Since its inception in 2017, digital asset tokenization has generated a lot of curiosity and anticipation. Tokenization is the process of creating a digital representation of an asset on a blockchain. Physical assets like real estate, artwork, financial assets like stocks, or even intangible assets like intellectual property can be considered among these assets. By 2030, analysts predict that tokenized digital securities might be issued for between $4 trillion and $5 trillion.
What are the benefits of tokenization?
Here are some benefits of tokenization:
Cost savings
Smart contracts can be used for automating processes and complex transactions by placing conditions to be met. Any process or task that required more human attention or was error prone can be executed automatically with the help of smart contracts. System automation leads to cost savings as it eliminates a lot of intermediate processes and makes the system more efficient.
Streamlined payment processes
The real advantage of tokenization is realized at the time of receiving periodic interest payments. Dividend payments are only transferred to investors after complete verification of details by back-office servicing and third-party providers. This is a time intensive activity and also takes up resources. A tokenized security can regularly transfer payments directly into the investor’s digital wallet in a transparent and secure manner with an immutable record of the transaction.
Enhanced compliance, auditability, and transparency
Most of the conventional and current compliance systems are manual. by integrating compliance related actions into the tokenized assets, all the compliance processes can be automated. Along with automating these compliance processes, it also opens up the potential of immutable recordkeeping and real-time auditable accounting.
KYC and client eligibility process improvements
Smart contracts and digital wallets allow integrating specific information like client’s eligibility, security-specific transfer and other regulatory restrictions to streamline the transactions and have better compliance monitoring. This helps financial institutions with their know-your-customer (KYC) processes, which are essential for stopping crimes like money laundering and fraud. The fact that these frequently laborious forms and applications only need to be filled out once and updated appropriately, rather than every time an investment is made, is another advantage for investors.
New opportunities
Tokenization opens up the possibility of increased profitability and developments for investors as it eliminates the conventional concerns like lengthy lockups high minimum investment, and relative illiquidity by digitizing private assets like those in real estate and private equity.
Enhances settlement process
Settlement is practically immediate with blockchain. A conventional investment transaction would get settled in three steps. First comes the trade. The procedure of cleansing comes next. After two days, the transaction has finally reached its last stage, known as settlement, when money is transferred in return for the DTC security transfer.
The new method currently consists of two steps: match and settle. There’s no phase of cleansing involved. The transaction will reverse itself if the smart contract is not able to arrange the exchange of cash for securities directly into each party’s wallet. Both parties can return funds and assets to work more quickly thanks to this almost instantaneous settlement.
