Although its development is still in a fairly early stage, it is a promising technology. What does it essentially involve, what risks does it pose, and what opportunities does it create? Born from the context of decentralized finance and blockchain technology for distributed ledger systems, asset tokenization refers to the process of converting the rights to a physical or digital asset into a digital token recorded on a blockchain. That means this process converts physical assets or traditional financial instruments into digital tokens that can be traded, owned, or managed.
Tokenization enthusiasts believe that it has the potential to change the way physical and digital assets are bought, sold, and exchanged. Some even claim it is gradually transforming how capital is raised and how investment products in assets are developed and distributed. For instance, among other things, this model could facilitate fractional ownership, as a tokenized asset can easily be segmented into fractions (tokens) with multiple owners.
Currently, asset tokenization is used to digitize finance, support environmental causes, fractionalize real estate, and track supply chains.
McKinsey forecasts that the total capitalization of the tokenized market could reach around USD 2 trillion by 2030 (excluding cryptocurrencies and stablecoins), driven by adoption in mutual funds, bonds and exchange-traded notes, loans and securitizations, and alternative funds.
Pros and Cons
This model offers several advantages such as greater accessibility, liquidity, transparency, and efficiency. It also facilitates product innovation, diversification, and risk management. Additionally, it can increase profitability by reducing costs associated with intermediaries in traditional asset transactions.
However, it also presents a set of disadvantages, such as regulatory uncertainty, volatility, security risks, and technological complexity. There are even concerns about the potential use of digital assets for illegal activities.
Clearly, it is important to strike a balance between technological innovation and investor protection in the digital economy to avoid scams. And for that, among other things, unified standards are needed.
Investment in Digital Assets
Currently, what types of assets can be tokenized? In theory, many real-world assets can: commodities, financial instruments (stocks, bonds), art and collectibles, luxury items, agricultural and transportation assets, industrial and telecommunications infrastructure, real estate, intellectual property, renewable energy infrastructure, and more.
One of the pioneering countries in this field is Singapore, which recently introduced new measures to boost the commercialization of tokenized assets, although Japan is also very active in this area, and Switzerland has a comprehensive legal framework. The United Arab Emirates is also making progress, as is Hong Kong. In addition, there are initiatives in Germany, Spain, Slovenia, Uruguay, Canada, Malta, and Iran. In the United States, some states are pushing the topic forward. In the European Union, crypto asset market regulations include rules on tokenized securities.
For example, farmers could tokenize their crops before harvest, creating new financing opportunities and risk management tools. In agriculture, this model could enable the emergence of tokenized commodity trading platforms, fractional ownership of agricultural assets, crop insurance based on smart contracts, and automated supply chain verification.
In the energy sector, it could drive tokenized carbon credits, fractional ownership of renewable energy projects, and community-owned solar and wind farms, among other initiatives.
Meanwhile, blockchain-based asset tokenization in logistics can lead to improved inventory visibility, optimized valuations, enhanced traceability, and more.
At Baufest, we support companies in accelerating their digital businesses, enabling them to create solutions or platforms that drive their tokenization initiatives across various industries.