Tokenization of assets in financing

Tokenization is revolutionizing the way we manage, trade, store and, of course, finance assets of all kinds.

As you will discover below, this process consists of converting the properties and rights of an asset into digital tokens, which provides a series of advantages. We will show you everything below.

What is asset tokenization?

Asset tokenization is the process by which an asset is given a digital representation that is stored on the blockchain. In other words, the rights to a certain asset are recorded in a digital certificate in the form of a token (a non-fungible token or NFT is created).

This makes negotiation easier, making it easier to carry out any type of legal transaction with the token that represents the asset, such as buying and selling, leasing, exchanging, etc. 

A priori, any type of asset can be tokenized, although this process usually occurs with real estate and works of art. However, financial assets (such as bonds or shares), digital assets, and even intangible assets, such as patents or copyrights, can also be tokenized.

In summary, asset tokenization is possible thanks to three elements:

1. There must be an underlying asset, which, as we have seen, can be tangible or intangible.
2. The technological infrastructure on which everything is based is Blockchain.
3. Tokens represent the properties of the asset or a fraction of it.

What benefits does it present in terms of financing?

It is easier and more accessible to finance an asset that is tokenized due to the following:

• Possibility of fractionation: When it comes to assets that have a high value (such as real estate or works of art), it is easier to acquire aliquot parts of them, therefore reducing entry barriers, improving accessibility and any business becomes more democratic. In other words, the tokenized asset gains greater capacity to attract investors.
• Increased liquidityLiquidity is the ability of any asset to be transformed into money without having to suffer a significant decrease in its value. In other words, any asset can be negotiated in a clear and transparent way through the Blockchain. It is even possible to create a larger market than the traditional one for certain types of assets.
• Cost reduction: One of the fundamental characteristics of the Blockchain is decentralization, allowing transactions to be made directly, without the need for intermediaries (such as banks or brokers). Consequently, commissions are eliminated.
• Speed: The transmission of assets in the form of tokens through the blockchain occurs instantly (it can take a few minutes or hours, depending on the network through which they are transmitted). Much of the bureaucracy is eliminated.
• Accessibility: We have previously mentioned the reduction of entry barriers provided by asset tokenization. However, on the other hand, this process also allows for the creation of an international market and access to any type of asset, overcoming geographical barriers. This fact leads to an increase in opportunities and greater diversification.
• Efficiency: When tokenizing an asset, the use of smart contracts can be included, in order to automate actions. 
• Security: transactions are recorded in an immutable and transparent ledger (Distributed Ledger Technology or DLT).
• Innovation: Thanks to tokenization, new types of products and services can be developed that facilitate financing. 

 

Example: How does real estate asset tokenization work?

Assuming you want to invest in a real estate project, what would happen if the asset in question (the property) were tokenized?

In principle, you can opt for collective financing (such as crowdfunding) in a simpler way. Developers can divide up the property and sell the parts to interested investors.

On the other hand, they will also enjoy a larger market to place the project's real estate properties, which facilitates the process to obtain the necessary financing, for example, a promoter loan.

He process for tokenization would be the following:

• Determine the asset to be tokenized and set its value.
• Create tokens, which can represent a fraction of the value of the real estate asset.
• Ensure that the procedure complies with legal and financial regulations.
• Conduct an initial offering to investors to distribute the tokens.
• The tokens can then be traded, managed and stored in a simple and transparent manner.

Can consult with Alter Finance If you have any questions about how the asset tokenization process can help you finance your projects, our team will assist you and offer you a personalized solution.