Blockchain is a technology with a unique aspect where everything present majorly revolves around “coins,” or “tokens.” Each of the transactions in a blockchain project usually involves the transfer of tokens or coins regardless of the fact whether it is for granting access to personal data, rewards for certain actions, ownership of a game element, or any monetary transactions. Thus, it can be clearly understood that coins or tokens are blockchain platforms, and they have very high utility in the entire blockchain ecosystem.
What are Tokenized Securities?
We know that tokens are a major part of the blockchain. Now, let us understand what tokenized securities are but before understanding the same, let us have a brief idea about tokenization.
Tokenization refers to the process of transforming sensitive data into non-sensitive data known as tokens. These tokens can be used in an internal system or database without bringing it into scope. The process can be used for the purpose of securing sensitive data by the replacement of the original data with an unrelated value of the same length as well as format. The tokens are then sent to the internal systems of an organization for use, and the original data is stored securely in the token vault.
In other words, at the time when tokenization is applied to data security, it is the process of substituting a sensitive data element with a non-sensitive equivalent, known as a token. A token has no extrinsic or exploitable value or meaning and here it is a reference that maps back to the sensitive data via a tokenization system.
Now, we have an idea about tokenization. Let us proceed to tokenized securities. Tokenized securities are designed in such a manner that they help in widening the market and at the same time enhances liquidity by enabling fractional ownership as well as reducing the minimum investments. A greater volume of people will be able to invest because of lower investment requirements.
It is similar to using a known asset and putting a digital wrapper around it. So, tokenized securities are nothing completely new from the point of view of regulators. It is like a new channel of distribution, which makes the overall process of approval much easier. These are much more efficient as well as scalable and play a significant role in the reduction of cost, simplification of auditing, bringing about a reduction in paperwork, lowering the fees if issuance, and many more.
Importance of Tokenizing Securities
Now, we have gained a fair idea about tokenized securities. So, let us dive a bit deeper into the topic to understand the importance of tokenizing securities.
Enhanced Investor Liquidity
One of the major benefits of tokenizing securities is enhanced investor liquidity. Several assets, especially non-fungible assets or shares in private equity funds need investors to hold the same for longer periods of time before they can sell their position which hampers the liquidity. On the other hand, tokenized securities allow investors to take an earlier exit which enhances the liquidity to a great extent.
Round the Clock Trading
With the security tokens there is nothing to worry about closing of markets as in the case of traditional markets, therefore allows round the clock trading as per the ease and convenience of the investors.
Market Valuation is Direct
Obtaining a correct valuation for one’s business is of immense importance and might be required in various contexts like partnerships, equity sale, taxation, and many more. Getting a valuation can be quite difficult for a small business and might require the intervention of experts, thereby incurring high costs. But by selling tokenized securities directly to investors, even for small equity, businesses are able to get an instant valuation directly from the market that too at the lowest possible cost.
Attraction of Global Investment
For businesses selling any type of tokenized securities, easy access to global capital pools and a diversified investor profile might lead to faster sales as compared to traditional constrained markets. Moreover, tokenized securities that exist on a blockchain make it possible to accept contributions in both fiat as well as cryptocurrency, thereby opening up a completely new avenue of potential participants. Additionally, tokenized securities might also create opportunities within the new markets.
Disintermediation is another major important aspect of tokenized securities. The issuers of tokenized securities can easily get rid of costly intermediaries, like brokers or financial intermediaries, and by proxy avoiding high intermediary fees. Thus, the elimination of fees associated with costly intermediaries or middlemen proves to be extremely beneficial.
Programmability and Automation of Contract
Tokenized securities based on smart contracts save a lot of time for the fund managers as well as the asset issuers. At the same time, they help create new markets for oracle providers who verify the existence of the underlying asset. Thus, the security tokens can help in automating capitalization table management for easily tracking their largest equity holders, take advantage of the automated record keeping, and reduction of physical office hours spent on different admin tasks. Therefore, reporting and auditing have become much easier in this regard. Moreover, being powered by blockchain technology, transparency is readily enhanced.
Fractionalization and Divisibility
Due to the enhanced liquidity of tokenized securities, they are easily divisible, thereby allowing fractionalization of assets. Assets that were traditionally difficult to divide might be very easily represented as fractionalized assets because of tokenization which brings about liquidity into such markets that were previously unrealized.
Future of Tokenized Securities
Tokenized securities are extremely innovative and possess their own place in the blockchain industry. The entire ecosystem of tokenized securities is providing a wide array of benefits and hence is bound to grow in the time to come. This is very likely to be consolidated by a stronger differentiation between the cryptocurrency markets, which have always been approached with caution by institutions, but on the other hand, the market of tokenized securities represents a completely new regulated asset class. In the near future, we might see more such securities hitting the market in the near future. It is undoubtedly very useful for the industry as the huge supply will allow traders to get a better grasp of things and understand the working process in detail.