The term ‘asset tokenization’ has taken the world by storm over the past few months with news about successful projects everywhere. Some are curious about it, some are highly excited, and some are just too doubtful that they choose to neglect it. Still, the question remains: What exactly is asset tokenization, and if it is powered by the blockchain, would it be able to change the face of asset management in the near future?
Asset tokenization simply explained
Asset tokenization refers to the conversion of the rights to assets with economic value into a digital token, which is then stored and managed on a blockchain network.
For instance, an asset valued at $200,000 could be tokenized into 200,000 tokens (or even 2,000,000 tokens if needed). Then, each token will hold 0.0005% share value of the asset. We can then issue these tokens on blockchain platforms that support smart contracts (such as Ethereum) and have them bought and sold freely on exchanges.
If someone buys a token, they are purchasing 0.0005% ownership of the asset. Buy 100,000 tokens, and they own 50% of the asset. Buy all 200,000 tokens, and they own 100% of the asset.
However, this type of ownership does not mean that someone will be able to become the lawful owner of the asset. Instead, the ownership details are registered and sealed to the public ledger of the blockchain, which cannot be removed or erased by anyone, even when not registered in government-run registries.
The concept of asset tokenization sounds strange and new to the public but has already been successfully applied to many valuable assets around the world.
A couple of months ago, ‘14 Small Electric Chairs’, a painting by the renowned American visual artist Andy Warhol, became the first million-dollars-worthy artwork to be tokenized and sold successfully on the blockchain. It was valued at US$5.6 million at the time, and approximately US$1.7 million was raised in exchange for a 31.5% stake of the artwork, with the auction entirely conducted using a smart contract. The event attracted more than 800 bidders, who were mostly from Asia and Europe.
The tokenization of ‘14 Small Electric Chairs’ introduced more than six million Ethereum-based tokens, named the ART token, and utilized by the Ethereum smart contract.
How it will change the way we manage assets
The application of asset tokenization is by no means limited to paintings only. Big value investments such as real estate properties, stocks, gold, and fine arts pieces could also be moved to the blockchain.
The values of these assets are rarely kept stable over time. As the demand and interests in these limited properties rise, their value would increase, as well as the tokenized value of the assets. The tokens could then be sold at higher prices, or generate dividends in some cases.
Take the Andy Warhol artwork for instance - if the bid price for the painting surpasses US$5.6 million, the value of the tokens held by its stakeholders will also escalate accordingly. If the current stakeholders decide to sell their ART tokens, they will receive a good return on investment.
The pros of asset tokenization are mostly attributed by the blockchain distributed ledger, which enables the tokenization process to be immutable, accessible, divisible, cost-effective and transparent.
How we can make it happen
Regardless of its undeniable benefits, asset tokenization still encounters several challenges. The legal status of the concept is currently left open, as the existing legal and regulatory framework is way far behind the technology.
If officially considered by governments, asset tokenization will launch a significant attack on the current property rights system, tax regulations, security infrastructure and safety regulations in many countries around the world.
The good news is that, some countries such as Switzerland and Malta are already on the frontier of blockchain adoption. These governments are more than ready to adjust their legal framework to adapt to the new blockchain market models quickly.
If successfully moderated and harmonized, the pricey assets that not many people can afford to buy might become the firsts to get tokenized. From then on, other countries will gain an interest in the technology and the market model, which will open ways for more legal efforts and solutions.