Beneath the Surface: The Infrastructure Driving Tokenization Forward
In the evolving landscape of finance, a quiet revolution is taking place, driven by innovators propelling tokenization into the mainstream. Tokenization, the process of digitizing assets and recording or representing something on a blockchain, is set to reshape the financial industry. According to the World Economic Forum, the tokenized market is projected to reach a staggering 10% of global GDP by 2030. Tokenization likely won’t stay a quiet area of finance for much longer. Even giants like KKR and Franklin Templeton have embraced tokenization. Blackrock CEO Larry Fink has declared it the catalyst for the ‘’next generation’’ for financial markets.
Why should tokenization matter to you?
At its core, tokenization involves the creation of digital tokens that are securely stored on a blockchain, maintaining transparency, transaction finality, settlement, and auditability. But why should tokenization matter to you? Just as ETFs were developed in the 1990s to provide individual investors access to passive, indexed funds, tokenization:
- Provides individual investors ready access to private market assets with lower investment minimums and administrative fees (e.g., private equity, credit, real estate, and infrastructure)
- Provides individual and institutional investors access to blockchain-native investment opportunities (e.g., film slates, creator IP rights, etc.)
- Enables greater utility among investment portfolios (e.g., pledging assets as on-chain collateral)
These new possibilities dovetail with how investing is evolving. According to EY, investors are increasingly looking to allocate 7%-9% of their portfolios to alternative assets by 2027.
To understand the driving force behind tokenization momentum, we need to explore the underlying infrastructure: the tokenization platforms.
How do tokenization platforms help?
Tokenization platforms such as INX, Securitize, OPM, Republic Crypto, and Tokeny play a pivotal role in the tokenization ecosystem. They provide key infrastructure, tools, and compliance capabilities to create, manage, and trade tokens – especially security tokens – on blockchains. With their blockchain expertise and regulatory licenses, these platforms bridge the gap between traditional finance and on-chain finance (OnFi).
Here are some of the essential capabilities that these providers bring to the table:
Issuance - Issuing New Securities
These platforms must have the requisite licenses to guide issuers through Security Token Offerings (STOs), which are regulated securities offerings leveraging blockchain. These tokens may often serve as digital representations of off-chain assets and may be listed on exchanges. The blockchain element of STOs ensures the security and transparency of these assets, offering potentially greater investor protection.
Maintaining Compliance with Regulatory Requirements
Security token issuance is subject to varying regulations depending on jurisdiction. In the United States, security tokens must be managed by a Licensed Digital Transfer Agent, like Securitize and Republic, to handle ownership transfers and maintain the cap table associated with the underlying asset. With licensed digital transfer agents involved, lost or stolen tokens can be replaced, enhancing investor protection.
Tokenization platforms with Alternative Trading Systems (ATS) and Broker-Dealer licenses facilitate secondary market trading. This functionality allows investors to buy, sell, or trade shares in various asset classes, including real estate, hedge funds, private equity funds, startups, and other alternative investments. Secondary trading may ultimately reduce the Liquidity Premium associated with selling illiquid assets and offers asset managers the opportunity to incorporate them into capital allocation portfolios for clients.
How do digital transfer agents compare?
Traditional transfer agents typically oversee securities transfers, shareholder records, dividend distribution, and more. They benefit from their extensive experience and industry relationships but are often limited by their manual processes, resulting in slower and more costly services. The securities transfer process with traditional agents can span several weeks.
In contrast, digital transfer agents are digital based platforms empowering companies to manage their securities online and on-chain. They prioritize efficiency and cost-effectiveness, enabling transactions to be completed quickly. Being digital, they are accessible from anywhere, simplifying securities management for companies operating across different countries. As a result, digital transfer agents have emerged as an increasingly popular choice for companies seeking to streamline their securities management processes.
What’s next for tokenization?
The gap between traditional and digital transfer agents speaks to a broader truth: The future of tokenized assets holds immense potential. Top experts in the field share their outlook and predictions:
Oasis Pro Markets: The entire Nasdaq may undergo tokenization at once, leveraging its tech-forward marketplace history to bring all market participants into the fold simultaneously.
Securitize: In the next decade, most financial services products will likely incorporate tokenization in some way. It offers a better way to issue securities, track ownership, facilitate trading, and unlock previously inaccessible asset classes and liquidity. Tokenization can also enhance securities lending by providing indelible on-chain provenance records. Tokenization players like Securitize–powered by Avalanche as a transfer and settlement layer–are poised to become leading in this transformative industry, redefining the future of finance.
We are in a period now very much like the early Dot Com period, where there was massive debate over this approach or that, over what was legal or illegal. Think of file sharing, or user-generated content. Early solutions gave way to better solutions, and over a few years, as regular people went online and became comfortable, the focus shifted from “how” – the technology – to “why” – the value.
We are still in the very early days of a migration of most financial services products from paper to blockchain, and firms like Ava Labs and Securitize will be some of the biggest names in that progression. - Carlos Domingo, CEO and co-founder of Securitize.
Republic Crypto: Tokenized assets will trade globally, non-stop, and with zero human intervention. - Jeffrey Vier, Advisory Partner & Sr. Director of Tokenization.
INX: Another major trend that we’ll continue to see in 2023 and beyond is the prevalence of private companies choosing the digital security path to raise capital over the traditional way (IPO, VC, debt). The advantages are clear and immediate – issuers maintain control and ownership of the company in a regulated and secure way. - Itai Avneri, Deputy CEO & COO, INX.
Tokeny: Private assets are poised for a more profound revolution than public assets. Tokenization opens up private assets to a global audience through a shared infrastructure, akin to transitioning from letter writing to instant messaging in the digital age. - Luc Falempin. CEO at Tokeny.
Disclaimer: The content contained in this post does not constitute financial or investment advice whatsoever and is for informational purposes only. All examples mentioned here that would otherwise lead anyone to speculate on future deals are completely hypothetical to simply make a point. All observations are general and thematic in nature and do not reflect the opinion of any one specific person or entit
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