The introduction of distributed ledger technology (DLT), with the most common variation known as blockchain, could be the ultimate financial disrupter. This technology feeds into the cutting-edge technology provided by FinTech companies and is likely to change the way we trade and hold assets.

 

This train of thought is particularly strong in the Far East, although some experts have highlighted one major issue: the need for existing and future infrastructures to work together. This could be incredibly challenging for cross-border transactions.

 

What is tokenisation?

 

In simple terms, tokenisation is the process by which the rights to an asset are converted into a digital token on a DLT such as blockchain. While we tend to focus on the investment world, this concept can apply to any asset, such as stocks and shares, bonds, real estate, or even art. The concept is flexible and will likely lead to a significant change in how we trade assets.

 

There are many potential benefits to tokenisation which include:-

 

Enhanced liquidity

 

This new process will bring relatively illiquid assets into the mainstream, and introducing fractional shares will significantly increase liquidity. Enhancing liquidity will attract more institutional and retail investors and further increase liquidity – a self-fulfilling prophecy?

 

Blockchain technology

 

Blockchain technology's structure makes it more secure than traditional trading/custodial methods. As this is a live ledger, peer-to-peer, there is no need to involve third parties.

 

Accessibility

 

Bitcoin is probably one of the better examples of fractional ownership. Investors can buy a small part of a coin currently valued at around $70,000. This not only increases liquidity but also brings new investors into the market who may otherwise have been priced out of relatively high-value assets.

 

Efficiency and lower costs

 

The use of cutting-edge technology, combined with blockchain's peer-to-peer basis, creates a process that is not only streamlined and efficient but also significantly lowers costs. While some investors are still sceptical of blockchain technology, the potential to automate most of the process, along with enhanced security, is now attracting the attention of many institutions.

 

Regulatory hurdles

 

Looking at the development of tokenisation globally, there is a need for robust and flexible regulations. However, this may be challenging in some areas, as we have seen with the UK regulator and cryptocurrencies. Looking at the broader picture, even if regulators were to move in the same direction, would their regulations interlink? To maximise the benefits of tokenisation, regulators will need to work together, which will, in turn, give investors more confidence.

 

Different types of tokens

 

As tokenisation becomes more commonplace, you will encounter two specific types: utility and security tokens. Utility tokens represent access to particular services or products, while security tokens are focused on tradable assets and ownership. The potential is obvious when you look at the basics of the different tokens.

 

Summary

 

We have mentioned tokenisation in the past, and it is moving towards wider acceptance. While it may take some investors and institutional bodies time to adjust to this ongoing change, once the security aspect and the liquidity issues are considered, the additional benefits become much more obvious.

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