Tokenization in a nutshell:
Tokenization refers to the creation of a digital representation of an asset on a distributed ledger – most commonly, on a Blockchain. The trend for tokenization in various industries emerged around 2017. It has enabled more efficient verification, transfer, authentication of possessions of different types of assets and made the assignment of rights much easier.
There are mainly four different types of tokens:
1. Asset Tokens – e.g. commodities, ownership of media
2. Credential & Attribute Tokens – a token representing anything that is tied to your identities, such as diploma, verification, IDs and passport. (However, we currently do not have a standardized decentralized identity system yet. All the applications built upon this kind of token have yet to come to the market.)
3. Access-Right Tokens – e.g. tickets and membership subscription. This has become increasingly important as the sharing economy grows.
4. Incentive Tokens - Bitcoin is an interesting example for this as it could be considered both an asset token and an incentive token, where you receive rewards only when you contribute to the operation of the network.
Many aspects of tokenization will have disruptive effects on entities. For organizations, a purpose-driven token could act as an incentive for employees’ contribution. Whereas for the banking and finance sector, asset tokens will drive the greatest impact as it serves as the basis for DeFi (Decentralized Finance) applications.
Focusing on asset tokens, we could categorize tokenization of assets in terms of physical versus virtual assets. Another way of categorization is identical assets, whereas currencies, commodities are also called fungible tokens and usually simply concern the amount of token and price of the token as its attributes. In contrast, tokenization of assets with unique attributes – non-fungible tokens are getting much more interesting. These are things that are tied to credentials such as real estate registration.
To put it in context, Shermin introduced how Web 3 Tokens will serve as an effective rights management tool for rights including access, management, voting and ownership rights. The authentication and management of the tokens are done by users through the use of a wallet that can run simply on a mobile phone.
Another very interesting example is the tokenization of data supported by Ocean Protocol, where data is being monetized, introducing yet another asset class. A few other important applications include tokenization of securities, tokenization of artwork and even tokenization of energy, which also helps to promote sustainability through energy trading.
Panel Discussion highlights:
Q1. Where do you see some of the biggest opportunities for tokenization, particularly in financial markets?
When thinking about opportunities of tokenization in the private sector market, we usually take two perspectives: the present forward perspective which concerns the immediate steps to take, and the longer-term impacts. Karl suggested that the biggest opportunities right now lie in the private market, including private equity, private debt, and real estate, which has a much faster growth rate and larger size compared to the public market. Use cases related to automation and transparency in the trading processes created more liquidity and improvements in efficiency in trading in the secondary market.
Q2. What are some insights in the application of tokenization?
From Jed’s experiences, currently, most of the successful go-to-market tokenization applications still focus on improving inefficiencies in the financial market, such as digitizing paper-based data, reducing the cost of authorization and proving ownership, but this usually does not utilize blockchain technology. The second piece of the puzzle still lies in the secondary market, where the trading of assets that are traditionally considered illiquid becomes more liquid, and this market is yet to be developed. More corporations are looking into this area and trying to explore how to unlock the values underlying these assets.
Q3. What do we need to have in place to have successful tokenization applications in the market?
Keith mentioned that we should look at three dimensions. The first one is the digitalization of assets, such as real estate. Although we have already seen this happening in the market, it’s only a scratch at the surface if we were to compare the value of tokenized real estate to the total market size. The second dimension is the tokenization of cash, which had also been developing in the past few years, with governments exploring CBDC (Central Bank Digital Currency) . The third key dimension is the market place itself. For instance, trust from market participants, especially institutional investors, the changes that need to take place in traditional exchanges and how custodian services need to adapt.
Q4. Tokenization is not a new concept in the financial market, but it is the new technologies and the implementation of them that are the key game changer. What are the key legal challenges surrounding tokenization and how are different jurisdictions responding?
Ferdisha suggested that the biggest challenge for tokenization is the uncertainty surrounding laws and regulations. Most policymakers have not prohibited digital assets (with some exceptions), but for all jurisdictions, it is difficult to navigate the regulatory framework. The UK has tried to address the question of whether digital asset tokens can actually be considered as property and the outcome was yes, but more questions are yet to be addressed – What type of property? What exactly is the relationship between the holder and the issuer? And this is further magnified from a cross border standpoint. The decentralized nature of tokenized assets means that they are globally tradable, so the transactions and trading of them would likely involve multiple jurisdictions. Then the question is when it touches different legal systems and infrastructure, which law should we choose? Do you need a license for such transactions?
In terms of how different jurisdictions could go about establishing such a regulatory framework, Ferdisha pointed out that more countries are trying to understand the fundamental technology and its uses, and starting from there consider different types of tokenized assets in turn. The other method is the sandbox and testing approach, which the European Union is currently proposing.
Q5. Is there a Hype around tokenization? Could the benefits of accessibility, liquidity be realized and what are some other benefits beyond the obvious ones?
Investors in the real estate market have already seen significant benefits in terms of improvements in liquidity. When asked why they want assets to be tokenized, 35% of institutional investors rated liquidity as being the primary reason. Moreover, there are other popular reasons: 62% for risk management, 55% for enhanced security and 55% for transparency. So there are indeed many potential benefits beyond liquidity. For instance, being able to verify and see who is on the other end of the securities or asset transaction allows us to better determine the underlying risks and prevent tragedies such as the 2008 financial crisis. On the micro-level, being able to securely declare ownership of your data is becoming increasingly important considering the rapid pace of technology improvement in the current age. Over the longer term, the ability to take ownership of your own identity and control who can access it would be hugely beneficial.
Q6. What are some of the cyber risks that tokenization is exposed to? To what extent is this a technical issue or an educational issue, or is it just a problem with regards to legal certainty?
There is a space for development for all three areas. These problems are common for any new asset, for instance when bitcoin was first introduced people were also extremely concerned with the security issues - “stolen cash out of the deposit box”. There were also hacks that occurred for Ethereum, and to some extent, this was indeed a technical issue and the way we solved it was to reach consensus on the use of a new protocol to replace the one that was vulnerable to hacks. However, there is also the regulatory aspect of it, for example, shifting away from bearer bonds because of the risks underlying it.
Dr. Shermin suggested that asset token are the gateway to the tokenization of the economy, the most important game-changer would be incentive tokens as they merges the concept of capitalism and communism, individuals are incentivized to contribute to a network towards a collective goal and it affects the role of value creation. In terms of DeFi, for long we have always separated the definition of different markets. For example, the crypto market and the commodities market. But as more assets become tokenized, they will become more transferable, and the idea of cross-asset class trading and transaction could be made possible. We imagine a future economy where the concept of money, finance and the real economy will merge, and the role of current fiat money might become less essential.
Fueled by the recent digital asset bull run, unprecedented public interest has risen in tokenization and its limitless potential. However, tokenization is not new. It is a long and structural revolution, and has already been revolutionizing and replacing traditional financial infrastructure for the last 2 years thanks to the efforts and innovation brought by legacy players as well as new entrants.
VALK, one of the tokenization market leaders, London Blockchain Labs of LSE, Imperial College and UCL have been at the centre of this revolution and are bringing together a unique panel of experts (from Bain & Company, R3, CMS and Cambridge University etc) to discuss what are the real use cases and opportunities for tokenization.
Shermin Voshmgir - Dr. Shermin Voshmgir is the author of the book Token Economy, the founder of Token Kitchen and BlockchainHub Berlin. In the past, she was the director and co-founder of the Research Institute for Cryptoeconomics at the Vienna University of Economics. Shermin was also a curator of TheDAO (Decentralized Investment Fund), an advisor to Jolocom (Web3 Identity), Wunder (Tokenized Art) and the Estonian E-residency program.
Keith Bear - Currently a Fellow at Cambridge University’s Centre for Alternative Finance, part of the Judge Business School, and a Fintech advisor/mentor. Previously Bear was the Global Leader for Financial Markets within IBM's Industry Platforms organisation.
Karl Gridl - Karl Gridl is a Senior Manager at Bain & Company’s Zurich office and a member of the EMEA Banking as well as the EMEA Financial Markets Infrastructure Sector Leadership Team. He advises clients in Switzerland and Europe on Strategy definition and M&A as well as Blockchain-based innovation and Ecosystem build-up.
Ferdish Snagg - Ferdish Snagg’s practice focuses on financial services regulation. Ferdisha has a wide range of non-contentious experience advising commercial banks, investment banks, asset managers, and market infrastructure firms. She regularly advises on a variety of financial services and regulatory issues including financial markets regulation, financial collateral and financial market infrastructure regulation, and banking regulation.
Jed Talvacchia - Jed Talvacchia is the Head of Corporate Development and the Corda Development Fund for R3. In this capacity, Jed supports the firm’s corporate finance strategy, including R3’s record $120mm+ Series A capital raise as well as its current investment activities. Jed directs R3’s Corda Development Fund, working to increase Corda Enterprise adoption within the ISV community and accelerate R3’s pipeline of new blockchain applications (“CorDapps”).