Asset tokenization is the process of creating a digital representation of an asset on the blockchain.
To understand how this process results in a range of benefits, it’s important to first understand how they are created and how they work.
Almost any digital or physical asset can be tokenized from a technical perspective. However, whether this is possible and has material benefits from a practical perspective depends on the specific asset, jurisdiction and use case.
For example, creating a token that represents the equity interest (a share) in a company is of limited value if there needs to be a physical register of share ownership (and physical certificates) in that company’s jurisdiction of incorporation. Conversely, when a token can represent the actual financial product, you’re likely to see meaningful benefits – whether that be from a self custody perspective, record keeping, issuance or transferability.
Assets can be tokenized in various ways, with tokens able to be fungible, non-fungible or partially fungible. This structural flexibility allows for the technology to be applied across a variety of asset classes and types:
Fungible asset tokenization: Each unit of a fungible asset is both interchangeable and divisible. This works for equity, debt and derivatives.
Non-fungible asset tokenization: Each unit is unique and therefore neither interchangeable and divisible. This is used for digital art and collectibles.
Partially fungible asset tokenization: The token contract is allowed to partition a token holder’s balances into tranches, within which tokens are fungible, and outside of which they may not be. This works best for certain financial instruments.
There are many advantages associated with tokens compared to traditional assets, impacting cost, compliance, liquidity and flexibility. Tokenized assets and digital securities can be a far more streamlined, cost-effective and ultimately beneficial way of owning and financing assets, removing friction costs and resulting in a more streamlined investment, trading and reporting processes.
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