Asset tokenization: the foundation for financial industry 2.0
The tokenization of assets is disrupting the financial industry by enabling frictionless transfer of ownership and democratizing asset ownership. Tokenization refers to the process of issuing a blockchain token that digitally represents a real tradable asset. These tokens can often be sold to investors and traded on secondary markets. This is expected to allow for more efficiency in the various stages of the capital markets lifecycle (from trading to settlement), more financial inclusion, increased access to financial products and higher resiliency of market infrastructure.
The tokenization timeline
Currently, tokenization is mostly applied to standardized products such as equity or bonds, with Security Token Offerings (STO’s) becoming a more familiar term. At the same time, we are seeing a rise in the tokenization of smaller or illiquid assets, such as shares of small and medium sized enterprises (SME’s) or real estate. In the future, we will also see ownership or usage rights of things such as cars, art and other alternative assets becoming accessible to a wider range of investors through tokenization.
Tokenizing assets brings many advantages for issuers, users and regulators.
For issuers and users, tokenized assets can be issued and traded (peer to peer trading without the need for a third party) cheaper and more securely than with traditional database records. Tokenization also enables fractional ownership of illiquid or alternative assets that traditionally require a high capital investment and hence have a limited investor base. This way, investors can benefit from a wider range of asset choices such as real estate, private securities, or art due to increased affordability. At the same time, the barriers to entry for raising capital are significantly lowered. This democratizes finance and greatly facilitates portfolio diversification. Together, these reduced trading frictions and greater access will significantly increase the liquidity of assets, even turning previously illiquid assets into highly liquid assets.
Tokenization also enables automatic enforcement of compliance, as rules can be programmed in smart contracts. Since regulators can monitor real-time and perform on demand surveys and audits, the cost of transactions and compliance can be reduced while the confidence in a system increases.
Finance 2.0: Tokenization is essentially touching the core of the financial industry. It is the next evolutionary step in the transition of accounting, transacting, and recording on paper to doing it in an entirely digital form, for assets both tangible and intangible. Without the need of a middleman.
Tokenization with NEXUS
Quantoz has developed NEXUS, the gateway to the token economy. With NEXUS, companies can create and manage stablecoins and security tokens without the need to deal with the technical aspects. NEXUS supports both public blockchains and private blockchains and enables companies to create their custom token ecosystem.
Stocks, bonds and other financial and non-financial assets can all be tokenized with NEXUS and made available for trading on secondary markets. Since blockchain technology also enables fractional ownership of illiquid or alternative assets, it enables companies to open up investments to a much wider audience.
By enabling traders to trade directly with each other through blockchain technology, the clearing, settlement and reconciliation process are eliminated. With NEXUS, we solve the crossing problem in a two-sided (or more) transaction process through atomic swaps. Whether stablecoins or security tokens are traded, since all transactions are executed atomically, no transaction ever gets lost. Moreover, transaction costs are significantly lowered. This reduces the friction involved in the buying and selling of securities for both investors and issuers.
In asset tokenization with NEXUS, stablecoins play an essential role. Stablecoins provide liquidity, enable transactions to happen within one technology stack, make processes such as dividend payouts more efficient and connect tokens to the existing fiat system. Thereby, they are an important enabler for a successful token economy.
Combined, NEXUS makes capital markets more efficient and accessible to everyone.