The Internet made it easy to exchange information with each other in various formats like text, image, file and video. Blockchain technology is making it easy for people to exchange value with each other in a secure way, in the form of digital assets such as cryptocurrency and other tokens.

Digital tokens have existed since before the blockchain and can also be exchanged in a centralised database. So why use a blockchain? The value it adds is:

• The ability to create verifiably scarce digital tokens to split up assets and make them easier to trade. This leads to a better experience for traders, with more money flowing around the asset, stabilising its price and making it easier to buy and sell larger volumes.
• The ability to monitor and manage the full lifecycle of a token at a global scale.

The technology is taking the issuance, distribution, trading, settlement and storage of digital assets to a whole new level. This opens up new business opportunities, which makes people want to tokenize all kinds of assets.

In this guide, we want to help you start on that journey. Below you can find key information and some first steps into the world of asset tokenization.

The big questions:

• What does asset tokenization enable?
• What are the different kinds of tokens?
• What can should be tokenized? Where are the opportunities?
• How do tokens work legally?
• Are there any issues to be aware of?
• How do you tokenize digital assets?
• What does it cost to tokenize? And how long does it take?

What does asset tokenization enable?

Improving existing business processes

Asset Tokenization is the process of converting physical or digital assets into digital tokens. The ownership of these tokens is tracked on a blockchain, which creates a permanent record.

You might expect any digital asset (even if not on a blockchain) to have a historical trail, but that is not how it works in practice. If every business has its own standards for tracking assets, you would quickly run into issues when an asset changes owner. This is part of why global supply chains are so complex.

A blockchain can be a common standard for tracking assets, which is what makes it appealing to use as a way to improve asset-related business processes across entire industries.

The typical list of benefits is: no borders, lower costs, less intermediaries, more liquidity for traders, and more transparency around the lifecycle of an asset for all parties involved.

Such benefits make it easier to do anything related to things like stocks and crowdfunding.

Enabling new financial activities

Beyond improving what exists, asset tokenization introduces new ways in which people can engage in financial activities.

You can understand these ways while learning about the different kinds of tokens.

Different types of tokens

There are 4 types, each with their different uses:

• Security tokens -> A token that represents another asset, such as a share.
• Utility tokens -> A token that gives a right to perform a specific action.
• Non-fungible tokens -> A token that represents ownership of a unique digital asset.
• Currency tokens -> A currency, but on a blockchain.

Security tokens

The term security token comes from the financial world, in which “securities” are tradable financial assets.

As you can imagine, not all of these assets are as easily accessible for everyone. This can make them difficult to trade and value.

Through various software solutions, these financial assets can now be turned into tokens on a blockchain. Once they’ve been created, these tokens can enter global markets with a low barrier of entry for investors, and their real value can quickly be discovered.

There are for example companies that enable you to tokenize real estate. This involves turning a building into many shares, so that people can invest lower amounts and real estate investment becomes accessible to the lower and middle class. It also means that people who own a building can sell partial ownership if needed. This would enable them to finance other things, without the inconvenience of having to move out.

If you’re interested in what is happening in tokenization of the Real Estate market, check out our recent research.

A company can also tokenize its shares, and sell them on an open market. This is an alternative to working with investment firms, which of course comes with pros and cons. Investment firms don’t just provide money, but also connections and advice. Working with them is not always easy on the other hand if you aren’t in the same geographical area or don’t have the right connections.

Utility tokens

While a token can have a simple function like representing a share in a company, it is also possible to extend the possibilities of this token. Instead of just being able to trade it, the token can be programmed and have additional rules for what it can do.

Some tokens can have voting rights for example. This comes in handy when a group of globally distributed shareholders needs to make a decision on the project they are funding, to give an example.

Other tokens can only be spent in certain ways or places. Some companies may try to reward loyal customers this way.

Non-fungible tokens (NFTs)

While shares in a company are equal and can be swapped, just like currency (tokens) can be exchanged, there are some uses for digital tokens that have unique properties that set them apart from other tokens.

This is typically the case for industries that are already engaged in exclusivity and ways for people to set themselves apart, such as art, collectibles, gaming and sports.

Trading ownership of the link to items on a global market is easier than everyone trying to use different infrastructure for it.

Currency tokens: Altcoins & Stablecoins

Tokens can be much more than representing a share or having a function. It is possible to build a whole monetary system through tokens by creating a program (smart contract) on a blockchain in which tokens can be traded. This has its limitations by not being the native token of the blockchain on which it operates.

Some companies have used this as a way to create tokens that are artificially stable in value, called stablecoins, so they can more easily be used for payments.

We’ve seen many of these currency tokens come and go over the past decade. Some people have created them because they truly believe they can create something better than existing cryptocurrencies like Bitcoin. Many others are just looking to enrich themselves.

We don’t want to spend too much time on these currency tokens in this article. Out of the 4 cases we listed, it is the least likely you would ever need to engage in creating a currency token. Most use cases you may have can perfectly be done with existing currency tokens.

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Do you need a token for that?

When it comes to deciding if something should be tokenized, there are two important factors to consider:

• What is your end goal? Does it truly need a token and a decentralized model, or could you build this without that, in a more efficient way?
• Does the end user understand the need for this kind of setup if you survey them at scale? Does it solve a problem for them?

Many tokens are launched because the person, group or company needs it for financial reasons, not because the user needs it.

This is the main reason why many token projects fail, they’re not about the user. There may be short bursts of activities and a few enthusiastic people who see an opportunity to make some quick money by being an early adopter, but the fundamental value is lacking.

Not everything that can be tokenized, should be tokenized, but the option being there can be useful to many people. Use it wisely!

How do tokens work legally?

You may wonder if all of these tokens are legally supported. Would all activity related to these tokens hold up in court if needed?

The answer depends on the asset and the regulations in your jurisdiction. The legal system in general isn’t there yet in acknowledging tokenization of all assets.

By using tokens in the meantime however, especially in places where the regulation does exist, people are trying to show how it could work, so that in the event that more or new rules are created, there is a basis for them.

Many countries are pushing for clear rules and standards, ever since Liechtenstein first passed its Token and Trusted Technology Service Provider Act in 2019. The companies innovating in this space need them to be able to run their business in a predictable way.

Who are you allowed to sell tokens to?

This is another very important legal aspect that cannot be overlooked.

If you launch a token and start selling shares in something, most countries have laws around what is and isn’t allowed, especially when selling to non-accredited investors. You will likely have to register your token according to the laws in your jurisdiction. We would strongly advise seeking legal advice for these challenges.

Issues & Challenges with tokenization

Beyond legal challenges, there is an important issue that needs to be addressed: Who links the assets?

If you want to use tokens to represent a physical asset, something needs to link them to their digital representations on the blockchain. This is known as an oracle in the blockchain world.

In practice, this oracle is a person or some automated service. Both of these are corruptible and need to be fully trusted by the user.

If the user trusts this centralized party anyways, then what is the need for a decentralized system like a blockchain? Can’t the centralized party just host a more efficient database in which the tokens are registered?

This issue does not exist for digital assets, as users can typically validate that there is a correct link, assuming the solution provides this level of transparency. This is because for each digital piece of information, we can always generate a unique digital fingerprint, a process known as hashing.

There is no waterproof solution to the problem of linking physical to digital assets today. Barcodes, QR-codes, special seals, and anything you can come up with, have their flaws.

If users want to own and trade tokens linked to physical assets, they simply have to trust the centralized party, in exchange for getting access to the benefits of global trade for these tokens. These are essentially use cases with some, but not all the benefits of using a blockchain.

How to tokenize digital assets

The easiest way to tokenize digital assets is by using an existing service for it, rather than getting into the code and creating your own solution.

There are various providers that can help you with the process. We compare 9 companies below, which we selected based on funding and publicly available tokenized volume. However, there are many more providers in the industry with various expertises and within different jurisdictions.

In practice, the process of asset tokenization has roughly the following steps:

1. Getting actors across the whole asset lifecycle involved to set up the project.
2. Setting up compliance rules & legal.
3. Creating the token itself through a software solution.
4. Setting up the payment, trading and distribution mechanisms.
5. Enabling automated reporting and corporate actions if needed.

Below we’ll share more details on what this process entails, based on the input from various companies.

How long does it take to tokenize assets

The technical aspect of tokenizing an asset is actually very quick, it can be done in minutes by a professional partner.

However, the total process takes ~3 weeks to ~3 months, depending on many factors.

Most of the time typically goes towards getting the right stakeholders involved across the entire asset lifecycle, creating documentation, and setting up compliance and legal structures.

As a result, many of the vendors focus on helping you to speed up the time-intensive processes, e.g. by building compliance into the solution, and by working with a network of partners that can help their clients to solve specific challenges.

Cost to get an asset tokenized by a professional company

Asset tokenization solution providers use different business models. Depending on your specific needs, some pricing models may suit you better than others.

Many of the vendors also look at a few different factors to determine pricing, such as:

• The frequency at which the client will issue assets.
• The volume of assets.
• The features the client requires.
• If they prefer SaaS or Cloud deployment.

In practice, this results in examples such as:

• A monthly SaaS fee of $5k, with a setup fee starting from $200k.
• A setup fee of $50-150k.
• A subscription fee based on the total value of the tokenized assets.

What do the steps to tokenize assets look like?

Asset Tokenization vendors will often start with an intake process using a web page or a form. This process has 2 goals:

• Learn about client needs and requirements, so they can configure the tokenization setup for the client perspective.
• Make the client aware of the steps in the process, so they can start the compliance and legal work in parallel.

The issuer/client will need to generate the capitalization table that determines the financial structure of the asset. Many companies work with third-party software solutions for this.

Once the vendor has received the cap table, it can generate the tokenized assets on the desired blockchain, and allocate them to the right entities in an automated way.

Some vendors have further developed this intake process to be a self-service setup with an API and/or a user interface. From there, the client can directly start generating tokens, setting up compliance rules and taking care of distribution.

A few examples of various platform interfaces below, to make the abstract idea of asset tokenization more tangible for you.

Once everything is set up properly, the issuer can start selling the asset on a primary market, and investors can begin trading the tokenized assets on secondary markets.

What do tokenized assets look like from an investors’ perspective?

Investors have access to the typical kind of dashboards you would expect, from which they can buy and sell their assets, view statistics and receive communication from the companies they invested in.

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The great asset migration

Now that the solutions to tokenize assets are becoming simpler to use, and many countries are looking into creating clear legal frameworks for tokenization, the great asset migration has begun.

Over the course of our lifetimes, an increasing amount of assets will likely start from blockchain-based solutions, rather than starting from traditional infrastructure.

We hope this guide will help you on your way to consider this option, and reap the benefits of asset tokenization. If you have any questions or comments, feel free to reach out to us.