The Potential of Tokenizing Assets: From Houses to Private Equity & Whisky

Industry InsightsMarch 02, 2024
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Asset tokenization represents a paradigm shift in the way we perceive and interact with assets, offering unprecedented opportunities for liquidity, accessibility, and efficiency. Although it’s a rising trend in the financial market, it doesn’t come without challenges. This article explores both the downsides and benefits of asset tokenization.

What is Asset Tokenization?

In the last six months, several private companies, banks, and real estate agencies have been experimenting with asset tokenization, taking the purchasing and selling of real-world good to a whole new level. It’s not just about a billionaire owning a really expensive piece of art, or a family buying a house in the suburbs. Asset tokenization opens up a new world of possibilities for people all over the world – and all you need is internet access and a blockchain-based wallet.

Asset tokenization is basically the act of converting the rights to an asset into digital tokens that are recorded on a blockchain. These tokens can represent a wide range of assets, including real estate, stocks, commodities, art, intellectual property, and more. Each token is programmed with certain rights and attributes. The latter can range from ownership stake, dividends, voting rights, or access to the underlying asset.

Asset tokenization may pose various advantages when it comes to protecting intellectual rights or purchasing a real-world asset without having to deal with time-consuming processes and jump hoops. The most obvious benefits of this trend are transparency and security, as everything is processed within blockchain networks. The fact there are transparent and immutable records of ownership reduces fraud and improves trust in asset transactions.

Increased liquidity is one of the benefits, especially when it comes to traditionally illiquid assets such as real estate or artwork. Asset tokenization allows investors to exchange fractional ownership stakes, offering more people the chance to own part of a certain asset. This means several people would be able to own a part of the Mona Lisa, or Guernica, for example.

With asset tokenization, forget the need for intermediaries like banks, brokers, or real estate agencies – this makes the whole process cheaper, faster, more transparent, and more trustworthy. Tokenizing this process also globalizes the purchasing and selling of goods, enabling exchange across borders, 24/7. If you’re in India’s remote countryside and have access to your web3 wallet, chances are you’ll also be able to purchase part of Mona Lisa.

From Homes to Vintage Whisky

If you think this is just a theory or a hypothesis, think again: there are companies already experimenting with this new asset exchange method. One of them is Citigroup. The investment bank giant has succeeded in completing a trial regarding the potential for tokenizing a private equity fund using blockchain. According to Citigroup’s research paper, the bank worked with Wellington Management and WisdomTree to assert ‘proof of concept – and with great results. Although this was only a trial, it shows the asset tokenization’s feasibility. “The potential benefits range from solving infrastructural issues in traditional operating models to the possibility of new investment product and servicing capabilities enabled by DLT features, such as programmability and composability”, the paper states.

Recently, the Indian company GIFT City has also shown interest in entering the asset tokenization market. Realdom India Pvt Ltd is set to launch Pinvest, an exchange platform offering different real estate projects catering to non-residents and foreign investors. This might represent the start of a new era for the real estate market – we are now looking at collective ownership over a real-world asset and other business models. To know more info on the GIFT City case, check here.

Another interesting case involves the whisky company, The Glinvet, which has recently launched an exclusive collection of 12 bottles on a blockchain-based marketplace, The Whisky Exchange. This is yet another example of a tokenized RWA: there’s a transferable digital certificate issued in the name of each buyer that proves ownership. The certificate also enables buyers to sample the rare whisky and get a bottle once it’s released later this year. Curious about this deal? Read all about it here.

Regulations, Fragmentation & Beyond: A Look into the Downsides

Although this market trend is growing and constitutes some benefits, there are some obstacles to its adoption. Regulatory compliance is one of them: besides the fact that a lot of countries don’t really have any real legislation regarding crypto transactions, there’s also the question of different jurisdictions imposing varying requirements and restrictions.

Also, despite the inherent security features of blockchain technology, these assets are still vulnerable to hacking, theft, and other cyber threats. There’s a need to tighten security regarding tokenized RWA, especially because we’re now talking about physical things.

Although there are some specific RWA and other asset tokenization markets being created, there is still a too wide range of different platforms with different tools, security frames, and elements, which can hinder liquidity and interoperability.

The decentralized aspect of markets operating with crypto is great for transparency and a more direct relationship between buyers and sellers, but it can also undermine prices and liquidity due to its highly speculative nature.

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