The Impact of Tokenization on New Markets

Asset Tokenization

Though these are early days for the tokenization of assets, it can uplift the functioning of markets. Currently, the cryptocurrency market is highly bullish despite extreme volatility. 

Tokenization can be a viable solution to these issues as it democratizes access to investors promoting equality without any chances of economic and social discrimination. 

The global market for Asset tokenization is expected to reach a whopping $4.8 billion in 2025 growing by 19.5% every year.  Some of the big players in tokenization that will play a major role in the future are Mastercard, VISA, American Express, IntegraPay, and AsiaPay. The main industries that stand to be disrupted by tokenization of assets are financial services, retail, real estate, e-commerce, healthcare, and education. 

What Are the Different Problems in Emerging Markets?

  • While there are highly mature markets like the USA, UK, and many European countries, some emerging markets lack liquidity since there is not adequate participation from investors. This leads to less movement of assets in trading activities.
  • This will lead to stagnant market conditions as investors will be hesitant to put their money as they do not have a high-risk appetite.
  • Governments follow conservative economic policies and this affects access to basic financial services for the unbanked sections of the population. It deprives them of profitable investment opportunities leading to high inequality.
  • Emerging markets have lower assets under management, less credit is disbursed, the costs are high, and the revenue is quite low. 

How Tokenization Can Be a Game-Changer in Improving the Functioning of the Global Financial System

  • It leads to complete decentralization putting more powers in the users’ hands by transferring it from centralized authorities.
  • It can decrease overhead costs by removing the role of multiple intermediaries like brokers and agents. This leads to an improvement in the operational efficiency of financial applications.
  • The unbanked people can use financial services just by using their smartphone connected to the Internet. They do not need to open a bank account or submit a valid credit score.
  • The tokens can be easily bought and sold in cryptocurrency exchanges and secondary markets leading to more market participation by prospective investors.
  • Since the trading volume starts increasing due to the high demand of tokens by investors, it can bring liquidity to historically illiquid assets.
  • Tokenization offers fractional ownership and the costs are equally divided among the users. This brings a lot of flexibility as an investment can be done even with a low amount of capital by small investors.
  • Smart contracts reduce the chances of errors and fraud by automating all the business operations without the need for any human intervention.
  • It leads to the discovery of new profitable opportunities by not only concentrating on the high-income generating economies.
  • User safety can be ensured by complying with different regulations issued by GDPR, PCI DSS, and HIPAA.
  • Any kind of asset like property, wine, fine art, sports teams, contracts of professional athletes, equity shares, private equity, venture capital funds, natural resources can be tokenized easily. 

What Are the Various Challenges in the Tokenization of Assets?

  • Compliance management is still a work in progress as many firms do not follow KYC/AML verification mechanisms for their users. It can create a lot of risk for users’ funds in case things go wrong.
  • The use of cash as a method of payment needs to be discouraged by developing a secure online payment gateway by establishing tokenization as a service business model. 
  • More awareness is needed among investors to know the characteristics and benefits offered by security tokens and how it is entirely different from traditional financial instruments like bonds, derivatives, and equity shares.
  • Firms that want to enter the token economy need to allocate a significant budget at the initial stages for investing in technology.
  • If tokenization cannot carve out a unique niche for itself, it must have enough interoperability to integrate with the traditional financial markets.
  • Business firms need to upgrade their technological infrastructure by investing in blockchain technology or applications that use distributed ledger technology.

As seen above, traditional finance will be influenced heavily by asset tokenization in 2021 as the possibilities are infinite. Many big banks and financial institutions may be forced to introduce digital financial products due to the changing market trends. 

It will sort out all trading issues and make every task streamlined through quick fund settlement for users. If regulatory authorities pass a uniform standard for tokenization of real estate assets, it will immensely help in boosting the growth of the token economy. 

This will create a more open financial system that does not exclude anyone. Tokenization will promote sustainable growth and make many industries stronger and resilient.