How to Digitize Securities, Assets, and Capital Market Instruments using Blockchain

Tokenization or Digitization of physical and financial assets is a game-changer in the capital markets industry. As investors and traders demand more convenience in trading and expect faster access to capital market instruments, it is obvious that digitization of physical/financial assets is inevitable. 

Today, the adoption of tokens and digital currencies for transactions are getting mainstream. In January, BrickMark– a real estate investment made the biggest real estate deal ever purchased in tokens at nearly $136 million. The company bought a commercial building in Zurich’s business district by using BrickMark tokens. The video below gives you a quick overview of capital market digitization. 

What is a digital asset?

A digital asset refers to any digital material that comes with the right to use. Essentially, it can be considered as a digitized right of ownership of an asset. Digitization of assets generally fall in the following categories:

• Digital currencies with a limited audit: For example, central bank digital currency, PayPal’s digital USD etc.
• Digital tokens: These are more transparent and offer auditability so that consumers can trace back the immutable transactions whenever required.
  

Asset Digitization Blockchain: an overview

Asset digitization means the process of creating a digital equivallent or copy of an asset, be that a physical asset or financial asset. These digital copies carries with it, the properties of the underlying asstes. During digitization of assets, the rights of ownership associated with a physical asset will be transferred and exchanged on a digital platform. These assets will be represented by digital tokens that can be transferred between individuals. 

For instance, consider a piece of real estate that is available on the market. By using an digitization of assets platform, you will be able to divide the property into smaller units of value called tokens, which are essentially digitized fractional shares of ownership. After being tokenized into a permissioned or permissionless blockchain, a new market can be launched internationally on digital exchanges. Shares are accessible to a massive untapped market and the growing consumer base can purchase tokens and  manage investments online. 

The blockchain is an integral aspect in facilitating the digitization of a physical asset. By converting these assets into tradable digital assets, you can realize the full potential of real-world assets, making it easier to exchange them in real-time. 

Digitizing Capital Market Instruments

The first step in capital markets digitization is to digitize the capital market instruments such as Securities, Derivatives, Bonds, Real Estates, etc. These digital assets should be created with properties like asset lock-in period, voting rights, trading restrictions, and trading conditions of the corresponding capital market instruments.

For facilitating faster access to capital markets, the digitized assets need to be made easy to access for trders and investors. The video below explains how to digitize capital market instruments. 

Why do we need asset digitization?

Asset digitization using blockchain is a booming industry, with an estimated $544 trillion worth of assets that can be tokenized. We can see several opportunities to establish new approaches for profit gains through tokenization, since investors can invest in smaller portions of assets or they can choose to spread their investments across multiple assets and asset classes.

Take the example of real-estate, where it is clear that investors have many more opportunities to invest in various properties in different areas to make their portfolios more diverse by purchasing tokens of a real estate asset, rather than investing in the entire asset itself.

For individuals who do not have the finances required to buy an entire property, fractional investment through tokenization can help them access the real estate market, making it much easier for people to invest. 

Digital asset blockchain platforms are managed without any middlemen or regional barriers. Therefore, we encounter lower transaction costs with increased liquidity. Through this, each and every kind of asset becomes more liquid, exchangeable and is able to receive the best prices from worldwide auctions. By increasing liquidity, owners of assets can also protect themselves from inflation by acquiring non-inflationary payments like limited-quantity tokens along with stablecoins that are backed by gold.

Additionally, asset digitization using blockchain also promotes transparency and better user experiences. Digitizing assets can also help strengthen rights of ownership, allow everyone to track resources and prevent waste, and create a tamperproof record of transactions.

In order to understand this concept better, let us take another example where asset digitization has come in handy. From time immemorial, people have used gold as a form of investment. However, it can be challenging for individuals to purchase gold bars and keep them stored in a secure vault. Firstly, this is because gold bars are generally sold at a premium. To make matters worse, storing physical gold often incurs additional costs.

Hence, the investment management industry has developed various gold-related investment products such as gold ETFs (exchange-traded funds), gold certificates and gold funds. These investment vehicles provide investors with indirect exposure to gold as an asset class. In order to give investors better access to gold at better prices, many fintech organizations are making use of blockchain technology to digitize the asset and open the gold market up to private investors. For instance, Vaultoro, a company based in London allows users to invest in physical gold using bitcoin. Essentially, they provide a real-time exchange platform that uses bitcoin as the base currency to buy gold. Traders can trade in and out of both gold and bitcoin with other members of the marketplace 24 hours a day without the need of a bank account to conduct payments.

When a user purchases gold on the online platform, the gold is deposited in an insured gold bullion vault in Switzerland. Vaultoro uses encryption, multi-signature storage and locked payout addresses to secure its vaults. It also maintains a transparent public audit both of bitcoin and gold holdings while preserving its customers’ anonymity. The primary aim of the company is to provide a platform for gold investment while enabling the under-banked population to make and receive digital payments using physical gold as a currency. 

What kind of assets can be tokenized?

Intangible assets, fungible assets, and non-fungible assets are the types of assets that can be created on the blockchain, and while creating the digital assets on the blockchain, the most important step is to choose a suitable blockchain platform and then a smart contract environment. These assets are described as below.

• Intangible assets: This type of asset does not have a physical nature and primarily exists due to the operation of law. For example, patents, brand names, copyrights, carbon credits will all come under this category.
• Fungible assets: Assets which can be exchanged for another similar asset of equal value are called fungible. For instance, commodities like gold or crude oil would be considered fungible.
• Non-fungible assets: Assets that cannot be replaced with other assets of the same type. This includes real-estate and artwork.

Asset digitization allows assets that were initially considered illiquid to be converted into liquid assets. This includes artworks, sport merchandise and even private equity. Storing precious metals on the blockchain as digital assets can offer several advantages over traditional precious metal purchases. By purchasing digital assets on the blockchain, you can purchase gold closest to its spot price and reduce unnecessary transport logistics. Athletes and sportspeople have also started to tokenize their contracts, while the gaming industry is tokenizing weapons.