Tokenized securities: A new era for financial markets
Photo by Austin Distel on Unsplash
Tokenization is a connector between the traditional assets and the digital world and many individuals and bodies are exploring this amazing development to stay ahead of time and competitors. Tokenized securities have the potential to revolutionize financial markets.
A report by Boston Consulting Group and ADDA says that the tokenization market is evaluated to become a 16 trillion USD business opportunity by the year 2030.
Tokenized securities will improve the efficiency, accessibility, and security of the financial market and it is in your best interest that you get updated. In this blog post, we’ll explain tokenized securities, the benefits of tokenized securities, challenges and considerations in integrating tokenized securities with traditional financial systems, and we will explore the future of tokenized securities.
What are tokenized securities?
Tokenized securities are blockchain-based digital tokens which portray physical and traditional financial securities or assets.
Tokenization opens up an unlimited world of investment opportunities and possibilities for anyone interested in owning an asset. Tokenization breaks down assets into smaller, easy-to-trade digitalized units.
For instance, you could own a piece of the Mona Lisa (if tokenized) even though you are not a wealthy investor. Isn’t this incredible?
You can also tokenize your asset. Yes, you can do it yourself, all you need is an easy step by step guide on tokenizing assets.
Benefits of tokenized securities
Tokenized assets are digital transformations of traditional assets. Tokenization leverages digital asset infrastructure to develop securities that can be issued in the form of tokens and then traded on a distributed ledger. Asset tokenization offers immense opportunities for everyone— investors, existing financial institutions, and the decentralized finance (DeFi) ecosystem among others. Let’s examine these three (3) benefits of tokenized securities.
1. Increased accessibility
This is the main benefit of tokenization, when assets are fractionalized into tokens, they can be issued as the minimum investment thresholds and this opens investment opportunities to a wider audience that couldn’t invest in traditional securities due to high entry costs.
2. Improved efficiency
Unlike traditional markets that have numerous intermediaries like custodians, brokers, and clearinghouses. Tokenized securities digitalized format reduces the requirements of intermediaries, this digital format permits peer-to-peer largely instantaneous transactions. Through smart contracts, tokenized securities streamline operations and lower costs by automating several processes to execute a predefined condition with zero manual intervention.
3. Enhanced transparency and security
Blockchain technology which underpins tokenized securities facilitates a transparent ownership record and transaction history which can be verified in real-time, this enforced compliance feature enhances the security and reduces probable fraud.
The future of tokenized securities
The future of tokenized securities is unlimited, they are on track to alter the financial landscape. Let’s talk about their potential future applications.
1. Increased liquidity
Assets like art or real estate that are traditionally illiquid can be unlocked through tokenization. They can be divided into smaller manageable tokens through fractional ownership. This opens up the door for more investors, boosting liquidity, and potentially increasing the asset’s value.
2. Democratization of investments
With tokenization, anyone, anywhere can participate in the financial markets. With fractional ownership people can invest in high-value assets which they couldn’t afford therefore leading to tremendous financial inclusion and wealth creation.
3. Streamlined processes
The backbone of tokenization—blockchain technology would automate diverse manual processes used in securities trading. This would streamline settlement times, reduce costs, and improve overall efficiency.
4. Enhanced transparency and security
Blockchain also ensures that tracking ownership and transactions are secure and transparent. This would drastically reduce fraud, enhance regulatory compliance, and ultimately boost investor confidence.
5. New investment products
The possibilities in tokenization are vast. Tokenization opens doors to innovative financial products. For instance, consider a mutual fund that invests in a portfolio of tokenized assets.
Challenges and considerations
Here are some hurdles to overcome on the way to this new era of tokenization in financial markets.
1. Regulation
Clear and consistent regulatory frameworks are required for tokenized securities. These regulations are needed to ensure investor protection and market stability.
2. Standardization
Standardization of processes and token formats is required for seamless integration between different platforms.
3. Technology adoption
For the widespread adoption of tokenization, there is a need for collaboration between blockchain technology providers and traditional financial institutions.
