Tokenization Is About Much More Than Bringing Assets Onchain

Tokenization represents more than bringing assets onchain. It is a powerful tool that helps enable a new financial system better aligned with the needs of a digital age.

Tokenization, which means representing real-world assets as programmable digital tokens on a blockchain, can be used for just about anything of value. This includes both financial and non-financial assets, and could involve raw materials such as gold, equities such as stocks, and fixed-income instruments like bonds.

It also involves more esoteric assets. For example, a business could tokenize its invoices and sell the resulting digital assets to DeFi lenders, which could allow it to generate capital more quickly and potentially less expensively than relying on a lending institution. This would also open up a new opportunity for investors to obtain a claim on the accounts receivable of a company.

Alternatively, a financial institution could take a $100 million private loan and convert it into a large number of tokens. This could create several benefits, reducing the minimum capital needed and opening up private credit markets to a wider pool of investors. It might also enable easier trading and therefore more efficient price discovery.

It is worth emphasizing that both of the aforementioned examples can benefit both issuers and investors by giving them a greater range of options. They also enhance liquidity by taking assets that are traditionally illiquid and making them accessible to a larger pool of investors.

While the aforementioned examples help illustrate certain benefits of tokenization, there are many other benefits to digitally representing assets in this manner. Here are some examples:

Instant Settlement

While many trades require days to settle, token transactions can settle immediately. This can help eliminate the counterparty risk that investors face as they wait for trades to clear and also free up collateral that could otherwise be tied up for days.

Greater Operational Efficiency

Tokenization can bolster operational efficiency by leveraging smart contracts to automate many back-office tasks like keeping track of asset ownership, determining coupon payments and handling reconciliations. Eliminating these tasks can reduce costs, and these lower expenses can potentially be passed on to investors.

Improved Transparency

All transactions are recorded on a blockchain, which is an immutable record. This provides greater transparency for issuers, investors, regulators and auditors. The blockchain also provides a singular version of the truth. This makes it so information does not have to be synchronized between different financial institutions and reduces expenses associated with auditing.

Tokenization can also help corporate managers make better-informed decisions by giving them greater visibility into collateral. More specifically, tokenizing collateral gives companies a better idea of what resources they have and how those assets can be used.

Automated Payments

Investors can use tokenized bonds to receive automated coupon payments. Since tokens are programmable, software developers can incorporate the various characteristics of a bond, including its maturity date and interest payments, into the relevant smart contracts. This can benefit issuers by eliminating manual processes and potentially reduce expenses for both them and investors.

Enhanced Collateral Use

Another benefit of tokenizing collateral is that investors can potentially make more efficient use of their assets. For example, if an investor collateralizes a tokenized bond, they can potentially link that digital asset to a DeFi platform and use it to secure a loan.

Always-On Markets

Tokenization allows issuers to take all kinds of assets, regardless of where they are based, and issue them in token form around the world at any time. Stock markets have made some progress in terms of having longer trading hours, but they still aren’t available 24 hours a day. Interestingly enough, forex markets are open all the time, and commodity markets are available virtually all the time.

The fact that issuers can mint tokens and distribute them to the public at any hour of the day combines with their ability to represent anything of value to make them truly versatile assets.

People have been talking about the coming “new financial system” for a long time. That new system is here, and it’s because of the capabilities made possible through tokenization.

Benjamin Sarquis Peillard is the founder and CEO of Cap, a covered credit platform for the US dollar.