Tokenization Breakdown

In recent years, tokenization has become a popular buzzword in the financial industry. Tokenization involves the digitization of assets and their conversion into security tokens that can be traded on a blockchain network. Initially, tokenization was used primarily for fundraising purposes, allowing startups to raise funds by issuing security tokens and offer them through Security Token Offerings (STOs).

However, as the technology continues to evolve, tokenization is increasingly being used for other purposes beyond fundraising. Alongside the evolvement of tokenization use cases, a new terminology emerges - real world asset tokens (RWA), which refers to security tokens of real world assets.

Tokenization is a revolutionary technology that offers many benefits to the financial industry. By digitizing real world assets and converting them into RWA tokens, investors can access new asset classes, increase liquidity, and gain transparency into the value of their investments. In this article, we will explore the various use cases of tokenization, including:

• Tokenization of real estate
• Tokenization of art
• Tokenization of commodities
• Tokenization of debt
• Tokenization of ESG products
• Tokenization of alternative assets

Let's go into details.

What Is Tokenization?

Tokenization is the process of converting a physical or digital asset into a digital token that can be traded on a blockchain network. The process of tokenization involves fractionalizing an asset into smaller, more manageable pieces, which are then represented by digital tokens on a blockchain. Each token represents fractional ownership in the underlying asset and can be traded on a blockchain network like any other crypto asset.

The tokenization process typically involves several steps, including:

• The selection of the asset to be tokenized
• The creation of a legal structure to govern the ownership of the asset
• The relationship between other issuer, token holders and other relevant parties
• The issuance of tokens on a blockchain network
• The trading of tokens on a secondary market.

Once an asset has been tokenized, it becomes more accessible to investors, can be traded more easily, and can offer greater transparency and security than traditional assets.

Is Tokenization Safe?

Tokenization is often considered a safe and secure way of investing, as it is typically governed by legal frameworks and is subject to regulatory oversight. The governing legal framework for tokenization varies by jurisdiction. Some rely on existing legislation while others have introduced new regulations which are specific to the issuance and trading of security tokens. This provides investors with greater comfort in knowing that regulatory protections are in place to mitigate fraud and hold issuers accountable for their actions.

Additionally, blockchain technology provides a high level of security and transparency, making it more difficult for bad actors to manipulate the market. Overall, when compared to traditional investing, tokenization offers a safer and more secure way of investing that can benefit both investors and issuers.

For investors keen on exploring legitimate RWA token investment opportunities, it is advisable that you choose to invest through an established, legally-compliant platform that possesses the requisite licenses to handle security token offerings (STOs) for tokenized assets, such as InvestaX and our sister platform, IX Swap.

Difference Between Real World Asset Tokens (RWA) and Crypto

While RWA tokens and crypto assets both use blockchain technology, there are some fundamental differences between the two.

RWA tokens are digital tokens that represent ownership in an underlying asset, such as stocks, bonds, real estate, or commodities. They are designed to comply with existing securities laws and regulations, and are subject to regulatory oversight. Security tokens provide investors with a way to invest in a more secure, efficient, and accessible way. They offer the potential for increased liquidity, lower transaction costs, and greater transparency than traditional securities.

Crypto assets, on the other hand, are digital assets that are designed to function as a medium of exchange, store of value, or unit of account. They are not tied to any underlying asset and their value is largely determined by market demand. Crypto assets are, for the most part, not subject to the same regulatory oversight as security tokens, and their legal status varies by jurisdiction. While crypto assets can be used for speculative trading or as an alternative form of payment, they arguably do not offer the same level of investor protection or regulatory compliance as security tokens.

Overall, RWA tokens and crypto assets have different purposes and characteristics. Consideration of investment goals and risk tolerance is essential when choosing between Real World Asset Tokens (RWA) and cryptocurrencies.

Common Tokenization Use Cases

Tokenization of Real Estate

One of the most promising applications of tokenization is the digitization of real estate assets. Real estate is one of the largest asset classes in the world and yet, it has historically been accessible by only high net worth investors due to the substantial investment commitment required. Tokenization allows real estate assets to be broken down into smaller, more affordable pieces, which can then be sold to investors in the form of tokens for a fraction of the cost. This makes it possible for smaller investors to participate in real estate investments that would otherwise be out of reach.

Tokenization of real estate also has the potential to increase liquidity in the market. Traditional real estate investments are illiquid, meaning that they are difficult to sell quickly due to the multi-million dollar prices associated with entire real estate projects. However, tokenized real estate assets can be traded in fractionalized pieces at fractionalized costs and on blockchain networks which become accessible to a larger pool of investors across the globe. This creates a level of liquidity that is unseen in traditional real estate investments.

According to conventional investment principles, acquiring liquidity typically obliges one to sell one's assets. However, real estate asset tokenization has changed this dynamic. Real estate owners can now unlock liquidity through their asset without having to sell the entirety of the asset itself.

To illustrate, consider a scenario in which a rental property owner is receiving $10,000 per month in rental income from a $1 million property. If the owner chooses to tokenize the property, the owner could mint 10,000 tokens and sell them to investors at a value of $100 each. The owner would unlock liquidity through token sales without having to resort to selling the property itself. On the other hand, an investor who has purchased a token could benefit by receiving a $1 per month share in the rental income. These tokens could also be traded with other investors on a digital asset exchange, thereby unlocking further liquidity.

ME Holdings has utilized InvestaX's Tokenization SaaS platform to issue real estate security tokens for their latest project, Highgate Mews. As a new issuer-partner, ME Holdings shares InvestaX's vision of asset tokenization as an innovative funding solution. The project will consist of 13 luxury apartments with various amenities, including landscaped gardens, private terraces, leisure facilities, and secure parking.

Tokenization Of Art

Art is another asset class that is being digitized through tokenization. The art market is notoriously opaque and it can be difficult for investors to determine the value of a particular artwork. Art tokenization allows individual artworks to be broken down into smaller pieces which can then be sold to investors in the form of tokens. This provides investors with more transparency into the value of a particular artwork and it also makes it possible for smaller investors to participate in the art market.

Artwork owners frequently sell prints of famous artists’ original pieces. Suppose there are approximately 1,000 prints of a painting. In that case, these prints can be tokenized through a company that holds their ownership, allowing art token holders to redeem prints in exchange for tokens, and upon redemption, the company can physically deliver the prints to the token holders. Otherwise, art tokens can also grant token holders the rights to a proportionate share of any profits received from the sale of prints.

Tokenization Of Commodities

Tokenizing commodities is a popular use case of tokenization. Commodities include things like gold, silver, metals, and oil, which are valuable assets that are traded globally. By tokenizing commodities, it becomes possible to trade them on blockchain networks which provides a level of transparency and security that is not available in traditional commodity trading. Further, tokenization costs are relatively low compared to the substantial overhead costs associated with the commodity exchange market, despite the significant shift towards paperless transactions. 

For example, a trust can be set up to own a vault of gold securely held in custody by a licenced custodian. The trust can then be tokenized with each token representing proportionate ownership interests in the gold held by the trust, and with gold being redeemable in exchange for tokens. Token holders would also be able to trade tokens on secondary exchanges.

According to a recent RWA Tokenization Report by Coingecko, in early 2024, the market cap of commodity-backed tokens climbed to over 1 billion USD. Gold remains the most popular commodity. Tokenized precious metals such as Tether Gold (XAUT) and PAX Gold (PAXG) make up 83% of the market cap of commodity-backed tokens. Other commodity-backed tokens, like Uranium308's tokenized uranium, are now available.

Tokenization Of Debt

Debt tokenization is another common application of tokenization. Debt includes things like bonds and loans which are valuable assets that can be difficult to trade. However, by tokenizing debt, it becomes possible to sell fractional ownership in them to investors. This provides borrowers with a new way to raise capital and it also provides investors with a new asset class to invest in.

DBS Bank issues debt in different currencies such as the $500 million subordinated debt issuance denominated in U.S. Dollars in March 2021. Additionally, DBS holds a 34% market share in the SGD debt market, having issued SGD $5.85 billion in 2019.

In 2021, DBS issued its first tokenized bond worth SGD $15 million which was fully subscribed through the DBS FIX Marketplace. The DBS FIX Marketplace is a fully digital and automated platform for executing fixed income transactions that also manages legal, operational, and sales-related transactional data flows and documentation. The platform allows investors to participate with a minimum ticket size of $10,000, making it more accessible to a wider market compared to the traditional bond issuances that have a minimum ticket size of $250,000.

Overall, tokenized debt issuances are gaining corporate attention, especially in Asian and European markets, due to their issued size and tenor.

Tokenization of ESG products

Environmental, social, and governance (ESG) products such as renewable energy and green real estate can be tokenized to allow fractional ownership of the product. Environmental assets, once being tokenized open exciting possibilities for increased transparency, liquidity, and accessibility.

In a recent podcast episode, our CEO and Co-founder Julian Kwan sat down with Mark Mah, Co-Founder & CEO of FRACSIO for a deep dive into tokenizing renewable energy products. Mark and his team have had many years of operating and investing experience in renewable energy, so they understand first hand the challenges associated with being the developers or investors of these types of assets: long ROI cycle, highly illiquid, and high entry barriers. And the team knew that they need some kind of solution, and here is where tokenization came in.

Listen to the podcast episode for a real case study of tokenizing renewable energy.

Tokenization Of Alternative Assets

Finally, tokenization is being used to digitize a wide range of alternative assets. Alternative assets include things like private equity, venture capital, and hedge funds, which are all valuable assets that have historically been inaccessible to many investors. By tokenizing these assets, it becomes possible to sell fractional ownership in them to investors. This provides investors with new opportunities to diversify their portfolios and gain exposure to alternative asset classes.

Blockchain Lowers The Entry Barrier To Opportunities Traditionally Accessible Only To An Exclusive Few

Whether you are an everyday retail investor or a small business owner looking to scale up, blockchain has made opportunities more accessible to everyone. To cite an example, the IXAPE token, that is now available on the InvestaX platform, is the tokenized version of Bored Ape #2371 (aka Howey Tez), an NFT that belongs to the highly coveted Bored Ape Yacht Club NFT collection. 

On its own, Howey Tez, will set anyone back several thousands of dollars, which makes it beyond the reach of an ordinary retail investor. However, by tokenizing Howey Tez into 5,000 tokens, anyone can now afford to own a part of Howey Tez and take advantage of its economic benefits, without having to fork out thousands of dollars. 

The same goes for small to medium-sized businesses that want to scale up but do not have the extensive resources needed to successfully execute an IPO. With the help of blockchain, they now have the option to go through route of tokenization which is less resource-intensive and allows them to raise the needed funds to grow their business. 

Conclusion

Tokenization is a powerful technology that is unlocking new opportunities in the financial industry. While it was initially used primarily for fundraising purposes, it is now being used to digitize a wide range of real world assets (RWAs), including real estate, art, commodities, debt, renewable energy, and alternative assets.

How To Kickstart Your Journey With Tokenization?

The STO - Security Token Offering market was born in 2018. Since then, there has been significant growth and progress around the world. However, until recently, there were only 2 models available for anyone that wants to issue security tokens of real world assets (RWA tokens) and conduct an STO.

The first model is called “token issuance” and it is a pure service offering with the value proposition being that an asset owner can use the token issuance service provider, a technology only service provider, to conduct the STO on behalf of the owner. This was the first model in the industry and provided some value. However, as security tokens are securities, most owners are looking for additional licensed service providers needed for the issuance of security tokens, such as broker-dealers and custodians (note that these typically require licenses and are regulated activities). Token issuance alone is not the end game.

The second model is what we call the “security token exchange” model, and it brings together the technology and necessary licenses to facilitate the life cycle management of issuing and trading security tokens. Think of this model as a “tokenized version” of the traditional stock exchange, where there are lots of services and fees, and asset owners must send their assets and their investors to the exchange. Many security token exchanges are also built on private blockchains and are disconnected from the entire ecosystem of digital currencies, crypto assets and other innovations from the decentralized finance (DeFi) industry, which all use public blockchains. This model adds value but again is not the end game.

The third model, and in our opinion, the far superior model, is the “Licensed” Tokenization SaaS (software-as-a-service). With this, you reap the benefits of both of the above models “token issuance” and “security token exchange” while eliminating the disadvantages. Additionally, you receive the added features of customization and control over your assets and investors. This is key. You can utilize broker-dealer, over-the-counter (OTC) and exchange services without needing licenses of your own. It is the best of both worlds and the end game from a market solution perspective.

Tokenize Your Assets On Top Of Our Infrastructure

Our Tokenization SaaS solution enables the issuance, trading, and custody of security tokens for real world assets. We have been granted Capital Markets Services and Recognized Market Operator licences by the Monetary Authority of Singapore to deal in and operate an organised market for securities respectively. Our service offers a one-stop solution for all your real world asset tokenization needs, including seamless banking integration, thorough user verification with a know-your-customer (KYC) module, flexible OTC trading options, primary issuance services, cutting-edge blockchain technology, and smart contract deployment.

Benefits Of Using Our Tokenization SaaS Platform:

All-inclusive one-stop-shop solution: Tokenization SaaS platforms offer everything asset owners and issuers need to get started with asset tokenization, including issuance, trading, and custody solutions.

Latest blockchain technologies: Tokenization SaaS platforms use the latest blockchain technologies to ensure the security and integrity of tokenized assets with a choice of preferred blockchains as well.

Fast integration time: Tokenization SaaS platforms are designed to be easy to integrate and onboard, allowing asset owners and issuers to get started immediately.

Low cost: Tokenization SaaS platforms offer the most cost-effective solution. 

InvestaX’s user-friendly Tokenization SaaS platform makes it easy for asset owners and issuers to get started with tokenization, customize the platform and their offerings, and stay ahead of the curve in the world of private market investments. You can read more about our competitive advantage here.

At InvestaX, we offer the leading Singapore Licensed Tokenization Service-as-a-Software (SaaS) platform for Real World Asset Tokens (RWA) and Security Token Offerings (STO). We provide a one stop shop for tokenized assets for global investors, including real estate, private equity, venture, ESG, startup, private credit/debt and more. We also provide IX Swap, the first legal and compliant Automated Market Maker (AMM) for RWA and STO.

Contact us for a consultation on your tokenization strategy.