From real estate properties to artwork, the methods in investing in these traditional assets may radically change with the emergence of asset tokenization. Blockchain, its underlying technology, has become one of the drivers in disrupting many industries, including the financial sector.
Asset tokenization is the process of converting a physical asset into a digital asset using smart contracts in a blockchain system. These tokens – mainly security tokens – represent the tangible assets that can be traded in a security token exchange anytime and anywhere in the world.
Using blockchain technology to raise funds
Ever since the introduction of the distributed ledger technology, or simply the blockchain, a lot of use cases have begun to surface and disrupted many industries. This innovation paved the way for many tech startups to raise funds through tokens offered in Initial Coin Offerings (ICO).
Back then, ICO firms issued tokens in exchange for a “share” in the startup, which was unregulated and, unfortunately, tainted with scam and fraud.
Similar to ICO, another form of tokenization was introduced in 2017. The Security Token Offering (STO) began to disrupt the financial industry by issuing tokens that are backed by an investment asset such as a real estate property.
These tokens are fungible, tradeable financial instruments that are not traded in regular token exchanges.
STO exchanges are regulated and should fully comply with the law, including scrutiny of every token listed, investor information, and data sharing procedures.
How STOs are becoming a new trend in investing
In a report published by the PwC in 2019 on crypto assets and tokenization, the number of STOs/ICOs has jumped from 552 in 2017 to 1,132 in 2018.
The report also showed that asset tokenization had become a trend, expanding from commodities such as oil and gold to intangible assets such as music rights.
STOs do not have much difference from ICOs, as both fundraising methods work on the blockchain system. STOs, however, combine the features of ICOs and the traditional financial market.
Characteristics of STOs include low-entry barriers for investors and security, as this is regulated by security laws such as KYC and AML.
The new age of regulated securities
As the adoption of STOs gains momentum, its popularity signals a new era of financial investment with blockchain as its underlying technology.
Leveraging security regulations has contributed to the rise of STOs globally, with investors seeing the benefits of security tokens as a financial instrument such as:
- Fractional ownership where new investors now have access to asset classes unattainable to them before
- Liquidity of assets wherein these tokens can be traded 24/7 anywhere in the world
- Lower costs, as the system reduces or even eliminates the need for intermediaries (bankers, brokers, etc.) found in traditional financial markets
- Faster settlement – by using the blockchain, clearing and solution can be quicker and more efficient
- Programmability allows a more efficient way to manage voting rights through smart contracts created in the blockchain
- Immutable proof of ownership, as blockchain secures all transactions having a “single point of truth”
The PwC report also predicts further growth in this space by 2020. As countries leverage local security regulations, investors are now becoming more confident in this funding method, thanks to the development of smart contracts and blockchain technology.