Asset Tokenization Has Big Potential, But Serious Challenges Must Be Overcome

The blockchain technology that underpins cryptocurrencies such as Bitcoin and Dogecoin can do a lot more than simply acting as a record of transactions and wallet balances. Anyone who knows anything about crypto will be familiar with non-fungible tokens or NFTs, which are commonly associated with digital art. NFTs can be minted that represent a piece of artwork, immutably and transparently recording who owns it. 

This concept is known as asset tokenization, with the “asset” being the digital artwork that’s “tokenized” as an NFT. While art is the best known use case for asset tokenization, it’s by far from the only one. In fact, many in the crypto community believe the ability to tokenize physical assets is one of the biggest opportunities for blockchain technology, with the potential to unlock massive amounts of liquidity and boost access to traditional financial markets. 

One of the most authoritative sources on asset tokenization is MaskEx, the highly secure and private cryptocurrency wallet and trading platform. In a blog post, MaskEx explains how tokenized assets can be superior to traditional cryptocurrencies because of the way they represent tangible value and utility. While Bitcoin’s value is based on simple supply and demand, the value of tokenized assets is based on the real-world, physical assets they represent on the blockchain. 

“The volatility observed in the cryptocurrency market can largely be attributed to its speculative nature, as it lacks tangible assets and real-world utility to anchor its value,” MaskEx explained. “The emergence of tokenized assets, however, has the potential to dramatically reshape the cryptocurrency landscape. By infusing the market with real-world value and utility, these tokenized assets could significantly reduce volatility and promote stability across the space.”

Tokenized Asset Benefits

MaskEx has identified six clear advantages of asset tokenization compared to the traditional way of doing business. One of the most important benefits is fractional ownership. Tokenized assets can be divided into thousands or even millions of small units, making them more accessible to a larger base of investors. For instance, a luxury apartment could be tokenized and split into 100,000 digital coins, each representing a small piece of that property. This makes it possible for 100,000 individuals to invest in the same piece of real estate. Without tokenization, splitting real estate in this way would be extremely complicated. 

Increased liquidity is another benefit. By converting a physical asset into tokens, it becomes much easier and faster to buy and sell. This has the effect of boosting liquidity in financial markets. 

By fractionalizing physical assets, we can also lower the barrier to entry. An investor would need several hundred thousand dollars to buy real estate such as a hotel outright. But if that hotel is tokenized, they can purchase a much smaller stake in the business. It means people with smaller budgets will have access to many new kinds of investment. 

Other advantages include increased transparency due to the decentralized nature of the blockchain that records asset ownership, and new mechanisms for capital generation. For example, decentralized financial protocols enable such assets to be lent or staked in order to generate capital for asset owners. 

What Assets Can Be Tokenized?

The beauty of this technology is that virtually any kind of asset can be tokenized. Indeed, a number of tokenized asset marketplaces already exist and are doing a thriving business utilizing this nascent technology. 

While most NFTs represent digital art, they can also be applied to real, physical works of art. An example is Kreatr’s marketplace, which enables artists and art galleries to tokenize both physical and digital pictures and photographs as NFT-certified limited-edition, museum-quality prints. Kreatr’s art NFTs are hosted on the Flow blockchain, and unique artworks from artists such as Mike Miller, John Waguespack, Fanakapan, Daniel Russo, MIDABI, Vladislav Lakshe and Dave McClinton can all be found on its marketplace. 

Exclusive memberships are a more unique type of asset that can be tokenized. NFTs are being used for alternative, easily transferable membership programs. For instance, the second floor of Warren Lotas’ Los Angeles-based store served as an exclusive hangout for Wild Bunch NFT holders on the grand opening day. The NFTs also bestowed holders with the rights to certain real-world garments. In this way, NFTs represent something with genuine real-world value, meaning they command a high price among the fashionista community. 

MaskEx offers the example of tokenized carbon credits as another novel use for asset tokenization. Platforms such as Changeblock can be used to tokenize carbon credits that encourage businesses to invest in cleaner technologies and practices. Changeblock tokenizes carbon credits, streamlines the credit creation process and works with registries to assist companies in meeting their sustainability goals. 

Traditional assets such as gold can also benefit from tokenization. While it’s certainly possible to melt gold down and break it up into many smaller pieces, doing so is an expensive and time-consuming process. Instead of dealing in physical gold, Meld Gold utilizes the Algorand blockchain to break down gold into smaller amounts, while keeping the physical metal it represents somewhere safe and secure, such as vaults of a bank. 

The above examples are just the tip of the iceberg for tokenized assets, which can in fact be used to represent almost anything that’s perceived to have value. As protocols like Creditcoin and Centrifuge have proven, it’s possible to tokenize corporate debt and equity, loans, invoices and even intellectual property such as patents and use them as collateral for borrowing. Then we have things such as commodities (coffee beans and oil etc.), sports teams, internet domains, wine, luxury goods and more that could also be tokenized. 

What’s Stopping Asset Tokenization? 

Perhaps the biggest obstacle to overcome is the lack of any formal regulatory framework. As MaskEx explains, each country has their own rules governing asset ownership that make it tricky for assets to be tokenized in a way that’s compliant. 

“For instance, in countries like China and Thailand, foreign individuals face restrictions on direct land ownership, while in Brazil, land purchases by non-residents are subject to regulatory approval,” MaskEx said. “Consequently, tokenizing land and allowing unrestricted ownership across borders becomes a complex and potentially illegal endeavor in some jurisdictions.”

Besides the regulatory considerations, there remain some security concerns over tokenized assets. For instance, if somebody decides to tokenize a physical gemstone, only for the police to later reveal that the gemstone was stolen, the underlying token becomes worthless. So there’s a need to create a mechanism to establish the authenticity of any new tokenized asset, and also rules that ensure token holders can be compensated in such an event. 

Finally, MaskEx points to some technological limitations around asset tokenization that may prohibit widespread adoption. There’s the age-old problem of scaling blockchain transactions to consider, as tokenization could result in massive network congestion if associated transactions increase significantly. In addition, there is the question of integrating blockchains for tokenized assets with existing, legacy financial systems. MaskEx says it will require a concerted effort from industry stakeholders, policymakers and developers to overcome these challenges, yet it’s a necessary step if tokenization is to realize its potential. 

“Continued advancements in blockchain technology, regulatory harmonization, and the development of innovative solutions to address security and technological limitations will be instrumental in propelling the tokenized asset market towards widespread adoption and success,” MaskEx concludes.