Asset tokenisation is the new kid in the block, pun intended. It refers to the process of representing real world assets as digital tokens in a blockchain ecosystem and promises to revolutionise the delivery of public services.
Let us begin with the basics of blockchain. It is a database that facilitates recording and sharing of transactions across a network of computers that are participating in the ecosystem. It has three central attributes. First, the database must be cryptographically secure and requires authentication through two keys – a public key, which is basically the address in the database, and the private key, which is a personal key that must be authenticated by the network. Next, the database is fully online and lastly, it can be shared across public and private networks.
What are digital assets
Bitcoins and other cryptocurrencies were the first blockchain based digital assets. However, it is not limited just to them. They encompass tokens representing value that can be traded within a blockchain network. In terms of real-world assets these can represent real estate, artwork, financial instruments such as equities and bonds, precious metals, IP rights and even carbon credits. In a nutshell, anything that has value can be tokenised. Currently the majority is focused on real estate and art.
Tokenising an asset not only makes the transaction more secure and transparent, but also eliminates any intermediation. Further, it enables fractionalisation of asset. Imagine a piece of land or an apartment. Currently, one person can hold the ownership but once the asset is digitalised and broken into a certain number of tokens, the ownership can then be distributed and rather than owning one piece of land, one can hold 1/10th or 1/20th of it.
As per a draft discussion paper, Blockchain: The India strategy released by NITI Aayog in January 2020, it has pursued proof of concepts in four areas to assess the potential of blockchain technology in delivering improved efficiency and better understanding hurdles in implementation. The paper discusses various areas where blockchain can be used to make public services delivery more efficient by leveraging existing technology.
Why to tokenise?
One might wonder, why tokenise at all. It might be a long time before perfection is achieved but tokenisation has its set of benefits. When assets are divided into smaller parts, more people can invest in them. By accelerating and improving the fractionalisation of new asset classes, tokenisation will expand the range of available and acceptable collateral beyond traditional assets.
Another major advantage is the efficiency and lower fees in blockchain transactions when compared to traditional financial systems. This makes it easier for small time investors and reduces the entry barrier for investing in certain asset classes.
Boundaryless transactions and transparent shareholder Management
Public blockchains are inherently global. With proper KYC and AML, the limitations of borders will fade away and this in turn will increase the geographic reach. Owning a property in US while sitting in India will be possible and hassle-free. Tokenisation will also reduce transaction times, permit 24×7 trading and also reduce counterparty risk.
Blockchain infrastructure offers a digital way to keep track of shareholder. This makes it easier for the issuer to handle administrative tasks such as profit sharing, voting rights distribution and buy-backs. It can also help professional investors by making accounting operations, like net asset value calculations simpler. Eventually the ability to manage asset-liability risk will improve through accelerated transactions and higher transparency. As people become more comfortable with using the digital ledger as the main source of information, there may be no need for reconciliation because everyone will trust the record.
There is a slow but steady movement by regulators to lay the foundation for creation and exchange of digital asset tokens. Importantly, the real-time data and immutability of data held in a digital ledger will help regulators to protect investors.
Though great strides have been made in technology, tokenisation is still at a very nascent stage. A lot has to be done before it can impact the way we transact. At present the concept itself is alien to most investors and those who are familiar with the technology are hesitant to let go of old ways and invest in digital assets. Despite these challenges, tokenisation is here to stay and has the potential to democratise access to a wide range of asset classes and to a whole range of new investors.
