Of late, financial institutions have started using blockchain networks to tokenize real world assets. This has generated a lot of excitement in the world of finance. Tokenization allows banks to create markets with the benefits of decentralized finance (DeFi), secure real-world assets on the blockchain, and increase the efficiency of transactions via smart contracts.
Someone might tokenize a real-world asset, such as property or artwork, to convert it into a digital asset that can be easily traded, bought, or sold online, without the need for traditional paperwork-based processes and intermediaries. This adds speed to financial markets, as the value of physical things can be traded more quickly. It can also allow new people to invest in certain assets, as a digital asset can be divided, or fractionalized, making it more accessible to a broader audience.
The benefits of asset tokenization include increased liquidity and the removal of intermediates such as brokers. Tokenization can also reduce transaction costs, increase transparency, and allow for greater flexibility in ownership structures.
Increasingly, with partners like Kaleido, financial institutions that want to start tokenizing assets no longer need expertise in blockchain technology to build a digital asset strategy. They simply need to ensure that the underlying assets are accurately represented and that there are safeguards in place to prevent fraud and ensure compliance with regulatory requirements.
Importantly, tokens can streamline international business as they facilitate cross-border transactions. By providing greater visibility into the real-time location and value of an asset we can gain insights into the value of a portfolio or transactions within a portfolio. This makes assets in motion more trackable and leaves us an audit trail as we conduct business internationally.
Tokenization of real-world assets is a major growth opportunity for financial institutions, both traditional banks and those who start in the decentralized space.
Let’s look at some industries and use cases for tokenizing real-world things.
Banks use tokenization to represent and trade commodities on the blockchain by creating digital tokens that represent ownership of the underlying commodity. These tokens can be traded on a blockchain-based platform, allowing for faster and more secure transactions.
The tokens are typically backed by physical commodities held in storage, and can be redeemed for the underlying asset if desired. This allows banks to streamline commodity trading, reduce transaction costs, and provide greater transparency to investors.
Banks use tokenization to represent and trade stocks and securities on the blockchain by creating digital tokens that represent ownership of the underlying assets. The tokens are typically backed by securities held in custody, and can be redeemed for the underlying asset if desired. This allows banks to streamline securities trading, reduce transaction costs, and provide greater transparency to investors.
Fractional ownership in stocks and private equity is an interesting concept too, as it allows new communities to pool resources to make purchases. Banks can use tokens to improve liquidity, as we can use current assets for collateral against future purchases.
Financial institutions use tokens to represent real currency holdings by creating digital tokens that are backed by physical currency held in reserve. These tokens are called "stablecoins" and are designed to maintain a stable value relative to the currency they represent, such as the US dollar. Kaleido has a lot of experience building institutional grade financial platforms.
The amount of currency held in reserve is audited and verified by third-party organizations to ensure that there is a one-to-one backing of the stablecoin with the underlying currency. This allows faster and more secure transactions for fiat currency transactions, as well as providing a bridge between the traditional financial system and the world of cryptocurrencies.
Tokens can represent intellectual property, including ownership or licensing rights to a particular piece of intellectual property, such as a patent or copyright. These tokens can be traded on a blockchain-based platform, allowing for greater transparency and efficiency in the licensing and distribution of intellectual property.
The tokens can also be programmed with smart contract functionality to automate royalty payments, licensing terms, and other contractual obligations. This allows financial institutions to streamline the management of intellectual property, reduce transaction costs, and provide greater liquidity for intellectual property owners.
Banks can tokenize a real estate asset to increase their liquidity, as a digital asset is easier to buy, sell, or fractionalize. Investors can buy smaller portions of the property, which can reduce the barriers to entry, making it more accessible to a broader range of investors. This means banks can access new customers, including those who might not be able to afford a whole property or don't want to take on the risk of owning an entire property.
Tokenization of real estate assets can eliminate intermediaries, reducing the time and cost involved in completing transactions. These transactions can then be made transparent or audited.
Cost is another benefit as we digitize physical places. We can reduce the costs associated with managing assets, such as property maintenance, insurance, and legal fees.
Tokenization of a piece of art involves creating a digital representation of the artwork on a blockchain network. This digital representation can be bought, sold, or traded like a cryptocurrency. This increases liquidity, as the token can be used for collateral against a loan. We can also imagine all the new people who could own a great piece of art if, say, they owned one millionth of a Picasso.
With the price of art skyrocketing in some markets, this technology can create a tamper-proof record of ownership and transaction history, reduce fraud, stop counterfeits, and prove provenance.
Financial institutions use different token standards to tokenize real-world assets, depending on the specific use case and platform they are using. Some of the most commonly used token standards for asset tokenization are:
New standards are being developed to address specific use cases and requirements. We’ll update this page as additional standards become available or popular.
Kaleido is a web3 platform that provides tools and services for businesses to create and operate blockchain networks. We make it radically simple for financial institutions to manage digital assets at scale. Tools we provide to help banks tokenize real-world assets include:
By using Kaleido's tools and services, banks can tokenize real-world assets easily and efficiently, providing benefits to both the bank and its customers. Schedule a talk with one of our solution architects today and see how quickly we can get your real-world assets on-chain.
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