This article is written by Åsa Dahlborn, Mariana de la Roche and Laura Kajtazi from the IOTA Foundation, and Robert Daykin from Nakama.

  • The problem: Tokenisation has gained a lot of attention with the popularity of blockchain, however, the lack of legal frameworks limits the benefits that can be achieved.
  • Why it matters: Important benefits such as democratisation of investment, data security and fractional ownership can be generated with tokenisation.
  • The solution: In order for legislators to establish legal frameworks that can harness the potential of tokenisation, the very concept, the benefits and the uses cases need to be understood.

What is tokenisation – a short overview of different tokens

During the rapid development of and increased interest in blockchain during the last few years, different processes that benefit from being implemented with blockchain technology have gained attention. Tokenisation is one of the processes on which the spotlight of blockchain popularity has landed.

Tokenisation is becoming more and more frequent in the context of financial services, real estate and other aspects that involve traditional assets. This article presents an overview of the different categories of assets that can be tokenised, the advantages and disadvantages of tokenisation and real-world examples.

Tokenisation of real estate assets makes it possible for people lacking a large amount of capital required to invest in a whole property to invest in a fraction of the property and enjoy the yields of the investment.

The Blockchain Council defines tokenisation as "the process of transforming ownerships and rights of particular assets into a digital form." As pointed out by the council, it is helpful to keep the difference between fungible and non-fungible assets in mind. Fungible assets are not unique and can therefore be replaced by a similar item, like a 1 Euro coin that can not be distinguished from any other coin. Examples of fungible assets include gold and money. In most cases, these assets can easily be divided into smaller fractions. In contrast, non-fungible assets are unique and irreplaceable assets that cannot be divided into fractions in the analogue world. One of the most common examples of non-fungible assets is the painting Mona Lisa.

Advantages of tokenisation on a blockchain

One of the key advantages of tokenisation is that it allows for assets that are non-fungible and hence indivisible in the analogue world to be divided into fractionalised digital tokens. In theory, one example could be real estate properties or artworks. In contrast to traditional processes, multiple people can own an asset through fractional ownership. The value of an asset is broken into fractions representing a certain percentage of the total value, which allows the possibility of having multiple owners of the asset through fractional ownership. Not only does this lower the barrier to investments in this kind of assets, it also increases global access to investment opportunities, which promotes financial inclusion and contributes to the democratisation of investment.

Regarding real estate ownership, this offers a potential considerable advantage as it lowers the barrier for people to invest in properties. Tokenisation of real estate assets makes it possible for people lacking a large amount of capital required to invest in a whole property to invest in a fraction of the property and enjoy the yields of the investment. Moreover, fractional ownership through tokenisation increases liquidity as investors easily and quickly can trade their tokens rather than waiting for years to receive the profits or losses from large and illiquid assets.

Keeping us safe

Another important advantage of tokenisation in combination with blockchain is data security. Blockchain tokenisation saves sensitive information as a combination of letters and numbers in tokens that pass through a cryptographic function. This process guarantees that each token is unique, but most importantly, it significantly reduces data security risks since the alphanumeric code stored in the token only serves as a reference to the sensitive data and does not reveal the original details or personal information; this is due to data and privacy rights that are materialised into regulation such as the European General Data Protection Regulation- GDPR.

The combination of tokenisation and blockchain also benefits from the inherent main advantages of blockchain: transparency, traceability, accuracy and immutability. With tokenised assets registered on a blockchain, all transactions with regard to each asset are available to anyone that interacts with the blockchain. This establishes trust in the market as the owner's history of an asset can easily be traced. The fact that blockchain does not allow any transactions to be changed further strengthens this trust. For example, it removes the possibility for sellers to manipulate the history of an asset to make it more appealing and charge more than its actual value.

Introducing a token economy at different levels can contribute to making industries more competitive and efficient while enhancing trust and reducing complexity.

There are numerous examples of assets that can be tokenised and consequently also tokenised on the blockchain. One of them is Yenna Tech, which is an initiative focused on tokenising real farmland that aims to support farmers by facilitating their access to funding. Properties of farm owners are tokenised and divided into fractions representing the business value, such as plants, crops, construction, etc., of a specific unit of land.

Future promises

The tokenisation of traditional assets brings a new universe of possibilities for investment opportunities to enhance and accelerate financial inclusion. Tokenisation can generate asset liquidity which increases market movement by creating accessible ways for selling and buying while also expanding the number of people that can participate in the market.

Introducing a token economy at different levels can contribute to making industries more competitive and efficient while enhancing trust and reducing complexity. This can be a crucial factor in supporting regions in the developing world to become competitive in the international market and hence empower their local economies. Consider the tokenisation and digitalisation of processes along the supply chain to accelerate processes and the cross-border movement of goods.

Regardless of the intrinsic benefits of tokenisation, challenges will need to be addressed. For example, regulators will have a crucial role in developing the token economy, especially in Europe, where stakeholders often demand a suitable regulatory framework and regulatory clarity to have certainty before they even consider investing in new businesses and technologies. Hence, one of the current main challenges is the lack of a harmonised legal framework with high standards of security and consumer protection that also allows innovation and provides incentives to explore the advantage of tokenisation.

To achieve regulatory clarity, it is necessary to have awareness about where the industry is going and what are the challenges and opportunities they face while also understanding what are the regulatory concerns in terms of consumer protection and guarantee fundamental rights such as privacy.

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