated approach to transactions.

For banks, embracing tokenization presents an opportunity to alleviate the administrative burdens associated with standard operations. By leveraging tokenization technology, banks can significantly reduce settlement and reconciliation times, enabling increased book size without the need for additional staffing. Despite the immense potential, the widespread adoption of tokenization faces challenges, necessitating regulatory clarity from entities such as the Federal Accounting Standards Board (FASB). Regulators and auditors must develop guidelines that allow banks to capitalize on the process improvements brought about by tokenization.

As the financial industry moves towards widespread tokenization, early adopters such as my company Rain, have observed the entry of non-bank lenders into this transformative space. The cooperation between regulators, auditors, and financial institutions is crucial to establishing a robust framework that encourages and regulates the numerous benefits that tokenization offers to the financial landscape.”

Cuatemoc Weber, Co-Founder and CEO of Gateway.fm

“Tokenization refers to the process of converting real-world assets into digital tokens on a blockchain platform. In the banking system, tokenization holds immense potential to transform traditional financial processes by digitizing a wide range of assets and financial instruments. Asset-backed tokens can be applied to real estate, stocks, or commodities, enabling fractional ownership, enhancing liquidity, and making investments more accessible to a wider range of investors.

Tokenization in banking can deliver a host of benefits, reducing administrative overheads and enabling faster transactions. However, the generally risk-averse DNA that is embedded in the banking sector can result in delayed adoption of new innovations. We’ve actually seen this happen with blockchain more broadly. The regulatory hurdles and compliance requirements might make tokenization a daunting prospect for banking executives, who are used to a particular way of working.

Whether banks embrace tokenization will depend on their willingness to think outside the box while recognizing the potential for major efficiency gains. At Gateway.fm, we’re already working with a number of interested parties which are seeing the massive opportunities of tokenizing these assets and enabling very efficient transactional processing of complex trading via smart contracts automation. I foresee a major wave of new products coming to the market over the next few years fully utilizing the power of tokenization, with smart contract automation unleashing a new level of efficiency in the financial markets.”

Chris Were, CEO of Verida

“There is a rapidly growing number of use cases for tokens:

• Real-world assets. It’s possible to take an asset (ie: treasury bond, house, car) and represent ownership of the asset on a blockchain. This asset can then be tokenized, allowing the asset to be split into lots of small pieces and owned by many others.

 

• In a similar vein, securities, such as company shareholdings, can be tokenized. Each token is similar in function to holding a share of the company. It’s possible to then build software and systems that streamline the operations of a company because shareholders can digitally prove exactly how many shares they hold.

 

• Physical infrastructure. This could be computation in a datacentre (ie: aleph.im) or it could be distributed data storage (ie: Filecoin, Verida) or it could be a network of mobile phone towers (ie: World mobile).

 

• Voting/governance rights. This is a rapidly emerging area with Decentralized Autonomous Organizations (DAOs) leveraging tokens as a way to provide governance rights to community members.

 

• Rewards. Similar to how frequent flyer points work, tokens can be distributed to users as a way of rewarding them for using a particular product or service. These tokens may or may not have intrinsic value, or may be a way for users to earn “status” within a community. In some instances, these reward tokens are dual-purpose and can provide access to governance rights or be used to access physical infrastructure.”

Bob Ras, Co-founder and CEO at Sologenic

“Tokenization became a hot topic this year because of advancements in one of the most exciting, tangible use cases of the technology that has the ability to transform global markets: the tokenization of real-world assets.

Real-world asset tokenization has the potential to revolutionize traditional financial markets by digitizing and decentralizing the ownership of tangible assets. Through blockchain technology, physical assets such as real estate, art, commodities, and even businesses can be represented as digital tokens on a secure and transparent ledger. This process not only increases liquidity in traditionally illiquid markets but also opens up investment opportunities to a wider range of individuals. Fractional ownership, which lets investors own only a small piece of a tokenized asset, enables market participation for investors of any level of wealth.

By leveraging blockchain technology, tokenized real-world assets automate the often complex processes associated with traditional asset transactions. Smart contracts automate tasks such as transfer of ownership, payment distribution, compliance checks, and reporting, which reduces administrative costs and minimizes the risk of errors and fraud. Blockchain technology ensures that all transactions are recorded immutably and transparently, enhancing the integrity of the overall financial system, all while providing tangible benefits to investors by enabling fast, secure, and cost-effective transactions.”

Mitch DiRaimondo, Founder of SteelWave

Tokenization: A Paradigm Shift in Commercial Real Estate Investment

“Tokenization is revolutionizing the CRE sector by breaking down traditional investment barriers. By converting property rights into digital tokens on a blockchain, we’re enabling fractional ownership, enhancing liquidity, and democratizing access to this asset class. This is particularly transformative for high-value real estate, where investment has traditionally been limited to institutional investors or high-net-worth individuals.”

Enhanced Liquidity and Accessibility

“One of the most significant advantages of tokenization is the enhanced liquidity it offers. Tokens can be traded much like stocks on secondary markets, providing investors with the ability to easily enter and exit positions. This liquidity is especially appealing in the real estate market, known for its typically illiquid nature.

Looking ahead, I believe we’re just scratching the surface of what’s possible with commercial real estate tokenization. Commercial real estate tokenization isn’t just a fleeting trend; it’s a fundamental shift in how we approach property investment, offering a more inclusive, efficient, and flexible framework that aligns well with the digital age.”