The incredible innovation potential of cryptocurrencies and their technologies is now taken very seriously. A recent report published by the Boston Consulting Group (BCG), estimates that tokenization could be one of the main development niches enabled by blockchain development companies.
The potential in this area of tokenization is simply gigantic in the medium term. Indeed, the Boston Consulting Group estimates that this market alone could reach $ 16,000 billion by 2030.
Tokenization of financial assets
To date, start-ups and large companies in the financial markets can use the tokenization of financial assets. Thus, many blockchain development companies and start-ups use tokenization to offer investors the acquisition of assets attached to secure economic rights.
Tokenization has come to revolutionize traditional financial investment methods. It allows continuous monitoring, streamlines processes, and makes transactions faster.
Tokenization: How does it work?
Today, owing to the tokenization of assets, it could go public, something that investment banks would have previously considered excessively expensive. With Security Token Offerings (STO), the owner of any fintech business could offer their assets, or part of them, to any investor in the world.
Blockchain security tokens are liquid tangible assets or intangible (copyright, celebrity, football player). Tokens allow investors to have the security, speed, and ease of transfer guaranteed by a real asset. Smart contracts are algorithmic software licenses that verify the terms and conditions without conflict or interference from third parties. Changes can only occur when all stakeholders agree on a given shift, which will help build trust and security among investors.
Benefits of Tokenization
Tokenization is suitable for subscription-based business models or any business that generates significant business through repeat customers. There are several fundamental benefits for companies that implement it.
Among the most glaring are:
● The possibility of attracting investors of all profiles: Indeed, it is possible to acquire tokens of all values depending on the extent of the rights attached to them.
● The instantaneous and dematerialized nature of the investment: This type of process is characterized by the elimination of the majority of intermediaries and its accessibility. Indeed, the geographical location of investors and issuers of securities does not matter since transactions are carried out exclusively via the Internet on a constantly open market.
● The security attached to this type of investment: The fact that the tokens and the rights associated with them are stored on the blockchain makes it possible to safeguard the traceability of transactions in a reliable and transparent manner.
● Security: If fraudsters steal tokenized payment data, it doesn’t mean they can steal money. They cannot use the stolen tokens to pay online since they cannot link the token to the payment information that the payment partner securely stores.
● Reduced costs: Businesses can save money in the long run due to the secure nature of tokenization. In addition to reducing compliance costs with minimal PCI scope, they run less risk of data breaches that could lead to significant fines or legal battles.
● Simplified payments: As we have seen above, the payment process is not only faster with tokenization – since it can be done with a single click – but conversion rates are also increased, in particular, because the information maps are always up to date.
Effects of tokenization on unlisted financial assets
A few initiatives have already emerged to facilitate investment in this asset class through DLT technologies. This is the case, for example, of HSBC, UBS AG (Union Bank of Switzerland, Aktiengesellschaft), EIB (European Investment Bank), IDB Group and Davivienda Bank, Bolsas Mercados Españoles (BME), along with Banco Bilbao Vizcaya Argentaria (BBVA) and the Inter-American Development Bank (IDB), Philippine Dealing System Holdings Corp. (‘PDS Group’). These banks use a DLT solution to streamline the integration of unlisted securities into the PEA (a financial framework that aims at diversifying companies’ funding sources)/ PEA-PME of its customers, or LiquidShare, which simplifies the post-trade processing of securities of SMEs along with the issuance of bearer bonds.
Let’s push the reflection with the case of a Private Equity fund that would use tokens throughout the value chain, which would issue them for its liabilities and hold them for its assets. On the liabilities side, the use cases of the Blockchain for the issuance of fund units are known, and solutions exist (IZNES, FundsDLT, etc.). However, the gradual release of capital by successive calls for funds is a specific process that should be considered. Automating calls for funds would be an undeniable benefit for the industry, subject to managing to encode the rules in a smart contract.
Are the benefits of tokenization of the participants of a private equity fund also there? The obstacles to adoption seem significant to us, and the ROI is still being determined. Indeed, most Private Equity funds take stakes alongside other investors during funding rounds. If a fund wants to tokenize its participation, it must decide with the company that opens its capital and the other investors. The fund custodian will also have a say. Stakeholder alignment is a powerful barrier to adoption.
In addition, the main benefit to be expected from holding tokens instead of non-digitized title deeds is, as for liabilities, the automation of “post-trade” operations. It is possible on the condition, again, of coding the rules of the shareholders’ agreement, the covenants, and other clauses specific to each fundraising. The initialization costs of the issue are, therefore, not zero and reduce the expected efficiency gains for the management of the life cycle of the participation.
Finally, the cost of managing investments remains limited compared to an investment fund’s sourcing, due diligence, and negotiation activities. For these high-value-added activities, tokenization does not bring any benefit.
For optimal performance and value for money, it may make sense to outsource key functions to a trusted fintech application development service provider with expertise. Even large enterprises, with huge IT budgets and internal resources, are turning to the cloud for access to specialized applications.