Digital assets — such as cryptocurrencies, non-fungible tokens (NFTs), and blockchain — have become popular in today’s fast-evolving digital world. This tech evolution leads major investors to shift markets, and financial firms turn various illiquid assets like corporate bonds, real estate, and derivatives into tokens (tokenization) to make them more accessible and liquid.
As digital assets are rapidly adopted in both consumer and business sectors, many digital asset management platforms like Nyala Digital Asset Platform emerged.
This new market landscape and the transformation into distributed ledger technologies (DLT) mean that companies now need secured, fast ways to store and transfer digital assets while keeping control of their encryption keys. In response to this need, digital asset management platforms provide investors and traders with cost savings, transparency, and efficiency in tokenized asset security.
Evolution of digital assets
Financial institutions worldwide have been integrating digital assets into their offerings. In shaping strategies, they weigh risk management and secure infrastructure of these assets, taking into account the growing prominence of digital assets, tokenization, and regulatory considerations.
The global market capitalization of cryptocurrencies surged to $2.8 trillion in November 2021 but fell to below $800 million due to crypto winter in 2022, before recovering to $1.7 trillion ahead of 2024. The growth suggests that cryptocurrency plays a significant role in investment portfolios and facilitating cross-border transactions.
Moreover, the utility of tokens has been used as proxies. it is possible to tokenize — a process to convert tangible or intangible assets to a digital token — various assets from cash, equity, and debt securities to real assets, such as real estate, commodities, artifacts, or artworks.
We could also see the increasing use of digital cash, such as stablecoins and Central Bank digital currencies for transactions. Millennials, generation X, and Z shifting their interest in cryptocurrency with high net worth categories.
Regulatory frameworks are starting to take shape, working on gaps and consistency for digital assets. In 2020, the EU Commission published drafted legislation of The Markets in Cryptoassets Regulation (MiCA), estimated to be regulated in 2024.
In the United States, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) are developing a joint framework for cryptocurrency supervision. Earlier this year, the U.S. Securities and Exchange Commission approved spot-based Bitcoin ETFs, providing investors with various asset classes and flexibility to trade shares during the trading day at market prices.
Recreating traditional roles
With the increasing interest in digital assets, investors expect a similar institutional level of service as the traditional ecosystem. Asset digitization could remake traditional financial roles and services as follows.
- Digital network access: the ability to access the digital networks for capital rising could reshape the relationship between investors and investment banks. It also benefitted the private company shares to become more efficient and automated, leading to simplified capital-rising procedures and enhanced liquidity for investors, founders, and employees.
- Tokenization: it simplifies the administration and servicing process, allowing asset managers and issuers to communicate directly with shareholders via digital networks.
- Digital asset exchange: it will replace the role of brokers and custodians to be responsible and managing the exchange.
- Blockchain networks: the decentralized and transparent open blockchain networks would introduce efficiency, security, and innovation into these traditional asset servicing — tax accounting, staking, voting, and record-keeping.
Asset tokenization system
Asset tokenization represents the ownership rights of an asset as digital tokens, stored on a blockchain maintained by the owners through a crypto wallet. These tokens can serve as digital certificates of ownership, including physical, digital, fungible, and non-fungible assets.
The process of establishing tokenized assets involves some steps — determining the token type, choosing the blockchain for token issuance, choosing a third-party auditor, verifying off-chain assets, and issuing assets.
Major industry players — Boston Consulting Group and ADDX, BlackRock, Deloitte, BNY Mellon, and EY — have evaluated asset tokenization, suggesting it could be transformative in multiple industries, including the global securities industries.
Tech giants like Microsoft and Vanguard have also implemented their projects in tokenizing assets and securities. Asset tokenization could be the most promising use case for blockchain, as it potentially generates trillions of value of real-world to the networks.
The integration with real-world assets like fiat currency, equities, T-bills, credit, commodities, and carbon credits, can be tokenized. GameFi projects and metaverse at in-game assets, such as skins, weapons, and in-game currencies, can act as tokenized assets as well.
Asset tokenization benefits
Asset tokenization has more benefits, aiming to provide a decentralized and trusted alternative to real-world assets and investment services. Additionally, these benefits make a path towards valuable, accessible, and useful assets within the DeFi ecosystem.
The current success and long-term potential of asset tokenization are significant advantages over non-tokenized assets. It allows increased liquidity of traditionally illiquid assets, more accessibility of investment opportunities, ownership identity, and history transparency, and reduced administration costs in management, issuance, and transactional intermediaries.
Financial events in conventional markets are typically documented in separate and isolated ledgers, resulting in significant inefficiencies in the market — increased cost and extended settlement periods. Asset tokenization can solve this lack of interoperability between different systems through interoperable tokenized assets.
Tokenization can enhance liquidity for traditionally illiquid assets, converting the assets to millions or billions of tokens and creating shared ownership. This process eliminates the requirement for costly transactional intermediaries, expanding the potential buyer while keeping the tokens as a unique asset.
Financial or regulatory limitations may keep assets with the highest potential returns out of reach of investors., for example, investing in foreign assets, collecting sports cars, or purchasing multifamily real estate.
The benefits of tokenization are similar to crowdfunding, but the framework allows a group of investors who financing an asset to also obtain financial gains for their involvement. This access opens up a pathway for smaller investors to invest in riskier but potentially more lucrative assets with relatively low capital.
Most high-value assets face the challenge of insufficient and readily available information, such as returns, ownership history, sale history, and other key metrics to make economic decisions. These challenges occur when evaluating foreign assets or inspecting an asset before buying it.
Tokenization allows for tracking and auditing of the entire records as the nature of many blockchains does. Users can see the ownership record, returns, interests, and dividends. Evidence tracking on the blockchain enables unchangeable records, significantly reducing investment security risks by minimizing record-keeping trust. Moreover, it has the potential to reduce fraud risk across multiple industries.