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What is tokenization and how it can unlock illiquid and opaque markets

BusinessCryptoWhat is tokenization and how it can unlock illiquid and opaque markets
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“The next generation for markets, the next generation for securities, will be tokenization of securities,” said Larry Fink, CEO of BlackRock, the world’s largest asset manager with $10 trillion in assets under management, in the December 2022 New York Times. dealbook event,

BlackRock is not the only major financial institution to express this sentiment regarding the token. JPMorgan has also promoted the benefits of tokenization one of its whitepapers, adding that tokenization could potentially enable financial services to be delivered “in a more open way”. JP Morgan not only writes about it but, and most importantly, has been experimenting with blockchain technology and tokens for several years.

One of its latest experiments was conducted in November 2022, assisted by the Monetary Authority of Singapore’s (MAS) Project Guardian, which was set up as part of a pilot program to explore the potential. Decentralized Finance (DeFi) Application in wholesale funding markets. JPMorgan has successfully executed its first cross-border transaction using decentralized finance (DeFi) on a public blockchain.

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The trade was executed on the Ethereum layer-2 network Polygon using a modified version of the Aave Protocol’s smart contract code. Live cross-currency transactions include simulated buying and selling of tokenized Singapore Dollar and Japanese Yen deposits as well as tokenized government bonds. The token Singapore dollar deposit was the first issuance of a token deposit by a bank.

In addition, JPMorgan developed the JPM Coin, a version of the United States Dollar stablecoin. JPM Coin is currently in its prototype stage and is being tested and tested for money transfers among JPMorgan’s institutional customers. JPM Coin may be launched in other currencies if the dollar prototype proves successful.

Why are these major financial institutions so excited about the potential of tokens? What benefits can tokenization bring to financial and economic markets? And how might it shape the way financial markets operate globally? Before we get into the benefits of tokenization, let us first understand what tokenization is.

What is tokenization?

Simply put, in financial terms, tokenization of assets refers to the process of issuing digital tokens that run on a blockchain. This token is a digital representation of an asset – tangible or intangible – and its value is based on the value of the asset it represents, just like the process of traditional securitization, but with a digital twist.

Tangible assets can be real estate, stocks, or artwork, which can be tokenized. Similarly, intangible assets can be voting rights, loyalty points or patents. Avios, a global travel currency that turns daily spending into travel and leisure rewards for nearly 8 million customers worldwide, is one example token loyalty point, IPwe, an IP transaction platform, is an example of token intellectual propertyPatents in particular.

So why bother tokenizing anything at all? How does this matter to institutions like JP Morgan?

benefits of tokenization


Liquidity is among the top reasons for tokenizing assets. The increased liquidity comes from several features: removal of the liquidity premium associated with illiquid assets, fractionalization and globalization.

Liquidity premiums are often associated with illiquid assets such as real estate or fine art, which given their scarcity may be difficult to transact on, or difficult to handle and transport (For example, imagine trying to safely transport a Jeff Koons balloon dog – In this case it may also be beneficial to create a “digital twin” of this fragile artifact through a non-fungible token (NFT), which can then be tokenized as a redeemable token to provide liquidity and fractional ownership to the NFT. can be given). Introduction of liquidity, therefore helps in introducing fair prices.

Tokenized assets also enable fractionalization of assets, which is not possible when using traditional instruments (for example, instead of owning the Mona Lisa, you can own a portion of the Mona Lisa if it is tokenized). have gone). Once investments are divested, their liquidity increases, as more investors will be able to afford their portions rather than paying for the entire asset.

Public blockchains are inherently global in their nature, opening up markets to a wider audience of investors. The increased liquidity enables investors to enter and exit positions faster without lock-up periods or large slippages – the difference between the price expected on sale and the price executed.

For example, real estate is one of the most illiquid asset classes. When a property is worth a few million dollars, it can take a long time to buy and sell the property, as there are only so many people who can afford such property.

Now imagine tokenizing a $1 million house, issuing one million tokens, where each token represents ownership of the asset. When these tokens are available for purchase in the market, anyone can participate based on how much they can afford — in this particular example, it would be as little as $1. In fact, it can be much less than $1, as each token is infinitely fractional. Bitcoin is fractional, and you can buy a fraction of a bitcoin.

All of this is to say that fractionalization naturally increases the ease with which illiquid assets can be bought and sold.

All illiquid asset classes, such as private equity and venture capital, can benefit from tokenization. In September 2022, KKR token Its Health Care Strategic Growth Fund II (“HCSG II”) on the Avalanche public blockchain, which made institutional private market strategies more accessible to individual investors.

From a property owner’s point of view, this opens up options to sell only a portion of the property through tokenization instead of selling the entire property – for example, you can only sell 20% of the property or only a particular apartment in an apartment building. Can token.

From an investor’s perspective, someone with $1,000 in Brazil could invest in property in Manhattan. This is not a hypothetical scenario; This is already happening. realt Offers tokenized properties to investors. While assets listed on their platform range in price from several hundred thousand dollars to a few million, they are tokenized, and each token can be worth as little as $50. This makes it extremely affordable for interested investors in most locations in the world.

In late 2022, the Boston Consulting Group (BCG) issued a reports Noting that “a large portion of the world’s wealth today is locked up in illiquid assets.” BCG predicts that the total size of tokenized illiquid assets, including real estate and natural resources, could reach $16.1 trillion by 2030.

The proof of the benefits of tokenization is already there. one in Study the matterIPwe grew ROl by 25% for Crown Electrokinetics’ IP portfolio.

Transaction speed and low cost

When assets are tokenized, many of the processes of intermediaries previously required for transactions and transfers can be automated. This leads to more cost-efficient transactions and faster processing, thereby benefiting investors and traders.

Tokenized assets also enable near instant settlement. In traditional finance, settlement and clearing are complex processes that require various intermediaries to complete. With tokenization, anyone can easily start transferring their tokens, leading to an automatic reallocation of ownership rights.

Token issuers benefit from reduced reliance on the public internet and reduced insurance costs. It is estimated that tokenization could reduce Bond issuance cost increased by 80%, A report by Roland Berger suggests that if the adoption rate of a token was high, overall cost savings could reach 4.6 billion euros (US$4.83 billion as of this writing) by 2030.


With a public blockchain, every transaction is stored in a publicly available ledger. The immutable nature of the underlying technology prevents tampering and helps reduce counterparty risk by giving everyone access to their counterparty’s transaction history. This benefits investors because they have more insight into who they are trading with than with traditional systems.

Tokenization of assets could potentially help fight corruption and tax evasion by making revenue streams visible. With respect to corporate social initiatives, tokenization can increase compliance through transparency and provide an easier way for shareholders to vote through governance.

one in recent reportIPwe demonstrated how their patent valuation methodology provides a solution to undervalued and underutilized patents by bringing transparency to the market and by measuring and increasing patent utilization rates.

Liquidity Risk Management

Liquidity risk management within financial services organizations can also benefit from tokenization. The collapse of FTX could clear up this gain. There were several underlying issues in the FTX collapse, one of them being related to a liquidity gap. If there were checks and balances that were transparent for customers to see, mitigation actions could have been taken in time.

At no point did FTX create transparency as to how much liquid assets they had to meet their liabilities. Thus, FTX managed to repurpose user funds (liabilities) to its investments (illiquid assets). Marking both assets and liabilities would show liquidity gaps in real time and alert the market of a looming crisis.

Following the collapse of FTX, there has been a rapid effort to provide proof of stores from several centralized crypto exchanges. Proof of reserves only shows that the company has some assets to repay its debts; It does not provide any information on the liabilities of the organization. If a company can transparently demonstrate that it has $1 billion in reserves/assets, but its liabilities, which could be $10 billion, are not clear to all, then its solvency is in question.

Hence, showing proof of A Going Concern would be more useful. If both the assets and liabilities of an organization can be tokenized, then on-chain analytics can be used to understand whether the organization has enough assets to meet its liabilities. In other words, it answers and verifies whether an organization is a going concern – that is, whether it will meet its financial obligations when they become due.

Democratization and Financial Inclusion

The tokenization of assets makes them more accessible to retail investors. In the example given earlier, an investor with $100 could own a share of a million-dollar asset in a prime position and benefit from an increase in its value. Without tokenization, they would not be able to participate in high value assets that offer good returns.

This is especially true for high-net-worth individuals who want access to products only available to private banking customers. Products with attractive return profiles are offered exclusively for institutional investors. Even high net worth and sophisticated investors would struggle to get access to these assets.

Since tokenized transactions run on the blockchain, they do not require the user to have a bank account or broker account, making it accessible to anyone from anywhere. Accessibility and fractionalization enable financial inclusion to reach those who most need financial services, meaning that underserved communities will be served.

the challenges

There are some challenges that must be resolved if the token is ever to scale to become mainstream. Following are some of the main challenges, which are yet to be resolved:

  • loss of private keys if the asset still exists;
  • The underlying property is lost, but its symbolic representation still exists;
  • scalability;
  • Regulation – How can we have unified regulation to facilitate global compliant transactions in a global framework.

Tokenization has great potential to open up markets, democratize access, and significantly increase efficiency and transparency. As technology and regulations develop, tokenized assets will play an increasing role in financial markets and beyond.

The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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