Global Market Access: Tokenization for Businesses

Introduction

Tokenization stands out as a revolutionary idea that can be turned into reality thanks to Web3 and blockchain technologies. But why is it important to consider tokenization for your business?

• Institutional interest increases: Major institutions, like Goldman Sachs and J.P. Morgan, are investing in tokenized assets, signalling growing trust in the technology. More details here.
• Real-World Assets expand: Beyond cryptocurrencies, tokenization finds applications on RWAs like real estate, financial instruments, collectibles and art, drawing more investors. Protocols like Centrifuge and Maple Finance have gained notable interest in 2023.
• Regulatory progress: Global regulatory bodies are crafting frameworks to accommodate RWAs, boosting institutional engagement (e.g., MiCA in Europe or VARA in UAE).

This article aims to get clarity on tokenization for companies at the cusp of Web2 and Web3, offering a blend of analytical insights and practical steps towards adopting this innovation. Tokenization, at its core, involves converting rights to an asset into a digital token on a blockchain. This digital leap can significantly enhance the liquidity, security, and efficiency of asset transactions. As a company exploring new opportunities, understanding and implementing tokenization to access the Global market could be a game-changer for your business strategy and operations.

But what is Tokenization?

Tokenization refers to the process of issuing a blockchain token (in most of the cases a security token) that digitally represents a real tradable asset. These tokens are not just limited to representing cryptocurrencies like Bitcoin or Ethereum; they can represent any tangible or intangible asset, including real estate, artwork, or even intellectual property. The beauty of tokenization lies in its ability to democratise access to investments, making it easier for small investors to buy shares in high-value assets and for companies to raise capital directly from a global pool of investors.

Tokenization can be broadly categorised into several types, each serving different purposes and applications across various industries:

• Asset tokenization: Converts rights to tangible or intangible assets into digital tokens, facilitating fractional ownership and trading.
• Security tokenization: Represents investment contracts into real-world assets, offering ownership rights and regulatory compliance.
• Utility tokenization: Grants access to specific services or products within a blockchain ecosystem, acting as digital coupons.
• Currency tokenization: Digitizes fiat currency on a blockchain for secure and efficient transactions, including stablecoins.
• Document tokenization: Ensures the authenticity and security of important documents through blockchain technology.
• Identity tokenization: Allows individuals to control access to their personal data, enhancing privacy and security.
• Fractional ownership tokenization: Enables fractional ownership of high-value assets, making investments more accessible.

The Benefits of Tokenization

Tokenization offers several benefits, including enhanced liquidity, increased transparency and security, fractional ownership, and access to a global market. It also reduces many of the traditional barriers to investment, such as high entry costs and complex regulatory compliance. By tokenizing assets, companies can streamline operations, reduce transaction times, and enhance the traceability of asset ownership, making it a lucrative option for both Web2 and Web3 entities.

The big picture: Tokenization has the potential to transform asset ownership, reduce transaction costs, and enhance liquidity for traditionally illiquid assets.

When is Tokenization useful for your Business?

Tokenization is particularly beneficial in scenarios where enhanced liquidity can unlock value for asset holders or when assets are not easily divisible. For instance, real estate or rare collectibles, which are traditionally illiquid assets, can greatly benefit from tokenization. It is also useful for projects seeking to raise capital in a more efficient and inclusive manner.

Steps to implement Tokenization

1. Define your Objectives: Clearly articulate why you want to tokenize your assets. Moreover, objectives may include raising capital, improving liquidity, or creating a new customer engagement model.
2. Legal and Regulatory Compliance: Understand and comply with the legal frameworks in your jurisdiction and in the jurisdictions where you intend to conduct targeted geographical marketing. This may involve registering the token as a security, depending on local laws.
3. Select a Blockchain Platform: Choose a blockchain platform that suits your project’s needs in terms of security, scalability, and community support. Ethereum, for example, is popular for its robust smart contract capabilities, but it is still expensive to transact in it. A client may prefer some faster and cheaper alternatives while preserving the Ethereum security framework, such as Layer 2 solutions built on top of it.
4. Develop the Token: Design your token’s characteristics, including its type (utility, security, governance, etc.), total supply, and functionalities. 
5. Token Issuance and Distribution: Plan your token sale, ensuring transparency and fairness. More precisely, this could be through private sales, IDOs, or direct offerings on exchanges (launchpad and launchpool as an example). For security tokens, you will need to use marketplaces with the appropriate licence or create your marketplace.
6. Post-Tokenization Support: Provide continuous support and updates to your investors, including regular financial disclosures, token buyback programs and burn, or additional token issuances.

A practical example of tokenization in action is the tokenization of real estate. By converting property rights into digital tokens, owners can sell fractional interests in the property, thereby increasing liquidity and making high-value investments accessible to smaller investors. This not only accelerates transactions but also opens up the property market to a broader audience.

Assessing the convenience of Tokenization for your Company

To determine whether tokenization is a strategic move for your company, consider the following key questions:

• Tokenization goals: What are your objectives with tokenization? 

Understanding whether the aim is to improve liquidity, raise capital, enhance asset management, or innovate the customer experience is crucial.

• Asset Nature: Is your asset suitable for tokenization? 

This approach fullfills a fractional ownership requirement. Still, not all assets or services benefit equally from tokenization. Thus, assessing whether the asset can be efficiently divided into tokens and if there’s a market for these tokenized assets is essential.

• Market Readiness: Is there a demand for your asset in a tokenized form?

Ensure you thoroughly review your benchmarks, or take the initiative as a Pioneer in identifying ways to make your company stand out by providing a unique value proposition.

• Regulatory Environment: Can you comply with the legal requirements in your jurisdiction?

Not every jurisdiction currently supports blockchain and tokenization efforts. Indeed, it is crucial to address legal requirements early on to avoid derailing future developments.

• Business Operations: How will tokenization impact your existing operations?

Considering the implications on current business operations, including the need for new systems, processes, or partnerships, is necessary.

• Technical Readiness: What technology and infrastructure do you need? 

Assessing whether the Company has the required technological infrastructure or needs to develop or acquire new capabilities for tokenization.

• Strategy and Risk Assessment:  How does tokenization fit into your long-term strategic goals, and what are the risks involved? 

Evaluating how tokenization aligns with the company’s long-term vision, mission, and strategic objectives, as well as identifying potential risks, including market, legal, regulatory, and technological risks, is mandatory to assess whether the Company is equipped to manage these risks.

Final Thoughts

Tokenization is one of the most promising innovations in the digital asset industry, offering invaluable opportunities for asset management and investment. For companies navigating the transition from Web2 to Web3, understanding and leveraging tokenization can open up new avenues for growth and engagement. By following the steps outlined, businesses can make informed decisions about integrating tokenization into their strategic planning. 

As we advance, partnering with experienced advisors like BrightNode can ensure that your journey towards tokenization is both successful and compliant, while allowing your Company to position as a leader in the digital economy.