What is a token?What is tokenisation?Benefits of tokenisationTokenisation processCurrent hurdles faced by tokenisationConclusion
Thursday, 20 February, 2020
Tokenisation: Unlocking value
The term ‘token’ is very commonly used in the digital assets space, but few people fully understand it. In this edition of The Bridge, we provide an understanding of what tokens are and how they can be categorised based on their characteristics. We also dive into the concept of tokenisation of assets in order to understand its benefits and use cases before looking at how tokens are issued. Finally, we discuss the hurdles that tokenisation is facing at its current stage of development.
What is a token?
The concept of tokens is not very clearly defined in the digital assets space. We describe tokens as a digital representation of any kind of value or valuable underlying. Therefore, cryptocurrencies such as bitcoin and Litecoin can also be considered as tokens. Besides cryptocurrencies, which represent the value of human economic trust, tokens can also represent the ownership of any valuable underlying assets such as gold, equity, land and more. In figure 1, we categorise tokens based on their characteristics.
Figure 1: Categories of tokens
Source: SEBA Research
Tokens can primarily be categorised on the basis of fungibility. Non-fungible tokens are non-interchangeable as they are unique and usually non-divisible in nature. This makes non-fungible tokens ideal for use cases such as digital tickets, digital identity, digital certifications, etc.
Fungible tokens are interchangeable and divisible by nature. Based on their use case, they can be further divided into payment tokens, utility tokens and security tokens.
What is tokenisation?
Tokenisation is the process of issuing tokens that digitally represent an asset (tangible or intangible). The tokens can then be bought, sold and stored on the distributed ledger they are issued on. The tokens can be issued on various kinds of platforms but are generally seen on blockchains. Tokenisation draws many similarities from the well-known process of dematerialisation or digitisation. Although there are many forms of tokens, their use cases are unique. Last year, AnnA VillaAnnA Villalink1 in Paris became the first European property to be sold entirely via blockchain transaction. The tokenised deal was conducted on the Ethereum platform. The process involved first transferring ownership of the EUR 6.5 million luxury property to a joint-stock company, then dividing the company into 100 tokens to be distributed to the owners respectively. Each token can be further broken down into 100,000 units, meaning individual shares of the building can be bought and sold for as little as EUR 6.50. There have been several worldwide efforts to bring real estate sales onto blockchain technology. Last year, a USD 30 million Manhattan property was also tokenised on Ethereum. We look at some benefits of tokenising below.
Benefits of tokenisation
Observed use cases
At a technical level, tokenisation is the process of representing the value of a tangible or intangible asset in the form of a digital token on a database such as a blockchain. It further allows us to own, exchange, lend or alter digital tokens in various ways on these databases. One of the most used database structures for tokenisation is blockchain. It works as a ledger for these tokens and keeps a record of all the transactions, whilst its smart contract executes the token economics of the issued token. A generic process of how to tokenise an asset is shown in figure 2.
Figure 2: Tokenisation process
Source: SEBA Research
Current hurdles faced by tokenisation
Even though tokenisation has the potential to change financial markets for the better, at its current stage it faces a few hurdles:
Tokenisation will allow us to create a more integrated financial system which will be more transparent, efficient and inclusive for illiquid assets and small investors. Market entrants are coming up with their own infrastructure whilst the traditional markets are also showing interest in tokenisation. However, a few hurdles such as the regulatory framework, infrastructure and adoption must still be dealt with if tokenisation is to have a meaningful impact on financial markets.
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