April 03, 2024
By Anjali Kochhar
Tokenization of assets or asset tokenization is a process involving the transformation of assets into a digital token. It can be physical or non-physical assets that can be utilized by industries like finance, art, real estate, and health care. In simple words, we can put it as a process where digital tokens indicate the ownership rights of an asset which are stored on a blockchain.
The digital tokens are akin to digital certificates of proprietorship and as they are stored on a blockchain, the custody of the same can be maintained by the owner in their secure crypto wallet.
Tokenization of assets is a relatively new term as it was only introduced in 2017 and has not picked up at an expected pace. However, recently financial giants like UBS, JP Morgan, Goldman Sachs, HSBC, Fidelity, BNY Mellon, and BlackRock have started using asset tokenization for real-world assets.
According to Ben Challice, Global Head of J.P. Morgan Trading Services, “The TCN allows more assets to be used as collateral – by representing ownership interests in the assets as tokens. It enables the mobility and velocity for these assets that the market has been demanding by removing the settlement friction that exists today.”
Real-world assets (RWA) like fiat currency, equities, bills, credit, commodities, carbon credits, intellectual property, and fine art all can be tokenized and can be stored on a blockchain. Like gold bonds or house documents, they’re owners’ assets that give the owner a right over an RWA. The main difference from traditional bearer assets is that RWA tokenization enables assets to be stored and used as collateral across blockchain networks.
Goldman Sachs has launched its digital asset tokenization platform, GS DAP, with the issuance of a €100 million ($104m) digital bond for the European Investment Bank (EIB) on the private GS blockchain. “Blockchain has the potential to disrupt a wide range of sectors. It plays a central role in the success of Europe’s green and digital transitions, and strengthens our technological sovereignty,” said EIB Vice-President Ricardo Mourinho Félix
As per a report published in South China Morning Post on 27 Mar 24, HSBC has launched tokenized gold to its retail customers in Hong Kong as part of a push by the bank and the government to make real-world assets available in digital form.
According to Maggie Ng, GM and Head of Wealth and Personal Banking Hong Kong at HSBC, “We acknowledge the rising demand for digital assets and the existing familiarity of our customers with gold investment, We are proud that HSBC Gold Token, powered by HSBC Orion, is the first retail product in Hong Kong that is based on distributed ledger technology.”
As per the data available at marketsandmarkets.com, the global tokenization market was around $2.3 billion in 2021 which is expected to cross $5..6 billion by the end of 2026.
India is not far behind in asset tokenization and it is expected to soon roll out digital asset tokenization service in Gift city Gujrat.
India’s first International Financial Services Center (IFSC) at Gift City in Gandhinagar will soon roll out regulated digital asset tokenization services. While asset tokenization is offered by the US, France, and Switzerland among others, this is the first time when GIFT-IFSC enables its launch in India in a regulated manner.
Risks associated with Asset Tokenization
One can see that asset tokenization offers numerous advantages and presently there is tremendous hype around the world for the same. However, as an investor or as an owner of an asset, one would like to consider all the scenarios including the risks associated with it. The biggest question is “How safe is asset tokenization?”
1. Regulatory Framework – Firm regulatory policies are not in place. Tokenization of different assets needs different standards and in-depth knowledge.
2. Smart Contracts are not foolproof – Smart contracts are used to automate the implementation of a contract and all the participants are immediately certain of the result, without any third-party involvement and loss of time. However, this is one of the biggest reasons for financial losses in the DeFi community. Smart contracts do have coding errors and flaws which can lead to undesirable outcomes.
3. Limited Takers – Blockchain technology requires tech-savvy takers. Further financial regulators also resist blockchain investments. Conservative investors, those who are habitual in trading in government-regulated environments are not very comfortable taking risks in trading in the blockchain environment.
4. Volatile and Speculated Market – Mainstream media is full of news related to scams in crypto exchanges which has impacted the confidence of the probable investors in this segment. High price volatility without any news or reasons, has become a big challenge for the market to attract investors and offer them stable market conditions.
Asset tokenization presents a transformative shift in ownership representation, yet faces challenges such as regulatory ambiguity, smart contract vulnerabilities, limited adoption, and market volatility, necessitating careful consideration.
About the author
Anjali Kochhar covers cryptocurrency stories in India as well as globally. Having been in the field of media and journalism for over three years now, she has developed a sharp news sense and works hard to present information that goes beyond the obvious. She is an avid reader and loves writing on a wide range of subjects.
