10 Business Cases for Tokenization of Assets

“Startups and major financial companies around the world are now racing to develop systems for the next phase of this evolution: tokenizing assets. - NASDAQ

Tokenization of assets is disrupting the financial industry. Blockchain and Distributed Ledger Technologies (DLT) have captured the attention of many, thanks to their potential to deliver new and better infrastructures for the improvement and digitalization of the capital markets.

Companies taking advantage of the token economy are building bridges between real-world businesses and global digital investors. Through digital securities, cross-border investments are becoming more fluent, and financial participants are securely opening their portfolio and operational systems to broader schemes.

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Technology is rapidly evolving towards DLT, a potent enabler of both investment experience and effective operations. Now that digital interactions have become the norm, financial activities are starting to keep the pace. Institutional investors are turning towards digital assets, evaluating the great potential to respond to acute liquidity challenges.

Moving towards a token economy implies an ever-closer integration of production activities, including upstream and downstream processes (sourcing, distribution, etc.) with digital payments and enforcement of contracts in an automated manner. Applied correctly, it can solve structural solvency problems, efficiency, and access to markets. And, this is the crucial and most critical point of this disruptive technology.

Although many think that all its benefits are reserved for the traditional participants of the financial markets, embracing this technology-based economic system offer a broader picture: the democratization of investment and liquidity increase.

Through digital assets, the investment can be liberated, bringing more participants and more capital to different business models, that otherwise, would have remained unfunded and unlocked.

Hence, there is not a limit on what can be tokenized, as long as the process ensures secure investment and custody of the underlying assets or financial instruments.

Currently, several commercial cases are demonstrating the potential that tokenizing assets have. Many projects have increased their turnover and broadened their investment perspective thanks to this technology.

In fact, the projected tokenized market volume is likely to reach 24$ trillion until 2027. In other words, 10% of the world’s GDP will be tokenized and on a blockchain. So, it only makes sense to consider the opportunities it can bring to any business before it is too late to leverage this once-in-a-life chance.

This article provides a list that compiles the most relevant business cases for tokenization nowadays. Thanks to our experience advising diverse clients around the world with compelling growth opportunities, we are confident that these digital securities increase turnover and boost productivity, renovating complicated legacy through innovative technology.

  1. Collectables
  2. Real Estate
  3. Art
  4. Employee Stock Options
  5. Intangible Assets
  6. Precious Metals
  7. Energy Markets
  8. Investment Funds
  9. Shares
  10. Luxury Goods
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1. Collectables

These assets have been gathering a lot of attention from institutional investors that are looking for new investment products to diversify their portfolio. From wine and whiskey, through Balmain bags to memorabilia and gaming cards, the range of opportunities is wide. Tokenizing collectables is a great business case that can expose the assets to international investment and increase product demand.

Through tokenization, the collectables business transforms into a global market, making the commercial case more attractive than just the storage and the offering of these assets on specialized and limited markets.

Thanks to the digital representation of the rights over the assets, material custody also gets more accessible and more secure. Traders can retain the custody of the assets, and ensure their physical integrity, offering investors the certainty that their asset is saved while it increases in value.

The business case gets even more attractive, because representing collectables with digital assets, making each of the security tokens unique, creates digital scarcity and more exclusivity. The ledger support complements this exclusiveness, reassuring that all participants can differentiate their rights and clearly distinguish them.

2. Real Estate

This asset class is one of the best business cases for tokenization. The acknowledgement of its potential to reinforce the industry has been assertive and has empowered legacy systems. Tokenization introduces far-reaching liquidity solutions to the global real estate market, adding more flexibility and cost efficiency to investors.

Clearly, the market demands have driven the urgency for digitalization, creating new opportunities to diversify investment portfolios and increase revenues on regulated markets.

Through a digital market built-on DLT, most of the costs on real estate transactions can be drastically reduced. Given that DLT is a decentralized and distributed peer-to-peer registry, most of the information sharing and layers of assessments can be supported by the network of relevant participants simultaneously.

Thanks to tokenization, a highly complex market can be optimized and opened to broader investment, diversifying the type of offering. For instance, some of the tokens may grant strict ownership of the building and facilities. In contrast, others may only allow access, or even just divide the property to later distribute profits from management (a very similar concept to creating different classes of stock).

The opportunities and benefits that tokenization creates for real estate are vast, generating more financial inclusion and improved information-sharing systems. The token economy implies a fragmentation of the entry ticket, incentivizing lower upfront investment and increasing the liquidity and returns of the assets by reducing management costs.

micobo has successfully developed multiple real estate tokenization projects. For these, we provide a real estate digital market, using our multi Security Token Offering (STO) scheme on the ledger. White-listed investors and stakeholders can interact securely and fast, trading the tokens they own of different real estate assets, to build a diverse portfolio and raise their returns.

We empower the digital transition of a traditional player into the new wave of digital assets. Thanks to our solution, real estate companies can improve their offering and manage their projects cost-efficiently and digitally. With our platform, professional investors who are looking to diversify their real estate portfolios to control risk and maturity can manage their digital assets directly.

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3. Fine Art

Another renowned case for tokenization of assets its fine art, a growing investment option for stakeholders around the world. Due to the tremendous economic valuation potential of fine art, many investors are seeking to include exclusive pieces of art into their portfolio. However, this quest is, until now, not so easy for the average financial investor.

Traditionally, art pieces have several entry barriers, limited not only to their prices. The transactions usually take place in private auctions or through gallery visits. Hence, the artwork seems to be hindered to physical trading venues and large ticket sizes, increasing the illiquidity and largely reducing their reach and exposure.

Thanks to tokenization, owners of appreciating artworks can liquidate some of its value, while retaining custody over the physical asset (to avoid mistreatment and damages). Under these conditions, the co-owners of the artwork would be similar to shareholders. They would benefit from the appreciation of the fine art piece that they invested in, with the insurance that is being well taken off.

Hence, the value of their digital tokens (“shares”) would increase as the asset continues to appreciate. At the same time, the owner of the art piece would have access to early liquidity to cover maintenance costs or even artistic fees.

Overall, the business case for art tokenization is really attractive, especially in times where investors are looking to diversify their portfolios. It offers art owners, art collectors, and artists the opportunity to obtain liquidity while the piece continues to appreciate, and opens an asset class to many interested investors that otherwise would not have gotten access.

A great example of such an innovative art offering is pARTicipart, a digital market that is enabling fractional ownership of exclusive art pieces. Through tokenization, they are digitalizing the ownership of fine art and going the extra mile by securing the investment with doubled chipped, double secured, and double issued digital securities.

pARTicipart provides the premium buying, owning, and selling experience characteristic of fine art, offering a tech-twist: each investor gets an immediate proof of ownership, secured by a token issued on the blockchain. In addition to holding a fraction of the actual piece of art, investors receive an exclusive high-quality print of the original artwork, which is also NFC-Chip secured and issued as a digital twin on the blockchain.

With this ground-breaking scheme, tokenization of art elevates its potential, not only by offering more liquidity and opening investment return to diverse portfolios but also by improving the experiences for art enthusiasts. For those investors that are looking for a unique experience, this aligns with an ecosystem that gives the most returns over time and the best position to enjoy their interest in art.

4. Employee Stock Options

Unlike the afford mentioned opportunities, employee stock options are an uncommon case for tokenization. Yet, it is one of the most ground-breaking and empowering, hovering a lot of interest among many uprising tech companies.

These type of assets are usually subject to many formalities, which make the process of distributing stocks among employees, not only tricky but highly expensive. Indeed, paper and complex legal agreements are cumbersome, difficult to transfer and can be hard to track. In contrast, DLT offers a peer-to-peer system, automatically acting according to how the smart contracts are programmed, removing layers of information transactions,

A tokenized employee stock option plan eliminates intricate and expensive procedures that usually deter company owners from distributing equity among their employees. Using the underlying technology for tokenizing assets, entrepreneurs can easily create incentives that aim to motivate and develop a stronger sense of belonging among their employees, building mutual success as a common goal.

Through a digital platform, companies can update and agree on the contractual terms & conditions of the plan, and this can be fed to a dynamic smart contract, that can be programmed following the specified needs. The stock options are then, tokenized, allowing for the management to have efficient governance and lifetime management of the tokens.

These sort of schemes are an outstanding instrument to increase productivity and generate loyalty among employees. Company founders can leverage this digital tool to acquire and keep the most valuable resource for growth: great human talent.

As a growing company, we were curious about the possibilities offered by such a scheme and decided to implement it. However, the usual expenses are too high for it to be cost-efficient. Hence, we developed a comprehensive ESOP, that brings the incentives our team is looking for, without consuming excessive amounts of resources while being capable of managing it in an efficient and secure manner.

The terms & conditions were put together with our legal team and our employees, during rounds of discussion to produce a standardized contract -that can be generally used by all companies clients of the platform- that takes into account both parties’ risks and expectations. Using a cliff vesting schedule, the participant employees receive their tokens monthly, with time-stamps to progressively vest their options, according to the legal terms.

Our digitized ESOP agreement outlines the process by which employees acquire the token (stock option), as well as the benefits for the employee while underlying all plausible events for suspension and exits, with conditional strike clauses. Further, the vesting schedule is internalized in the smart contracts’ logic and is programmed to automate the calculations necessary. With cliff vesting, the employee will receive 1/48 vested tokens after passing the locking period, continuing the progression.

micobo’s TESOP (Tokenized ESOP) is a SaaS solution that integrates legal procedures into human resources management efficiently and transparently. It is a comprehensive solution gathering legal requirements and HR-management systems in an easy-to-use digital platform that facilitates and improves an otherwise complex and costly process.

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5. Intangible Assets

This case is especially relevant in an ever-evolving digitalized world. Intangible assets are gaining importance, given the rights they confer and the intrinsic value they represent. These assets may be things that you can’t touch or see such as patents, trademarks, carbon credits, etc., or things which have a representation you can see such as an invoice, website address URL, etc. Either way, there is no doubt that owning rights to a special patent or brand, or having access to carbon credits, can be a business gamechanger for many investors.

Thanks to the nature of intangible assets, the rights they represent are easy to combine with digital blockchain-based systems. Although plenty of their ownership rights are already digital, they are highly susceptible to fraud as ownership can be difficult to prove or prior encumbrances discovered. That is why there is a competitive advantage of tokenizing them.

With a tokenization solution that complies with all the regulatory mandates to onboard investors and to distribute ownership rights, only those people that have proven sufficient capital and legal adequacy can invest and trade the fragmented rights. Likewise, the original owners of the intangible assets prove the ownership, following the legal requirements that are embedded in our software and through our smart-contracts execution.

Thanks to DLT, the costs and efforts required to prove ownership and encumbrance can be efficiently automated, and locked into the smart governance system that the software provides. Thus, this business case presents an excellent opportunity to optimize the management of these assets and their encumbrance, given that tokenizing intangible assets require a much simpler process.

Primarily, the tokenization does not need a custodian to be compliant. Hence the whole process becomes more cost-efficient. It would not need intermediaries once the asset has been properly verified, tokenized, and audited. Through immutable digital records of the assets, proving the ownership and encumbrances going forward becomes much transparent and allows for easy audit. Additionally, they are virtually no concerns regarding storage or shipment of the assets, which makes this business case a perfect scenario for digital assets.

Thanks to tokenization, trading and dealing with intangible assets offer, on top of the liquidity and fungibility, a reduction of friction and an increase of trust between the parties. Additionally, with a comprehensive smart-contract standard, as the one micobo has developed, the assets transfer lines up with the real-world legal model of the transfer, auto-enforcing the conditions of the contracts in a timely and licit manner.

micobo has been actively developing systems to provide solutions to this the intellectual property industry and the tangible assets branch, staying on top of market developments. In fact, our carbon credits tokenization solution has been selected as one of the most innovative business cases on DLT & blockchain within the EU, recognized with a sponsoring award granted by the European Commission Horizon 2020 programme.

6. Precious Metals

Precious metals, like gold and silver, have been used as stores of value for thousands of years. Legally, they are classified as fungible assets, given that they can be replaced with identical units. Commonly, fragmenting these types of assets into smaller units is physically possible, in contrast with the previously considered assets. Tokenizing them is also easier, as its general set of tokens is associated with the overall collection of interchangeable assets

The most known and tradable precious metal is gold. However, regardless of its market liquidity, its custody and shipping costs can drastically increase its transactional costs. In comparison, other precious metal markets tend to be really illiquid and even controversial, as is the case for palladium. Hence, these commodities can foster complex markets, that limit price discovery and develop information asymmetries.

All these complexities summed to the increasing international safety and sustainability regulations have limited their production and raised the price and the entry barriers for the precious metals markets. That is why tokenization represents such a good comprehensive business case for these commodities. It not only allows for fractionalization, reducing the entry barriers and boosting access to new cross-border markets but it can also deliver a digital tracing system that can track the metals from production to customer/investor over the whole supply chain, thanks to the DLT architecture.

Increased market participation can lead to increased market liquidity for many of these commodities. Thanks to this continuous and global trading capability, stakeholders involved can reduce their operational costs and safely store the assets, while investors can reduce the risks of theft associated with physical metal custody. The ability to transparently back security tokens with precious metals will provide a market segment for investors wishing to have direct access to their investment, without the necessity to store bulky metal themselves.

Hence, a greater number of market participants would entail a move from bilateral to multilateral trade. Although this is burdensome in the conventional world, DLT supports smart contracts and atomic swaps, ensuring a stable and near-instant settlement of complicated multi-party trades.

It is clear that there is a great opportunity for precious metal traders and distributors to simplify their operations in a compliant manner, and to open their business to broader investors pools.

7. Energy Markets

Energy resources are a high stake for a global economy and for international security. As traditional energy distribution systems struggle to keep up with increasing demand, there are also increasing concerns regarding transparency and efficiency, relative to the rising pressure to reduce climate change and obtained sustainable growth.

Innovative ideas often get unseen by a strong industry that has too much a stake. That is why opening these to investors looking to build ESG portfolios, brings tremendous opportunities. In fact, research has found that tokenization allows for greater development of renewable energy sources by attracting additional financing through STOs for the construction of energy generation facilities (Varnavskiy et al., 2018).

These schemes can be powered to support operations, improving the investment distribution to develop further the technology. Financing through tokenization also allows multiple participants and stakeholders to be part of the system, creating stronger transparency and efficiency within the supply chain.

By strategically placing nodes/states along the supply chain, tracking back critical information and transactional history can be done in seconds.

The use of smart contracts to conclude transactions and the growth of the energy potential of the entire system will lead to the creation of the best terms of trade at lower prices.

Because we know about the importance of these markets, and we aim to contribute with sustainable development, we have developed systems to support the circular economy within the energy markets.

Through a partnership with AAA Efficiency, micobo is powering the financing of alternative energy productions. Collecting the data produced to sensors attached to the energy generations, we are able to tokenize CO2 certificates based on the documented power generation data per machine in a legally compliant and real-time manner.

The use of blockchain and the software solution created especially for this purpose results in complete documentation of measurement data for each machine. Hence, in addition to a display of real-time data, the entire history of data collected is stored immutably. To enhance transparency, the documented production-data can be viewed by all investors through an exclusive portal. There, investors will also have access to the allocated CO2 certificates and the STO tokens.

With the same aim, we have also developed a supply chain management system for the biofuels’ value chain. In partnership with Gevo Inc and our sister company Blocksize Capital, we created Verity, to eliminate double counting and suppress the risk of green-washing on sustainable production.

Through this digital system, every stage of the supply chain is kept through a state in the blockchain. Each state has unique properties that reflect its current status and its stage characteristics (e.g. farming). All states have a unique ID and a hash with the participant’ traits. With this, all stakeholders can identify the product precedence and the parties involved in its transformation along the value chain. Further, the distributed ledger system is coded to request agreement of crucial nodes (participants/stakeholders) to verify key transactions, according to the rules of the smart contracts.

With all this information locked in the blockchain, we are able to determine the reductions in carbon emissions created by sustainable production systems. Thus, producers are able to tokenize their CI Scores’ values or carbon credits.

These tokenization schemes are based on real data (as underlying assets), reducing speculative risks proper of these markets. With these systems, investments are ensured by real values and secured transactions.

8. Investment funds

Investment funds are private investment vehicles pooling capital from accredited investors and implemented a variety of strategies to offer returns. They are widely popular among traditional investors, thanks to the range of financial instruments and investment branches they covered. Some funds, like hedge funds, can invest in almost anything from currencies to real estate to stocks. Hence, they represent a good opportunity to transform savings in passive investment opportunities.

However, regardless of their attractiveness, some type of funds are not accessible to the vast majority of investors. For some of the funds, the entry ticket is quite high. As the case for the ones offering higher returns, hedge funds often require $1,000,000 to invest as an average minimum. That is why the case of tokenization here is particularly interesting.

By means of tokenization, shares in a fund can be freely exchanged on a distributed ledger, reducing barriers to entry, allowing transparency and adding liquidity to a market that has no access to it. Through security tokens, small and medium-sized accredited investors may benefit from the profitable, diversified portfolios designed by investment funds.

Investment funds managers also benefit greatly with tokenization. The enhanced transparency of a blockchain-based network enhances investor trust, which may result in a more significant investment. Yet most significantly, it is the idea of fractional ownership that will pump huge capital into investment funds.

micobo has been working together with the Stock Exchange of Thailand and a large German Asset Manager to build a Mutual Fund platform, especially the Transfer Agent Registry on DLT. To this goal, we are currently implementing a fully paperless and digital redemption process of fund shares on our tokenization platform. The Net Asset Value (NAV) will be used to calculate the performance of investor portfolios and will be provided through a technical interface to our platform.

With this step ahead, we proudly move forward with our contribution to digital finance. Responding to the pressing needs of a more-than-ever digitalized world, we are building the infrastructure to allow financial institutions to thrive in this context.

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9. Shares — Company Ownership

The classic case for tokenization is company shares. Accessing to a broader pool of investors implies more opportunities for raising capital. That is why tokenized equity was the first big case for tokenization, leading to a boom that developed in higher awareness by regulators and authorities, creating a more secure ecosystem to empower business digitalization.

By tokenizing equity, the issuing of tokens can replace all sorts of capital increase or even the Initial Public Offering (IPO). The security tokens created represent equity ownership units and can be assigned the same rights as “normal” shares. Through Security Token Offerings, entrepreneurs can benefit from the reduction of upfront capital requirements that are usually attached to IPOs.

Business owners have the option to open their company to a global pool of investors through a simplified and efficient digital process. Companies can access a global investor audience to finance their growth.

In the same manner, investment bankers can offer equity tokenization to speed the process for many upraising business and entrepreneurs, by lowering the costs reducing the intermediaries and steps to raise capital. The blockchain infrastructure simplifies and streamlines the process of issuing, selling, and managing the equity during its lifecycle.

With reliable infrastructure, the traditional methods of raising capital can be improved by removing operation hurdles while enforcing regulatory requirements. As is the case of our tokenization solution, issuers can automatically enforce rules and agreements on transfers through our dynamic smart-contract standard. micobo’s tokenization solution is the perfect tool for financial institutions and intermediaries that want to directly connect issuers and investors on one platform.

Additionally, issuers can be sure that their investors and future shareholders have cleared the origin of their funds. Our software integrates Know Your Customer (KYC) and Anti-Money Laundering (AML) processes, including APIs to (video) authentication and background check services.

As we are committed to driving digitalization forward, one of our partnerships has the aim of offering tokenization of equity, delivering the infrastructure for new digital entities as a service.

Amazing Blocks, a Lichtenstein based company that supports entrepreneurs and founders to raise initial capital through STOs, pioneering into the digitalization of finance with the use of the Lichenstein Token Act. Our tokenization software is powering Amazing Blocks with their outstanding goal of simplifying and digitalizing the founding & funding processes. Aiming to boost entrepreneurship, they help new companies tokenize their shares, improving their opportunities of success greatly.

The accompanying benefits are tremendous: Time and money saving, full automation and standardization, high transparency, remote setup and secured governance. All these advantages offered thanks to a digitalized DLT-system that we are proud to provide.

10. Luxury Goods

The global luxury market will reach €1.3 trillion (~$1.5 trillion) by 2025. And, as millennials and generation Z consumers drive 85% of global luxury sales growth, the tendency of these markets will grow towards digitalization and improved digital experiences. Tokenization opens the door to a completely digital-investment system, where investors can have certainty of the legitimacy and quality of the products.

Another argument supporting tokenization is the profitability increase that it delivers. These particular class of assets is highly illiquid because it has a smaller range of possible investors. Tokenization of luxury goods offers greater potential because it can offer an ecosystem where individuals with more modest incomes to enjoy luxury goods, even if on a fractional basis or for a temporary period.

Certainly, the strongest point in favour of implementing DLT and blockchain technology to commercialize luxury goods is assuring consumers transparency regarding the product history and proof of its authenticity.

Tokenization does have the potential to open up investments in the luxury industry. But it also has plenty of benefits for industry players and asset owners themselves.

Harness the power of financial technology

2020, with all his particular circumstances, has triggered further the mass migration from analogue to digital. But not everyone has seen the benefits, and only those who take a step ahead now will lead with the new order of business.

Tokenizations opens countless doors, growing the opportunities for market exposure and revenue increase. Institutions are going forward with digitalization, and adopting digital assets has proven to be a successful decision.

Recently, a survey published by State Street revealed that over 45% of financial institutions say the tokenization of traditional assets will be a massive disruption to the market within the next five years.

As digital assets continue to come a long way in gaining credibility among institutions, taking a strategic decision today can boost your leadership to the top in the coming years.

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Our mission is your success

We understand the challenges of digitalization and want to take advantage of the opportunities that it brings to create more secure and efficient capital markets. With the integration of blockchain and technology and DLT, every business process can be done in a more affordable and faster manner.

We are proud of offering tokenization solutions that promote new growth opportunities to all financial players.

micobo is committed to offering excellent products and services capable of empowering our customers, so we have studied all the alternatives in order to choose the most competitive software solutions capable of complying with all the functionalities a security token needs.

If you are ready to elevate your business and offerings, don’t hesitate to contact us to request a free demo of our solution.

About micobo GmbH

micobo GmbH is a leading European software company for Security Token Offerings and Blockchain Software Development (DLT). micobo provides fully compliant software solutions for Security Token Offerings and advises on structuring DLT- and Blockchain-based Securities.

Author

Luisa Blandon, Communications Manager at micobo GmbH (lb@micobo.com).

Originally published at http://7664816.hs-sites.com.

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Delivering. Digital. Excellence.

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