If you’ve never heard of tokenization on the blockchain, don’t worry – you will. Tokenization is set to disrupt everything you’ve ever seen when it comes to physical assets and raising capital. Tokenization is a method that converts the rights and ownership of a certain asset into a digital token with “smart contract” capabilities. By tokenizing an asset, you are dividing it into fractional ownership to allow investors of all sizes to participate in deals that were previously not available to them. Now owners of art, businesses, real estate, and really just about anything can transform a previously illiquid investment into a tradeable asset via blockchain technology.
These smart contracts are programmed to allow for automated events to occur. Through the use of smart contracts, tokenization leads to easier management of investors and their rights. Most notably through the World Token Market, transactions can be easily tracked by seamless integration with transfer agent custody to allow investors to receive automatic distributions and exercise their other rights associated with their tokens such as voting rights through the blockchain, and especially with respect to the speed of settlements. In addition, compliance is programmed into the token, as investors all must prove their digital identity via all relevant KYC/AML checks.
In most cases, this blockchain technology means using Ethereum as the backbone for this entire process. Tokens are issued by the company and freely bought and sold on cryptocurrency exchanges. Because blockchain is a public ledger that is immutable, you can be sure your tokens are secure and can’t be tampered with in any manner, adding a layer of security that gives investors the confidence to participate in the process to begin with. As far as understanding the flowchart, it’s simple: You take your asset, tokenize it to create its digital ownership rights representation and store the record on the Ethereum blockchain. There are six main steps to consider:
- Identification of the asset – what exactly is being offered?
- Evaluation and confirmation of the asset – determine the correct valuation for the deal.
- Tokenization and Smart contract generation – basically configuring the “economics” of your offering
- Investment type: What are you offering, equity or cash-flow, or something else?
- You must qualify your offering with the SEC (Reg.D, Reg.A, or Reg.A+ filing). This is why these types of deals are called “Security Token Offerings”.
- Once approved, start selling tokens to investors.
Progress in the blockchain world is moving at lightning speed. Tokenizing assets to prove ownership of real assets provides a number of benefits that expedite the process of buying and selling securities. Tokenizing an asset or backing the value of a token with a real-world asset opens up the potential investor base to a much wider market, increases liquidity compared to traditional securities, and drastically reduces the time required to trade them.
Don’t get left in the technology dust! Now is the time for you to see the entire process for yourself by requesting a demo of the world’s most advanced, compliant and efficient tokenization platform and find out if tokenization is for you! Hint: it probably is!