How to Tokenize a Physical Asset?
According to Ernst & Young (EY), 3% of the world’s foreign exchange is already in tokenized assets. The market is just warming up! The tokenization of real-world assets is forecasted to reach $16 trillion by 2030 according to a report by BCG and ADDX. Five factors that asset tokenization may be on the verge of widespread worldwide acceptance are listed in the BCG and ADDX report:
✓ Increases tokenized asset trade volume.
✓ Improves stakeholder sentiment internationally.
✓ Greater asset classes being tokenized (Including assets such as real estate, equities, bonds, and investment funds, as well as less traditional assets such as car fleets and patents)
✓ Recognition among monetary authorities and regulators.
✓ An expanding skill pool of active developers in the blockchain sector.
What are the real-world assets that can be tokenized?
| ASSET | TYPES |
|---|---|
| Financial securities | Stocks, bonds, options, hybrid financial assets. |
| Intellectual property | Patents, copyrights, trademarks, trade secrets. |
| Physical property | Fleet, equipment, luxury goods (cars, apparel, accessories). |
| Physical commodities | Energy, precious metals and stones, agricultural products like coffee, wheat, beans, etc. |
| Real estate and land | Residential, commercial, and industrial property, as well as raw land. |
| Artworks and collectibles | Antiques, coins, stamps, books, paintings, sports memorabilia, and pieces of digital art. |
| Medicines | Medical and pharmaceutical products, clinical trials. |
| Tickets | Purchased and free tickets, loyalty/reward points. |
| In-game assets | Characters, player cards, pieces of virtual land, skins, weapons. |
Key Benefits Of Asset Tokenization
Apart from improving asset liquidity, and streamlining asset management, asset tokenization brings many benefits to the table. Some of them are,
Fractional Asset Ownership
A person can be a fractional owner of an asset with the help of tokenization. Everyone cannot afford big real estate or other physical assets of value in this 3d world. But when we tokenize a physical asset, the tokens can be sold to a single user or multiple users based on their invested amount. For example, if a building is estimated to have a value of 1 million, and if I generate 1000 tokens for that asset and fix the value of 1 token as USD 1000, then if I buy 5 tokens for USD 5000, then my share in the asset will be 0.5%.
Peer to Peer Asset Trading
Anyone around the globe can now invest or buy physical assets with asset tokenization. One more advantage that gives an edge to this is the peer-to-peer transactions. Peer to Peer trading of physical assets via asset tokenization is a straightforward send-and-receive transaction settlement and clearance can be automated (with smart contracts), enabling quick and cheap transactions including cross-border payments.
Smart contract Based Automation
Smart Contracts are used to automate the process involved by entering the pre-determined conditions and dealing in code format, when the pre-determined conditions are met the smart contract gets executed automatically without the need for any intermediaries to authorize the process. This can be used with the help of ERC-3643 protocols.
End to End Traceability
Asset owners and investors can trace the whole history of activities performed over tokenized assets in the distributed ledger.
Compliance
Tokenized assets can be programmed to comply with AML/KYC, ISO 27001/27002, SEC, GLBA, PCI DSS, GDPR (for the EU), HIPAA (for healthcare), and other required regulations.
How To Tokenize Real-World Assets?
To tokenize physical assets, you can follow a general process that involves the following steps:
1. Define the Asset: Identify the physical asset you want to tokenize. It can be real estate, art, precious metals, commodities, or any other valuable physical item.
2. Determine Ownership Structure: Decide on the ownership structure for the tokenized asset. Will it be represented as a single token or divided into multiple tokens? Consider the fractionalization of ownership to enable smaller investments.
3. Select a Blockchain Platform: Choose a blockchain platform that supports asset tokenization. Ethereum, Stellar, and Polymath are popular choices, but there are several other platforms available. Consider factors such as scalability, security, and smart contract capabilities.
4. Legal and Regulatory Compliance: Understand your jurisdiction’s legal and regulatory requirements for tokenizing physical assets. Consult with legal experts to ensure compliance with securities regulations, property laws, and applicable KYC and AML requirements. For this purpose, nowadays we use ERC 3643 for decentralized identity management.
Why ERC 3643? Why not other protocols?
ERC 3643 is a security token. Unlike tokens like ERC 20 and other utility tokens
ERC 3643 makes sure the person who is at the receiving end is the real buyer or not. This is done by the integrated regulation system and digital identity management within it.
5. Smart Contract Development: Create smart contracts on the chosen blockchain platform to represent the ownership and transferability of the asset. Smart contracts should define the rules and conditions of the token, such as ownership rights, dividend distribution, and voting mechanisms.
6. Asset Valuation and Verification: Determine the value of the physical asset through appraisal or evaluation. Verify the authenticity and condition of the asset through trusted third parties, if necessary. Ensure transparency in the process to build trust among potential investors.
7. Token Creation and Distribution: Generate digital tokens that represent ownership of the physical asset. Issue these tokens to investors or stakeholders in accordance with the ownership structure defined earlier. This can be done through an initial offering, private placement, or other means.
8. Asset Custody and Security: Establish a secure custody solution for the physical asset. This can involve trusted custodians, escrow services, or blockchain-based multi-signature wallets. Ensure that the custody solution aligns with industry best practices and provides adequate security for the asset.
9. Market Listing and Trading: If desired, list the tokenized asset on compliant digital asset exchanges or platforms. This provides liquidity and enables trading among investors. Ensure that the chosen exchange or platform supports the specific token standard used for the asset.
10. Ongoing Governance and Compliance: There is a drawback when it comes to multiple owners for a physical asset, where many quarrels may occur while choosing a decision or others, people may differ in their opinions, so there should be a mechanism where they can come to consensus. For that, implement mechanisms for governance, such as voting rights and decision-making processes, if relevant to the asset. Maintain compliance with legal and regulatory requirements, and regularly communicate with token holders to provide updates on the asset’s performance and any relevant changes.
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