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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

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Taking Real Estate Tokenization Further

U.S. President Franklin D. Roosevelt once said: “real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” This view still holds strong with property ownership being the single, greatest store-of-value vehicle and wealth creator throughout human history. Although many individuals and institutions see real estate as an attractive investment, the initial capital required to achieve this investment creates a significant barrier to entry for the average investor.

Apart from the high cost, inefficient manual and labor intensive processes, liquidity due to limited participation adds friction and inefficiencies also adds to overall costs. To make real estate investments accessible to a wider investor base would require improving the inefficiencies. This would significantly bring down the cost of investment in the initial stages.

Real estate investing has evolved considerably over time. Most notably with the introduction of Real Estate Investment Trust (REIT). This provides retail investors with exposure to the asset class for the very first time. The next generation of real estate investments is already happening as we speak. Issuing real estate tokens on the blockchain and creating a marketplace for property owners, investors and other stakeholders is the solution to take the real estate market further.

Tokenization is the process of creating tokens to represent fractional ownership of an asset, or a real estate in this case. A token is very versatile in nature as it could represent an equity interest in an incorporated entity that owns the real estate, or an outright fractional ownership of a particular real estate amongst many other potential representations that the real estate industry has to offer.

Fractionalizing a title deed into tokens would potentially allow many investors to begin participating in a single property. This solution immediately solves the issue of high barriers to entry. A $5m property, once an unachievable investment for most, can be fractionalized into 5,000 tokens with each priced at only $1,000. These tokens are backed by the value of the property and can potentially offer rental dividends yield as well. The rental dividend can be done on a smart contract for a periodic payment like on a monthly or quarterly basis. This rental income could be distributed directly to the investors digital wallet. Owning an investment property can essentially be as simple as holding a digital token. This type of fractionalization allows smaller investors a low-risk and low-cost way to participate in the market, and have exposure to a real estate investment. This would eventually open new possibilities once unattainable.

REITs success could be down to its liquidity. Investing in REITs is a viable option to have some form of general exposure to commercial real estate but the selection of property is not at the discretion of the investor. However, if the intention is to own individual private property or a small collection of private properties, only crowdfunding offers an alternative solution, until now.

Tokens can be tradeable on secondary markets, such as ECXX.co. The process of tokenization combines the best of both investment subsegments, a REITs liquidity model and option to participate in a single private property investment.

Tokenization and digital securities represent the next wave of technology. It gives investors unique opportunities to rethink real estate investment from an age-old system that has high entry barriers to anyone with some spare cash and an internet connection.

 

Sources: RENX, Nasdaq

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Blockchain to Disrupt Traditional Markets

The opportunity of blockchain could be substantial as crypto already has a market capitalization of about US$2.3 trillion. Almost all assets will eventually be tokenized to trade, ranging from stocks to securities to bonds and commodities. That has been the vision of many executives in the crypto space. New-age, mainstream finance will have to eventually run on digital rails and platforms. In other words, on the blockchain.

Blockchain is a record of all transactions that does not require an external or centralized authority to validate the authenticity and integrity of data. This technology is used to create tools to provide many types of financial services in a decentralized, and non-governed way. This is now typically referred to as decentralized finance (DeFi) and Security Token Offering (STO). Blockchains are trying to recreate existing traditional financial services in a decentralized way using blockchain.

On a smart contract platform, it is possible to tokenize almost anything imaginable. This would include things like pictures, music, virtual gaming items, art, wine and much more. This is called a non-fungible token (NFT). These NFT’s are tradeable and are representations of their underlying asset. They are one-of-a-kind digital collectibles and this game changer could have huge repercussions for IP protection and royalty collection in the art and media industry. An NFT was recently sold for US$69m by digital artist Beeple called ‘Everydays: The First 5000 Days’. This made major waves in the NFT scene.

Apart from a representation of a physical asset, an NFT can also be used to represent collateral for loans or accounts receivables. In another real-world use case, an NFT can also be used as digital identity, in lieu of physical cards or certificates. In an ever increasing digitalized world, such digital identification services are becoming more critical. To put NFT’s in perspective, they are as unique as an individual’s identity and can virtually represent any good, service or person and more.

Digital innovation has always disrupted almost every major industry, from retail commerce and media to hospitality and even logistics. Fintech startups have begun to eat into the market shares of traditional financial services providers, the current business and transaction models have not been challenged on a larger scale. Big players in every industry still dominate the competitive landscape and will most probably continue to do so in the short term future, at least.

This is still very early stages for tokenization, it is important to track the developments in the industry. The groundwork for potential disruption of major businesses around savings, payments, investing and capital raising are already being laid. As part of the industry’s growth, there have been big strides and a growing number of companies that enable the tokenizing, trading, managing and storage of digital assets. This could be the start of a major disruption in the industry.

 

Sources: Robeco, Coindesk

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Tokenization of Everything

Tokenization is changing almost every industry and establishments have to be ready for this major force. Asset tokenization could bring fundamental change in the way traditional investing was done. Tokenizing involves issuing a token on the blockchain, this would probably be a security token. This token would then be a representation of the real asset that can be traded. The tokens serve as a store of value while carrying the rights of the assets that it represents. At the same time, the real-world assets represented by tokens continue to exist outside the chain.

 

Tokenization is creating a variant of an Initial Coin Offering (ICO) known as a Security Token Offering (STO). STO creates a security token which is a digital representation of an asset. Creating a token on the blockchain simply means that it provides a representation of a share in a company, investment fund, or ownership of real estate. Digital tokens can leverage smart contracts through direct sales to buyers or on specialized exchanges to be traded. Any quantity could be purchased to completely own or just have partial ownership of an asset. could purchase their desired amount of digital ownership tokens.

Tokenization has many benefits, namely, improving efficiency, inclusivity and transparency in transactions. Tokens can help in reducing friction of the old model of transaction that is associated with purchase and sales of securities. The benefits include:


  • Liquidity

The tokenizing of illiquid assets like fine art could unlock trading of the tokens on the secondary market for the issuer. This allows access to a wider range of traders, hence improving the overall liquidity. Investors get access to more opportunities and sellers could realize the benefits of higher liquidity. Sellers could potentially get better value from the tokenized asset. This is one way how tokenization on the blockchain can help liquidity.


  • Transparency and Accountability

Security token has the capabilities to embed the rights and legal responsibilities of token holders directly into the token. Essentially enforcing a smart contract. All this while the security token would have a record of token ownership. This will help in improving transparency in transactions. Tokenized assets could offer a clear impression of the ownership and who you are dealing with in a tokenized asset transaction. These features similarly resemble the blockchain feature.


  • Better Accessibility for Investment Options 

The lower threshold of investment amount and time taken to be tokenized could greatly reduce the barriers for entry of new participants in asset management and trading. Divisibility of the tokens, also known as fractionalization, implies that investors could purchase tokens representing smaller shares of the tokenized assets. With orders being cheaper and easier, there is less of a need to worry about high minimum investment amounts. The increased liquidity of security tokens can lower down the minimum investment period and investors could easily exchange their tokens on the desired secondary markets that is available globally at all times.


  • Lower Costs and Faster Transactions

One of the most important benefits of tokenization is the possibility of lowering transaction cost as well as increased speed of transaction. Smart contracts that are activated during transactions would help automate specific parts of the process. These smart contracts serve as a software algorithm that integrates into a blockchain with actions triggered on the basis of specific parameters that have been pre-defined. This automation process is helpful in lowering the overall administrative cost, especially with buying and selling. The lesser intermediaries there are, the lower the fees and the faster the transaction.

 

Different asset classes call for different tokenizing types. Major portion of the future economy would focus on tokenization of digital as well as physical assets.There is no limit to the types of assets that can be tokenized.

 

Sources: Masterthecrypto, 101 Blockchains