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Art Tokenization

It all started in 2018 when a startup introduced a whole new concept that revolutionized the art industry. Tokenization of art, involving blockchains and cryptocurrencies is the process of digitizing rights to an asset into a digital token on a blockchain. It is to enable efficient ownership transfer that can potentially decrease friction in transactions. With fine art being such a conservative industry, it should be digitally transformed in order to sustain growth.

Paintings, sculptures and other such artefacts were sold through the conventional method. It has always been an archaic industry right up till then. Auctions were only for a limited few and it required the bidders physical presence. The skyhigh prices also made the pieces harder to sell. What tokenization did was to flip the entire industry on its head. One of the biggest advantages of tokenization is to make markets much more liquid. It makes buying and selling much more seamless and in an illiquid art industry, this could be a very interesting advantage to leverage on.

Artists and art owners could simply use NFTs to fragment the ownership of the artwork on the blockchain. This is done by converting the physical painting into thousands of digital tokens, where each represents owning a fraction of the actual painting itself. In a way, it is similar to purchasing shares which represents partial ownership in a traditional business.

There are several steps to be taken before tokenization starts:

  1. The piece of art is appraised by an accredited curator to set its value.
  2. The artwork will then be converted into digital tokens. Easiest way to justify the number of tokens minted, is to mint each token at nominal $1 to represent the full value of the artwork.
  3. The token could then be sold to potential buyers. Once the sale is completed, the tokens will then be transferred from the artist to the new owners, either in full or based on the number of tokens they have purchased.
  4. Buyers are able to purchase tokens of numerous artworks to have fractional ownership of each.
  5. These tokens will then be available for trade.

The blockchain is an immutable and transparent technology. All of its features, benefits and advantages are also available to the minted tokens. This could remedy many of the issues plaguing the traditional art industry.

Fractionalizing the ownership of the artwork goes beyond multiple ownership. It means the democratization of the art industry, and that the opening of a sector to a newer and larger network. This way, independent and up-and-coming artists can leverage on this technology  to list and promote their artwork instead of displaying them in the traditional and expensive galleries. This also allows them to own the entire artwork and lower the running cost by not having to pay third-parties or agents.

The global art industry was valued at $63.7 billion in 2018 and experts predict that this sector will experience exponential growth in the coming years. The blockchain has the potential to play a major part in art tokenization. It could be a revolutionary move to lower the barriers to entry for potential investors and new artists alike.

Source: Medium, TokenD, Scalac

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Tokenization of Funds

Blockchain technology is one of the most disruptive forces since the invention of the internet. It has brought down many barriers and made the cost and speed of transactions cheaper and faster. People are able to transfer vast amounts of money anywhere around the globe at a fraction of the price and at almost instantaneous speed. This was just the beginning.

This has led to other products being offered on the blockchain like DeFi and smart contracts, to name a few. Tokenization is one of the newest projects to be available on the blockchain. It is the process of digitizing an asset, e.g. a fund. These tokens then represent a unit and economic interest in a fund that can be freely traded on a distributed ledger. No matter the capital, tokenization will be able to address the issue as more tokens can be minted to ensure that the fund is accessible to almost all types of investors without diluting the value.

Looking back at traditional funds, they suffer from friction such as lack of liquidity, opacity, and high barriers to entry like large initial minimum investment. Tokenization of funds could likely iron out these problems. There are little to no broker fees involved which reduces barriers to entry, and it allows investors to see the fund mandate smart contracts on the blockchain as well.

Despite all the positives, some questions still remain, e.g. blockchain’s scalability, regulatory concerns, structuring hurdles and more. Without resolving the scalability issues, mass adoption is not possible. Regulatory concerns is another major issue as a central authority governing blockchain services like tokenized funds is severely lacking. This would then naturally create concerns for investors regarding liability and accountability. In the event if a tokenized fund does not conduct as their mandate suggests, would they then be subjected to the same securities laws as traditional funds are bound to?

After tokenization, comes the issuance of these tokens. When these tokens are issued, they are allocated to only eligible and approved investors. This is derived from the regulatory point to whom a fund can market to and the type of investors they can onboard. Next comes the custodian to store these tokens. Fund issuers are generally always in control of their token supply and it would be difficult for investors to lose their securities, even in the case of losing access to their wallet. Tokenization will bring most of its benefits post-issuance. Corporate actions and reporting are easily managed due to smart contracts and speed of execution is also increased. Tokenization will increase transparency and overall operational efficiency of the fund industry.

With all that said and summarized, the benefits seem to outweigh the costs. Tokenization is the direction of the future, and more regulations will definitely improve investor sentiments on the governance issues which will only make the industry flourish.

Source: Medium, Hackernoon, Tokeny