Tokenization

The related process of tokenization for data, which is where the tokenization of assets as a concept emerges, is a similar process of using tokens to represent something else. In the case of data securitydata security, the tokens represent sensitive data by replacing the data with a token. The information the token represents is stored safely in a centralized server known as a token vault, and the token vault is the only place where the original information can be mapped back to the corresponding token.

Early examples of tokenized items include bottles of wine, pills or jewelry. IBMIBM, in partnership with Pacific International Lines, ran a pilot program in 2019 to track a 28-ton shipment of mandarin oranges from China to Singapore on the IBM blockchain platform. Similarly, as tokenization of assets grows, the value of blockchain grows, with the blockchain market expected to grow to more than USD$176 billion by 2025, and grow beyond USD$3.1 trillion by 2030.

The security token combines distributed ledgerdistributed ledger technology with new features dependent on the design of the token. Specifically, these tokens are programmable. And, as such, security tokens can be considered financial securities and must be issued, transacted, and processed in accordance with the relevant federal securities laws in the jurisdictions where they are permitted to be issued and sold. The programmability of these tokens refers to the possibility for them to be programmed for the enforcement of ownership and trading restrictions. And they represent securities that are issued conventionally and brought to the secondary on-chain market in digital form, where the security token operates as a store of value.

Security tokens digitally represent a real tradeable asset and are created through a type of initial coin offering, referred to as a security token offeringsecurity token offering (STO) to distinguish it from other types of ICOs, which can produce different tokens. An STO can represent a share in a company, ownership of a piece of real estate, or participation in an investment fund. These tokens can be traded both on-chain and off-chain (traditional financial market infrastructures), and the communication between off-chain and on-chain environments are crucial for assets that continue to exist off-chain.

Early examples of tokenized items include bottles of wine, pills or jewelry. IBM, in partnership with Pacific International Lines, ran a pilot program in 2019 to track a 28-ton shipment of mandarin oranges from ChinaChina to Singapore on the IBM blockchain platform. Similarly, as tokenization of assets grows, the value of blockchain grows, with the blockchain market expected to grow to more than USD$176 billion by 2025, and grow beyond USD$3.1 trillion by 2030.

Early examples of tokenized items include bottles of wine, pills or jewelry. IBM, in partnership with Pacific International Lines, ran a pilot program in 2019 to track a 28-ton shipment of mandarin oranges from China to SingaporeSingapore on the IBM blockchain platform. Similarly, as tokenization of assets grows, the value of blockchain grows, with the blockchain market expected to grow to more than USD$176 billion by 2025, and grow beyond USD$3.1 trillion by 2030.

Regulations have been uneven and jurisdictional, but traditional market structure has made moves to adapt to and accept the token economy. Both the United States' SEC and the European Union's ESMA have made comments on the token economy, pointing to the regulatory bodies considering how to accommodate the token economy. While MaltaMalta and Switzerland have made more progressive plans for the new marketplaces for tokenized securities and have worked to develop the clear regulatory framework considered necessary for a safe development of the token economy.

Regulations have been uneven and jurisdictional, but traditional market structure has made moves to adapt to and accept the token economy. Both the United States' SEC and the European UnionEuropean Union's ESMA have made comments on the token economy, pointing to the regulatory bodies considering how to accommodate the token economy. While Malta and Switzerland have made more progressive plans for the new marketplaces for tokenized securities and have worked to develop the clear regulatory framework considered necessary for a safe development of the token economy.

Tokenization used for data security has been used since the 1970s, when it was used to separate sensitive information from other information stored in databases. Other early forms of tokenization included subway tokens and casino tokens, which serve as representations or substitutes for money, offering the same concept used in digital tokenization. More recently, in 2001, TrustCommerceTrustCommerce was credited with creating the concept of tokenization to protect payment card data. Since then, tokenization for data security has been expanded to use cases including patient records, software programs, security, login credentials, and governance.

Regulations have been uneven and jurisdictional, but traditional market structure has made moves to adapt to and accept the token economy. Both the United States' SEC and the European Union's ESMA have made comments on the token economy, pointing to the regulatory bodies considering how to accommodate the token economy. While Malta and SwitzerlandSwitzerland have made more progressive plans for the new marketplaces for tokenized securities and have worked to develop the clear regulatory framework considered necessary for a safe development of the token economy.

Early examples of tokenized items include bottles of wine, pills or jewelry. IBM, in partnership with Pacific International LinesPacific International Lines, ran a pilot program in 2019 to track a 28-ton shipment of mandarin oranges from China to Singapore on the IBM blockchain platform. Similarly, as tokenization of assets grows, the value of blockchain grows, with the blockchain market expected to grow to more than USD$176 billion by 2025, and grow beyond USD$3.1 trillion by 2030.

These tokens are then shared on a blockchain, or the decentralized public ledger, where people can transact the tokens. The smart contracts act as executable applications residing in the shared ledger, which execute their programmed instructions when triggered by a transaction. EthereumEthereum is one such example and one of the largest public blockchains developed the concept of smart contracts.

Regulations have been uneven and jurisdictional, but traditional market structure has made moves to adapt to and accept the token economy. Both the United StatesUnited States' SEC and the European Union's ESMA have made comments on the token economy, pointing to the regulatory bodies considering how to accommodate the token economy. While Malta and Switzerland have made more progressive plans for the new marketplaces for tokenized securities and have worked to develop the clear regulatory framework considered necessary for a safe development of the token economy.

Money, as a form of promise to pay, serves as a store of value; as the token economy works on representation, a tokenization of currency makes similar sense. While physical money offers a level of privacy not enjoyed by digital deposits, a digital currencydigital currency could be used to offer similar levels of privacy for those concerned. CBDC could be account of token based, issued centrally or de-centrally, and have been split into two different categories based on proposed purposes: wholesale CBDC and retail CBDC.

Tokenization, and the issuing of related security tokens, can represent regulated financial instruments (such as equities, bonds, loans, and funds), tangible assets (such as real estatereal estate, artworks, precious metals) or intellectual property (such as copyright to works of authorship). The tokenization of these assets allows for the issuing of a blockchain token, specifically a security token, that digitally represents a real tradeable asset, and is similar to the process of tokenization used in data security.

The ERC-20 covers fungible tokens, such that it works for a transfer of value between users and allows for the authorization of someone to spend value on one's behalf.

ERC-1400 covers security tokens, such that it allows the transfer of ownership of a security token between users, yet still requires a certificate; allows for the same security token to be split between several partitions; authorizes a transfer of a security token on one's behalf; can managemanages the documentation associated with the security token; and allows a controller to force the transfer or redemption of an asset.

For liquidity, tokenizing assets, especially private securities or illiquid assets such as fine arts, can be traded on a secondary market of the issuer's choice, benefiting investors by offering more choice, and benefitting sellers because the token can benefit from the increased liquidity and capture greater value for the underlying asset.

On-chain settlement via security tokens enables disintermediation, removing the need for middle menmiddlemen, where value transfers can be processed without centralized intermediaries but rather through a process automation using smart contracts. This automation can lead to reduced costs in the issuance and servicing of securities, reducing the costs throughout the security's lifetime, and reducing fees for issuers and investors.

As well, automation of value transfers through a decentralized ledger also allows transactions to happen more rapidly. As trust is decentralized, counterparty risk is reduced, and the reduced friction, in terms of time, could lower operational risk. And, the process of wallet-to-wallet exchanges could further improve the efficiency and speed of settlements. A tokenized economy can also allow for the converting of a single asset into another asset, and eliminate the entire process of exchanging cash between settlements.

A tokenized economy can offer greater transparency through the use of the distributed ledger, which increases the recording and sharing of information. The ledger also works to strengthen the data integrity through its immutability, and improve the safeties of the securities. This is especially useful as a single point of failure is removed once a decentralized ledger is verified by global nodes. There are further implications for the possibility of automatic auditability, and could lead to registrars and transfer agents being redundant, as corporate or shareholder registries are replaced by the decentralized ledger. This can also offer the automation of regulatory enforcement, as it can be programmed into smart contracts, which would notify regulators in the case of a restrictions violation.

While current investments lack exposure to a global investor base with political and economic boundaries complicating trading equities across markets, the tokenization of funds could enable retail investors to access asset classes and risk otherwise beyond their capacity. This could increase the flow of private financing from capital owners to smallsmall- and medium-sized enterprises. As well, it improves the ability for a retail trader to diversify an asset portfolio, through investments into previously unavailable funds, and through fractal ownership of previously illiquid assets.

Fractal ownership and decentralized access offers more inclusiveness for smaller investors, which benefits the investor, but alsoand those seeking access to financing. Further, this can help sellers looking for a place to sell an investment, especially those considered illiquid. And participation in the markets can be increased and a wider range of investors can participate. Fractioning assets also introduces the notion of shared ownership, where multiple people can buy an asset and use it.

The advantages of the token economy, and tokenization overall, is that it opens up new possibilities for investments, and could permit a minimum investment in a piece of art or a piece of real estate a person may otherwise not have a chance to invest in or purchase outright. And, after purchasing, these tokens could also be sold at the holder's discretion. This offers greater possibilities for where investors can place their money, with greater personalization and customization in investment, especially as investors look beyond returns and instead look closer to where they are investing. Tokenization could unlock trillions of dollars in illiquid assets and increase the volume of trades accordingly.

In another scenario, an owner of a building needing to increase liquidity could tokenize the asset and sell the number of tokens necessary to raise the funds, rather than sell the real estate for full value on a traditional market and therefore lose the asset altogether, could tokenize the asset and sell the number of tokens necessary to raise the funds necessary.

In the development of a broader tokenized economy, there are some challenges whichthat need to be overcome before a wider adoption can exist. This includes challenges around regulatory alignment, especially as blockchain platforms are de facto decentralized,. andAnd security regulations which the tokenization of assets canwill fallvary undersignificantly, depending on the jurisdiction of tokenization. And thisThere anticipateswill thebe governance and compliance challenges faced by a necessarily decentralized and global trading system, which, can be called into question as regulations and governance workswork to standardize the market can be called into question. This already occurs when trading certain tokenized assets that fall into jurisdictional regulatory requirements.

The challenges faced by a tokenized economy by regulatory environment include the responsibility placed on the buyers and sellers of assets, which is increased in the decentralized system, given the removal of intermediaries. However, it is unlikely that financial authorities are interested in removing those authorities, which would require a new framework in order to ensure the token market is compliant with existing or new regulatory and supervisory frameworks.

Regulations have been uneven, and jurisdictional, but traditional market structure has made moves to adapt to and accept the token economy. Both the United States' SEC and the European Union's ESMA have made comments on the token economy, pointing to the regulatory bodies considering how to accommodate the token economy. While Malta and Switzerland have made more progressive plans for the new marketplaces for tokenized securities and have worked to develop the clear regulatory framework considered necessary for a safe development of the token economy.

In part a problem of understanding and acceptance, the relatively early phase of blockchain technology and the technology's interoperability has seen both challenges to its overall acceptance from institutional investors and retail investors. As well, with the rise of the technology, there have been large fees, as the infrastructure is developed. And with the slow adoption of the technology, the liquidity on the decentralized exchanges is poor, although with a rise of interest and willingness to trade on the tokenized economy could see a rise in the liquidity and a reduction in related fees.

Considered the tokenization of currency, central banks have begun to explore the use of alternative currency types with the emergence of distributed ledger technology and blockchain. This would meet the decline in the use of banknotes in advanced countries, but also offer a technological way for developing countries and the previously unbanked to take part in currencies and holding currencies in a more secured manner. The Central Bank Digital Currencies (CBDC), as proposed by central bank projects, would be a new form of money issued digitally by the central bank.

Money, as a form of promise to pay, serves as a store of value, and; as the token economy works on representation, a tokenization of currency makes similar sense. And, whileWhile physical money offers a level of privacy not enjoyed by digital deposits, a digital currency could be used to offer similar levels of privacy for those concerned. CBDC could be account of token based, issued centrally or de-centrally, and have been, in general, split into two different categories based on proposed purposes: wholesale CBDC and retail CBDC.

Wholesale CBDCs are intended to be suitable for financial institutions holding reserve deposits in a central bank. The wholesale CBDC can improve efficiency of payments and security settlement, and resolve concerns of liquidity and counterparty credit. This could ensure replacement or support for reserves in the central bank through a restricted-access token, which would serve as a bearer asset in wholesale central bank digital currencies, and; this would allow a sender to transfer value to a receiver without intermediaries.

The retail CBDC would be a digital currency intended for use by the general public. The retail CBDC would be based on distributed ledger technology, and are intended to carry the features of availability, anonymity, and traceability, while also offering the possibility for an interest rate application. These CBDCs are used among central banks in emerging economies where they have garnered a lot of interest. The primary reason for this popularity is for capitalizing on opportunities for growth in financial technology, as the retail CBDC can promote financial inclusion and a shift to a cashless society, helping to reduce the costs of cash printing and management.

The key factors, which could be considered the underlying principles, of retail CBDCs include the following:

• Retail CBDCs are suitable for the liability side of a Central Bank's balance sheet.
• They present a new variant of central bank money, subject to central bank functions of issuing, management and controlling, and can focus on a country's monetary policy.
• Distribution would be associated with one-to-one parity at par with the relevant fiat currency, with support for seamless and flexible conversion against cash and commercial bank money.
• The retail CBDCs could be developdeveloped on open infrastructures to allow businesses to create services and products over it.
• Retail CBDCs would not require users to have a bank account for accessing or obtaining the digital currency, and the associated transaction cost could also be lowered.
• And theseThese retail CBDCs must be accepted as a legal tender and a mode of payment, and be able to serve as a safe store of value for citizens, governments, and enterprises.

While the decentralized and emerging nature of tokenized assets necessitates that there is no specific approach to tokenize an asset, there is a general framework that defines the process of tokenizing an asset. The first step and obvious step is the selection of an asset and an analysis of the asset in order to establish the correct price, which is used to develop the token's value. For assets that do not have an implicit or established market value, the valuation should be done by an auditing or accounting firm, with the understanding that the more credibility the chosen firm has, the stronger the valuation. For assets with an established value, this is an unnecessary process.

Once the valuation is done, a smart contract is created, and the price and number of tokens correspond with the price and valuation of the asset. The rights and ownership of the asset is also defined in the issuance of the token. This process is also referred to as tokenomics. During this process, the eventual supply and demand can be tipped, with too much supply diluting demand and the value of the token and restricting supply, stifling liquidity. As well, during this period comes an understanding of whether the token will give equity or profit sharing.

The Ethereum blockchain has more than 300,000 smart contracts associated with different tokens. With a proliferation of smart contracts comes a need for compatibility between tokens,; andthis has resulted in the creation of several standards. These standards allow developers to build applications that apply to all tokens adhering to the same standard for full compatibility. Ethereum standards are typically ERC-20 and ERC-721 (respectively fungible and non-fungible tokens). A token standard consists of predefined functions or attributes for the specificities of each asset and standards are chosen based on the characteristics of the asset. The most popular standards include the aforementioned ERC-20 and ERC-721, as well as ERC-1400.

With the increase in tokenization of assets comes a growing expectation of a new tokenized economy, or token economy. This token economy is expected to offer a more efficient and fair financial world by reducing the friction involved in the creation, buying, and selling of securities. As well, the four main advantages of a token economy includesinclude greater liquidity, faster and cheaper transactions, more transparency, and more accessibility.

While the decentralized and emerging nature of tokenized assets necessitates that there is no specific approach to tokenize an asset, there is a general framework whichthat defines the process of tokenizing an asset. The first step and obvious step is the selection of an asset and an analysis of the asset in order to establish the correct price, which is used to develop the tokenstoken's value. For assets whichthat do not have an implicit or established market value, the valuation should be done by an auditing or accounting firm, with the understanding that the more credibility the chosen firm has, the stronger the valuation. For assets with an established value, this is an unnecessary process.

Once the valuation is done, a smart contract is created, and the price and number of tokens correspond with the price and valuation of the asset. The rights and ownership of the asset is also defined in the issuance of the token. This process is also referred to as tokenomics. And duringDuring this process, the eventual supply and demand can be tipped, with too much supply diluting demand and the value of the token, and restricting supply, stifling liquidity. As well, during this period comes an understanding of ifwhether the token will give equity or profit sharing.

In the case of tokens whichthat offer equity in an asset, as the asset gains value, so does the token,; this is a model similar to a traditional security held in a publicly traded company, where the perceived value of the company influences the value of the share held in the company.

These tokens are then shared on a blockchain, or the decentralized public ledger, where people can transact the tokens. The smart contracts act as executable applications residing in the shared ledger, which execute their programmed instructions when triggered by a transaction. Ethereum, is one such example and one of the largest public blockchains developed the concept of smart contracts.

The Ethereum blockchain has more than 300,000 smart contracts associated with different tokens. With a proliferation of smart contracts, comes a need for compatibility between tokens, and has resulted in the creation of several standards. These standards allow developers to build applicationapplications whichthat apply to all tokens adhering to the same standard for full compatibility. Ethereum standards are typically ERC-20 and ERC-721 (respectively fungible and non-fungible tokens). A token standard consists of predefined functions or attributes for the specificities of each asset and standards are chosen based on the characteristics of the asset. The most popular standards include the aforementioned ERC-20 and ERC-721, as well as ERC-1400.

And ERC-1400 covercovers security tokens, such that it allows the transfer of ownership of a security token between users, althoughyet still requiringrequires a certificate; allows for the same security token to be split between several partitions; authorizes a transfer of a security token on one's behalf; can manage the documentation associated with the security token; and allows a controller to force the transfer or redemption of an asset.

With the ability to tokenize physical and illiquid assets, comes the ability to tokenize exotic assets, such as artwork, sports teams, and racehorses. Other, otherwise traditional, assets, such as bonds, real estate, and venture capital funds, can be and have been tokenized. As can commodities and almost every other asset class.

With the increase in tokenization of assets, thecomes a growing expectation isof a new tokenized economy, or token economy, in turn grows. This token economy is expected to offer a more efficient and fair financial world by reducing the friction involved in the creation, buying, and selling of securities. As well, the four main advantages of a token economy includes greater liquidity, faster and cheaper transactions, more transparency, and more accessibility.

For liquidity, tokenizing assets, especially private securities or illiquid assets such as fine arts, the tokens can be traded on a secondary market of the issuer's choice, benefiting investors by offering more choice, and benefitting sellers because the token can benefit from the increased liquidity, and capture greater value for the underlying asset.

Tokenization used for data security has been used since the 1970s, when it was used to separate sensitive information from other information stored in databases. Other early forms of tokenization included subway tokens and casino tokens, which, though physical, serve as representations or substitutes for money, offering the same concept used in digital tokenization. More recently, in 2001, TrustCommerce was credited with creating the concept of tokenization to protect payment card data. Since then, tokenization for data security has been expanded to use cases including patient records, software programs, security, login credentials, and governance.

The tokenization of assets is similar to the process used for data security, where a token is used to represent a real and tradeable asset. The tokens created to represent these assets are referred to as either security tokens, fungible tokens, or non-fungible tokens. And the choice of which token to use depends on the asset and how it is intended to be traded. Once an asset is tokenized and digitalized, it can be broken down into smaller parts whichthat can take the form of tokens, which offers a representation of a proportional part of the digitized assets and associated ownership rights.

Early examples of tokenized items includesinclude bottles of wine, pills or jewelry. IBM, in partnership with Pacific International Lines, ran a pilot program in 2019, ran a pilot program to track a 28-ton shipment of mandarin oranges from China to Singapore on the IBM blockchain platform. Similarly, as tokenization of assets grows, the value of blockchain grows, with the blockchain market expected to grow to more than USUSD$176 billion by 2025, and grow beyond USUSD$3.1 trillion by 2030.

The securitySecurity tokens digitally represent a real tradeable asset and are created through a type of initial coin offering, referred to as a security token offering (STO) to distinguish it from other types of ICOs, which can produce different tokens. An STO can represent a share in a company, ownership of a piece of real-estatereal estate, or participation in an investment fund. These tokens can be traded both on-chain and off-chain (traditional financial market infrastructures), and the communication between off-chain and on-chain environments are crucial for assets that continue to exist off-chain.

The security token combines distributed ledger technology with new features dependent on the design of the token. Specifically, specifically these tokens are programmable. And, as such, security tokens can be considered financial securities, and must be issued, transacted, and processed in accordance with the relevant federal securities laws in the jurisdictions where they are permitted to be issued and sold. The programmability of these tokens refers to the possibility for them to be programmed for the enforcement of ownership and trading restrictions. And they represent securities whichthat are issued conventionally and brought to the secondary on-chain market in digital form, where the security token operates as a store of value.

Non-fungible tokens (NFTs) are the opposite of fungible tokens, in that they and represent real-world assets and items that are by definition unique, irreplaceable, and non-interchangeable. Attributes represented by NFTs can vary by unique serial numbers or dynamic information such as location, size, or consistency of the product itself. By tokenizing Tokenizing the ownership of an asset traditionally held by one entity enables the ability to partially own the unique asset. This can improve the liquidity of assets and allow more investors to take part in the markets. Early physical items represented by NFTs have included bottles of wine, jewelry, and pharmaceuticals, and as part of a standardized supply chain for real-time tracking from manufacturer to producer to consumer.

Tokenization, and the issuing of related security tokens, can represent regulated financial instruments (such as equities, bonds, loans, and funds), tangible assets (such as real estate, artworks, precious metals) or intellectual property (such as copyright to works of authorship). The tokenization of these assets allows for the issuing of a blockchain token, specifically a security token, that digitally represents a real tradeable asset, and is similar to the process of tokenization used in data security.

These tokens are often used in place of encryption, where,; unlike encrypted data, tokenized data is undecipherable and irreversible. The distinction is important, as encryption uses a mathematical relationship to the data whichthat can be deciphered, whereas only a token vault can trace a token back to the original data. Tokens are increasingly used to secure many types of sensitive or personally identifiable data,. andThey isare being used more often as the backend systems of many organizations rely on Social Security numbers, passport numbers, and driver's license numbers as unique identifiers, in turn used to access information for billing, order status, and customer service.