Asset-backed tokens (ABTs) are a growing class of cryptocurrencies that pave the way for compliant and regulated digital ledger investment. Financial analysts have duped this class of tokens as the future of financial transactions for the digital capital markets.
Various sectors interested in embracing and thriving in the next economic revolution are prioritizing asset tokenization. Considering that the token economy offers not only plenty of efficiency gains but the opening to an international base of investors, developing a proactive attitude towards this growth possibility will bring tremendous changes to the future relevancy of all sorts of businesses.
The types of Asset-backed tokens
There are several types of ABTs. The taxonomy can sometimes become mixed-up and confusing, especially as regulators are still creating rules to define digital tokens. Nevertheless, Swiss financial regulators have come up with some helpful guidance to differentiate between payment tokens, utility tokens, and ABTs.
Bitcoin is the first cryptocurrency designed to act as a store of value, and that can be traded between peers without the need for intermediaries. Others include Litecoin and Dash, with their primary defining feature being pure payment tokens, with a function similar to fiat money.
Utility tokens were the next progression. The ownership of a utility token enables users to access particular functions in specific blockchain-based ownership. Pure utility tokens do not confer rights of company ownership or promise of future value for the holder.
Asset-backed tokens are the latest development. ABTs are backed by real-world assets, like gold, farm produce, oil, real estate, and many others. Therefore, an asset-backed token’s value is directly influenced by the worth of its underlying asset.
ABTs are classified as securities by the authorities. Ownership of the token signifies a right of ownership over the asset, and often the anticipation of future returns if the asset gains value.
What do tokenization and ABTs offer?
ABTs offers numerous benefits for investors and businesses alike.
Leveling the playing field for illiquid assets
According to the Credit Suisse Research Institute, there was an estimated $360 trillion worth of assets in the world by the end of 2019. But, most of these assets, such as real estate or fine art, are of low liquidity based on market conditions. Inferior liquidity makes it difficult to trade assets.
Consider the case of selling a piece of art. The pool of buyers is limited to those who can physically take custody of the piece. Using a virtual token that represents the piece of art introduces such real-world assets to a broader pool of investors and participants. An investor from any part of the world can trade the art-backed token without necessarily keeping the piece itself. Consequently, goods and services become more liquid, and businesses and traders can access larger investor bases.
Introducing fractional ownership across new asset classes
Asset tokenization allows for fractional ownership of physical assets. Previously, it was hard for someone to purchase a piece of an asset like art, an automotive, or real estate.
Let’s consider the piece of art once more. This time, rather than issuing a single token, the art can be represented by a set of tokens. Each token is pegged to an equal fraction of the piece of art. These art-backed tokens can then be exchanged individually, or in groups, in the same way, company shares are traded.
Fractional ownership of assets offers considerable potential for more people to take part in wealth creation.
Raising equity capital and trading real-world assets.
While blockchain startups of 2017 and 2018 were focussed on the Initial Coin Offering (ICO), their successors are now shifting to the Security Token Offering (STO). STO acts as a means of selling tokens backed by equity in the company itself.
This gives the business a means of raising the capital it requires while remaining compliant with the financial regulation of security trading. For investors, it is similar to buying company stocks- they own a portion in the company itself, gain from any increase in the value of the company, and qualify to receive dividend payments.
Ensuring the finality of transactions and minimizing transaction costs
Today, many assets, including commodities, artwork, securities, and real estate, are traded using paper trails and manual processes, typically involving one or multiple third parties like brokers to oversee traders. Blockchain technology digitizes everything using online exchanges to trade ABTs.
The technology’s features as an open and transparent ledger imply that transactions are easily verifiable. Besides, blockchain networks are immutable, meaning that token ownership is incorruptible. This offers transaction finality, which is essential in the global trading of assets.
The Tokenizer Platform
As a major blockchain investment banking company, Tokenizer is making blockchain technology simple for businesses to use. With Tokenizer’s offerings, clients can readily tokenize their offerings with an end-to-end decentralized finance infrastructure that will enable them to modernize their services and products. We are ready to help you make your next move with blockchain technology. Contact us today for fundraising, investing, and trading in asset-backed tokens.