In a recent survey, Deloitte found that 95% of enterprises were planning to invest in blockchain technology within the next year. It’s clear that more enterprises than ever are investigating how blockchain can be harnessed to add value.
However, enterprises are tending to limit themselves to using private, permissioned blockchain to increase the efficiency of record keeping and data processes. Tokenisation is one of several value-creating functionalities falling by the wayside as a result of this limited scope.
So, what do organisations stand to gain from tokenisation using public blockchain?
What are tokens?
Put simply, a token is a digital representation of a unit of value. This unit of value can be assigned to anything deemed valuable by society, be it digital assets (such as cryptocurrencies) or digital representations of physical assets (such as real estate, art or antiques).
Using public blockchain, software code in the form of “smart contracts” can represent agreements between individuals, enterprises, and governments.
The combination of these technologies unlocks a host of value creation opportunities in enterprise.
How can tokenisation unlock value?
Tokens can be created to represent the entirety or a portion of a real-world entity. These entities could be natural goods like gold or oil, real estate properties, financial instruments, and more.
Tokenisation enables traditionally illiquid assets to be split into smaller, more liquid components. This can create greater freedom in the trading of these assets and decrease illiquidity premiums, which improves process efficiency and creates additional sources of value.
Recently, institutional finance has begun to test and become more comfortable with security tokens, which boast a suite of benefits that traditional securities do not offer, primarily enabled by smart contracts.
These benefits include:
- More efficient and cost-effective transfers of fractional interests
Blockchain technology will unlock greater value than what currently exists in fractional interests of real-world assets.
- Greater compliance with laws
Issuers and investors can ensure that their securities and investments are always trading in compliance with applicable laws and compliance requirements globally.
- More efficient cross-border trading
Smart contracts governing the compliance functions of digital assets will ensure receipt of payment and allow for automated compliance costs to be spread across all global participants involved in the transaction.
- Enable better cap table management
Digital assets provide a definitive picture of a company’s cap table with all changes automatically occurring upon transfer of the asset, benefiting both public and private security markets.
- Better corporate governance
Digital assets allow for investors to hold stock as record holders and be more actively engaged in stockholder decisions like voting rights, as well as other new innovative rights previously not offered.
- Automated and transparent payment of distributions
The increased efficiency and decreased cost of distributions can be applied to dividend distributions, obligor interest payments, and eventually certain covenant compliance uses.
- Enable securities to have utility
Blockchain technology allows digital securities to be used as a utility and an incentive mechanism within a company’s eco-system, which can enhance the outcome of desired growth initiatives while unlocking new sources of growth that did not previously exist.
The combination of tokenised assets and a fluid, cross-border platform can also create the foundation for an open marketplace. This is especially important in regions lacking extensive financial infrastructure.
In the Phillipines, 56% live with limited access to the financial ecosystem, despite the existence of more than 400 regulated rural banks. These rural banks are neither connected to any electronic banking service, nor to domestic and international money transfer networks.
In this instance, a cash-backed token that can be openly traded in a national system can be used to create an open payment network. These digital tokens can be used to instruct and settle remittances between participating rural banks by consolidating messaging, execution, settlement, and accounting of the transaction through one platform.
New investment models
Investment into early-stage projects or ventures has traditionally been exclusive to venture capital funds or accredited angel investors. However, the issuance of tokens creates additional models for investment.
Tokens can be used to represent rights to a future good or service. This allows projects to raise capital in a new way and create buy-in from a potential userbase, even before the launch of a product. An additional benefit of tokens, backed by smart contracts, is that secondary behaviors in the marketplace can be automated and coded into the token itself.
Tokens as part of the protocol
At a fundamental and technological level, tokens can be utilised as a common protocol for data and value transfer, which can lower transaction costs and increase speed.
In supply chains, a set of detailed contracts define the terms between supplier, manufacturers, and retailers. However, on occasions when these terms are not met, an often long and tedious process is required to determine and collect financial penalties. By connecting value transfer with contract terms using tokens and smart contracts, overall transaction speeds and costs within the supply chain can be reduced.
The idea of utilising tokens to incentivise participation on an open blockchain network as part of the protocol can be expanded to aligning incentives in any network. By writing terms and stipulations into a smart contract with directly linked value exchange, such as automatic rewards or punishments, you can more closely align incentives in the network.
Further, due to the scale and decentralised nature of public blockchain, there is no single point of failure, which instills robustness and trust in the network that promotes participation.
Undoubtedly, private and permissioned blockchain is capable of improving the efficiency and transparency of many business processes. However, tokenisation using public blockchain has the potential to be far more transformative, because its core characteristics and functionalities allow for the creation of entirely new business models, thereby unlocking previously untapped value in enterprise.