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TRENDS IN CRYPTOS

A TOKENIZED PLANET

March 15, 2022March 15, 2022
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Ernst & Young, one of the world’s four biggest accounting and professional services firms, recently produced a decidedly bullish report on tokenization.
Titled “Tokenization of Assets: Decentralized Finance (DeFi), Volume 1”, it predicts that tokenization of assets, both digital and real world, are set to transform powers of ownership and commercial interaction.
According to the firm, Distributed Ledger Technology (DLTs) representations of assets via digital tokens will unlock asset usage and efficiencies that will “reinvent the way companies do business.”
What Makes DLT / Blockchain Tokenization Special?
The paper offers a description of what tokenization via blockchain technology is, and why it represents a leap forward:
“Tokenization can turn almost any asset, either real or virtual, into a digital token and enables the digital transfer, ownership and storage without the necessary need of a central third party/ intermediary…
“…the fact that a token runs on DLT/Blockchain differentiates it from other digitalization methods. Using a DLT/Blockchain to create a digital token enables the collaboration of different companies, which in turn allows the aggregation of otherwise fragmented information into one digital token. Moreover, all parties can update information seamlessly and verify their correctness.”
At this point, many people have heard about NFTs (Non-Fungible Tokens). But there’s confusion about what they represent, and whether they are of dubious value.
Unfortunately, the focus on fads like ownership of pixelated artworks has obscured the much broader implications of tokenization.
As the E&Y report points out, almost any physical, digital or conceptual object or asset can be tokenized. And tokenizing, depending on the asset, brings many possible advantages.  
To illustrate how encompassing tokenization might become, the report lists areas and specific examples of things that either are already being tokenized, or likely will be in the future. They include:

  • Physical Objects and Financial Products
      • Collectibles & Unique Objects
        • Fine Art
        • Automobiles
        • Medical Devices
        • Virtual Collectibles
      • Precious Metals
        • Silver / Gold / Platinum, etc.
      • Financial Instruments
        • Real Estate
        • Certificates
        • Fixed Income
        • Equities
      • Consumables
        • Food & Beverages
        • Pharmaceuticals
  • Intangible Assets
      • Licenses
      • Patents
      • Intellectual Property
      • Royalties
      • Trademarks
      • Various other rights
  • Payment Options
    • Fiat Currencies (Government issued legal tender)
    • Central Bank Digital Currencies (CBDCs)
    • Cryptocurrencies
    • Corporate Points
      • Loyalty points (eg. for Airlines miles, etc)
      • Meal points, etc.

The report notes that NFTs may contain a variety of information and features, including unique serial numbers, but also dynamic information like location, size, or provenance of the item.
Some early examples of tokenized assets have included physical objects such as bottles of wine, jewelry, or medications that are part of a standardized supply chain from manufacturer to consumer. 
The tokenization of the objects allows for real-time product tracking and allows the manufacturer to detect probable fraudulent usage.
How Can Tokenization Produce Value?
The E&Y report breaks down four key areas where tokenization can produce value:

  • Operational Efficiency
  • Assets Fractionality
  • Transparency
  • Single Source of Truth for Extended Ecosystems

The report considers aspects of each area in detail.  To give just a few illustrations:
Asset Fractionality: By allowing ownership over only a portion of an asset (eg. a percentage of royalty rights to a recording artist’s song or album), DLT/Blockchain enables a greater liquidity. By reducing price barriers to investment, and enabling automation and reduction in intermediaries concerning payments, etc, a wider range of people can buy/invest in assets. 
In traditionally rather illiquid markets (e.g. real estate, fine art) this technology can help sellers to more easily find a counterpart to perform a transaction.
An NFT with fractional ownership rights can be held in a crypto wallet, just like any other crypto asset. Payments can be made to a wallet that holds the NFT, and other benefits can confer to the holder.
Single Source of Truth for Extended Ecosystems: Corporates often acquire a substantial quantity of data for a given asset, but mapping and interlinking data points for items such as intellectual property rights, licenses, and ownership products is challenging, since information is often fragmented in different databases, documents, etc.
This fragmentation makes it environmentally unmanageable and leads to unnecessary waste.
Because DLT/Blockchain creates a single IT layer of trust for enabling business partners or rivals to exchange data, numerous players in an organization might benefit from tokenizing an asset.
Widely connected ecosystem can interact with the same digital representation of an item, resulting in increased efficiency.
As an example, in the trade finance industry, recent tokenization initiatives have allowed firms to communicate information about assets that are being transported throughout the globe, automating and simplifying the process for large volume trading, utilizing smart contracts.
Smart Contracts are essential software programs on a DLT that automatically execute functions according to criteria contained in the programs.
The Utility Age Of Blockchain DLT Is Just Beginning
As the Earnst & Young report on tokenization demonstrates, the potential for adding value and efficiency to current areas of commercial industry are significant, and even revolutionary.
There are countless ways in which an investor might choose to leverage this still very new technology to participate and profit. 
One might choose to purchase a fractional investment in real estate or precious metals, for example.
Or an investor might look at the backbone DLT / blockchain networks and initiatives enabling different utilities, and accrue the crypto tokens of networks which seem well positioned to play a major role in NFT innovations.
As always, performing due diligence and research before investing in anything is strongly advised.
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