Tokenization: democratizing investment across asset classes

The investment world is undergoing a massive change, as blockchain technology is reshaping the ways in which investments can be accessed and managed.

The driving force behind this sweeping change? Tokenization.

Tyrone Lobban, head of J.P. Morgan’s Onyx digital-assets platform, regards this transformation as inevitable and crucial. “We think that tokenization is a killer app for traditional finance,” Lobban told CoinDesk¹ “If you think about private markets — private credit, private equity, and private real estate — they are pretty much double the size of public markets, but many orders of magnitude less liquid, so there’s this huge disparity.”

In this blog post, we’ll explore an array of asset classes, from real estate and private equity to art and bonds, demonstrating how tokenization is not only addressing this liquidity disparity but also paving the way for a more democratized investment landscape.

In addition to these aspects, we will delve into why else it’s high time for financial institutions to embrace tokenization in their traditional financial products.

What is tokenization?

Before diving into how tokenization democratizes investing, it’s essential to understand what it is. Tokenization is a method that uses blockchain technology to convert rights to an asset — either a physical asset, a traditional financial product, or a digital asset — into a digital token.

These tokens, which represent a specific asset or a fraction of it, are stored and managed on a blockchain network. This process brings several benefits, including increased liquidity, lower transaction costs, and improved transparency.

How tokenization benefits various asset classes

Real estate 
For many people (particularly millennials) real estate investing isn’t easy, especially with today’s interest rates and short supply. Sure, REITs have given people a chance to participate, but REITS are more like buying into a portfolio rather than choosing specific properties. For many investors, diving into REITs can be quite a plunge. And even after making the leap, you don’t get the satisfaction of owning a tangible piece of property you can show off to others.

Enter tokenization, the game-changer that could make real estate even more accessible. It’s a simple idea — turning physical properties into digital tokens. Each token represents a little slice of the property, so you can buy in at a fraction of the cost.

Tokenization gives you the freedom to pick individual properties, without the huge upfront investment. 
The benefits of tokenization don’t stop at affordability. Traditionally, real estate is seen as a ‘locked-in’ asset. But tokenization is shaking that up. It allows token owners to sell their stakes on secondary markets. This means you can get your money out without waiting for the property itself to sell.

Tokenization also brings a high degree of transparency to the table. Each transaction and ownership stake gets logged onto a public ledger. This process offers a reliable layer of verification, contributing to the overall trustworthiness of the system.

So, while REITs have done their bit in making real estate investing more accessible, tokenization is taking it a step further. It’s all about choice, accessibility, smooth transactions, and transparency.

Private equity funds 
Private Equity (PE) funds have long been recognized for their high yields, but they often remain inaccessible to most due to substantial entry costs and stringent regulations. However, tokenization is revolutionizing this dynamic.

Consider this: tokenization allows for the division of these substantial PE funds into smaller, more manageable units through issuing tokens, each representing a share. This shift opens up new avenues for retail investors, allowing a more feasible entry point into this traditionally exclusive market.

With tokenization, gaining exposure to the PE sector is no longer exclusive to high-net-worth individuals or large institutional investors. Investors can now purchase tokens at accessible prices, bringing the potential of private equity yields to a broader audience.

In essence, tokenization is leading a democratization movement within the private equity market. It’s breaking down barriers, widening access, and making what was once exclusive, inclusive.

Bonds 
When investors aim to create a well-rounded portfolio, bonds often come into play. Yet, the high-reward bonds from the institutional debt market are typically out of reach for smaller investors.

Here’s what tokenization can do: by converting bonds into tradeable tokens, it opens up investment in high-yield debts to small investors. This process not only widens the spectrum of potential investors but also simplifies the funding process for debt issuers.

As a result, the market can become more competitive, potentially pushing down interest rates. For issuers, this process can make their fundraising efforts more cost-effective, proving that tokenization can create wins on both sides of the bond market.

Digital art and creative assets 
Non-Fungible Tokens, or NFTs, are introducing a new dynamic in the investment world. These unique tokens, securely stored on a blockchain, act as a proof of authenticity and ownership for individual items and content. While traditional financial products like stocks or PE funds are usually represented by fungible tokens — meaning each token of a certain type is identical to every other — NFTs are unique and not interchangeable with any other token.

This is significantly impacting creative industries, forging new pathways for artists to monetize their work and creating a unique class of investment for the public.

Imagine owning a stake in a digital art piece or a rare collector’s item. Unlike conventional investment in financial products, NFTs offer the possibility for everyday investors to explore more unconventional assets.

The principle is akin to owning a physical piece of artwork: as the value of the digital asset rises, so does the value of the investor’s share. This potential to profit from the appreciation of creative content is opening up a new frontier in investment. NFTs are redefining concepts of ownership and investment across art, music, and an array of creative fields.

It’s important to note that NFTs aren’t limited to representing creative assets; they can also serve as proof of ownership for other real-world assets like real estate.

Other assets 
We’ve gone over real estate, PE funds, bonds, and art, but tokenization doesn’t stop there. Its potential to democratize investing stretches across numerous asset types, including traditional financial products, tangible assets, and digital assets. Put simply, if an asset can be fractionally owned, it’s a potential candidate for tokenization. This opens up a much broader spectrum of investment opportunities to everyday investors.

Are fractional shares not the answer?

“Can traditional fractional shares offer the same benefits as tokenization?” you may ask. Well, fractional shares do indeed provide wider accessibility to investments. But they have limitations.

Fractional shares are typically linked to publicly traded companies. But for non-standard assets like real estate, private equity funds, or digital art? Fractional shares don’t hold up. There’s no fractional share of a beachside villa or an art masterpiece in the traditional sense.

That’s where tokenization steps in. It guarantees transparency and security that fractional shares often lack. The blockchain technology used for tokenization ensures that each token’s ownership information is secure, transparent, and unalterable, offering investors confidence in the safety and clarity of their investments.

But tokenization brings more to the table:

• Reduced management costs: Traditional asset transfers often involve intermediaries that lead to additional costs. Tokenization eliminates these intermediaries through blockchain technology, significantly cutting down expenses. Plus, smart contracts automate transaction details, making the process more efficient and affordable.
• Faster settlement times: Tokenization, aided by smart contracts, can greatly reduce settlement times. These smart contracts automatically execute transactions when certain conditions are met, enabling operations to run 24/7. This allows investors to respond instantly to market changes.
• Enhanced compliance: Smart contracts also boost compliance. They execute transactions in accordance with regulations automatically, promoting market integrity and bolstering investor trust.
• Increased transparency and security: One of the inherent strengths of blockchain technology is its immutable nature, which ensures that once data is recorded, it cannot be altered. This feature significantly enhances transparency and security, boosting investor confidence as all transactions and ownership stakes are permanently recorded and publicly verifiable.

The evolving regulatory landscape

The regulatory landscape around tokenization and digital assets such as cryptocurrencies is dynamic, evolving with each new precedent.

Staying updated with these legal shifts is crucial, because clear regulations will enhance the appeal of tokenization and make it more viable for a broad range of investors.

For financial institutions considering tokenization, team competency is paramount. It’s crucial to assemble a team that can architect secure solutions while keeping pace with evolving regulations. Depending on the resources and expertise within your organization, you have a few options. You could harness the skills of your existing development team, or alternatively, opt for collaboration with a technology partner

We’ve been that partner

A US-based global investment management firm sought to transform the traditional, cumbersome, and costly process of issuing bonds and securities. To do this, the firm wanted to establish the ability to issue tokenized bonds and securities.

However, despite seeing the potential of blockchain to optimize operations, the firm lacked the necessary in-house expertise to swiftly execute the transition.

And with a pressing need to maintain the firm’s position as an innovative market leader, it turned to Relevantz for its expertise in blockchain technologies.

Relevantz rapidly engineered a comprehensive tokenization and transaction pipeline. This included seamless integration with digital wallets and popular compliance solutions. We also helped the firm develop smart contracts on a private Ethereum network and issue tokens that mirror the complete value of their bonds and securities.

Our tokenization solution lowered transaction costs, boosted efficiency, and enhanced security. The solution also provided investors with access to consolidated reports of traditional and digital assets. Moreover, investors benefited from fractional ownership, allowing more straightforward bond and security purchases and portfolio diversification.

Conclusion

As we have explored, tokenization is profoundly transforming how investments are managed and accessed. Its ability to enhance liquidity, improve security, lower entry barriers, and reduce transaction costs highlights its potential to bring meaningful changes to the investment world. This shift towards greater efficiency can open new opportunities, particularly for retail investors.

Furthermore, tokenization is not just about enhancing current practices. It also has the potential to attract a new demographic of investment clients. This could further diversify the financial market, introducing new perspectives and strategies.

And remember, in this rapidly evolving field, it’s crucial to stay up to date with its fast-developing regulations and to partner with those knowledgeable in this area.

What Relevantz can do for you

Leveraging the latest in blockchain technology, we at Relevantz help financial institutions reinforce their market position by capitalizing on the advantages of tokenization.

Whether it’s tokenizing traditional products like equities and bonds or enabling digital assets like NFTs, our services enable asset tracking and ensure compliance with all regulatory requirements.

Ready to explore how digital token issuance can add value to your financial institution?