Unleash Revolutionary Tokenization Power for Unprecedented Capital Efficiency

Introduction

Tokenization is a process that converts assets into digital tokens that can be traded on a blockchain. It has the potential to transform capital markets by improving capital efficiency, democratizing access, and enhancing compliance, auditability, and transparency. Despite past challenges, the current landscape suggests a different path for the adoption of digital assets. In this blog post, we will explore the key elements of the report “Tokenization: a digital-asset dejà vu” by McKinsey&Company, summarizing every chapter with the main key points.

Tokenization: A digital-asset déjà vu

Tokenization adoption was poised for success six years ago, but progress was limited. Renewed interest might feel like déjà vu, but stronger business fundamentals and structural changes suggest the path could be different this time. Tokenization has the potential to transform capital markets by improving capital efficiency, democratizing access, and enhancing compliance, auditability, and transparency.

The benefits of tokenization are multifaceted and can have a significant impact on various stakeholders. Some of the key benefits of tokenization include:

1. Improved Capital Efficiency: Tokenization can deliver meaningful capital efficiencies in certain capital market use cases, such as triparty repurchase agreements or money market fund redemptions, by enabling shorter settlement times and generating significant savings, particularly in high-interest-rate environments.
2. Cost Efficiency: Tokenization offers opportunities for operational cost savings by embedding manual and error-prone product-structuring and asset-servicing tasks into the token smart contract, leading to enhanced cost efficiency for asset owners and service providers.
3. Democratization of Access: Tokenization provides access to new secondary markets and greater liquidity, allowing for access to new pools of capital with lower minimum investment requirements, thereby democratizing access to investment opportunities.
4. Revenue Opportunities: Tokenization presents revenue opportunities for asset owners, service providers, and investors through enhanced compliance, auditability, and transparency, as well as the embedding of rules and credentials into the token smart contract, creating new revenue streams and cost efficiencies.
5. Programmability and Automation: Tokenization offers programmability, allowing for the embedding of code in the token and engagement with smart contracts, enabling higher degrees of automation and operational efficiency.
6. Enhanced Transparency and Trust: Tokenization enhances transparency, accountability, and trust by eliminating intermediaries and enabling direct interaction between stakeholders, such as artists and fans in the music industry, leading to improved trust and accountability

The process of tokenization

Tokenization typically involves four fundamental steps:

1. Asset Sourcing: The process begins when the owner or issuer of an asset identifies that the asset or use case would benefit from tokenization. This step also includes identifying the structure to be tokenized, because the specifics will shape the process. For instance, tokenizing a money market fund is different from tokenizing a carbon credit. It helps to understand whether the asset will be treated as a security or commodity, which regulatory frameworks will apply, and which partners will be engaged.
2. Token Issuance and Custody: Once the digital assets have been created, they are stored by a custodian or special-purpose broker-dealer pending distribution. The tokens are issued to investors or other stakeholders, who can then trade them on a blockchain.
3. Tokenization Provider Selection: Once the asset has been identified, the owner or issuer selects a particular token standard, a network, and compliance functions to be embedded. The tokenization provider implements these decisions. The tokenization provider is responsible for creating the digital asset, ensuring compliance with regulatory requirements, and managing the tokenization process.
4. Token Distribution: The final step in the tokenization process is the distribution of tokens to investors or other stakeholders. This can be done through a variety of channels, such as exchanges, brokers, or peer-to-peer networks.

The asset owner selects a particular token standard, a network, and compliance functions to be embedded. The tokenization provider implements these decisions. Once the digital assets have been created, they are stored by a custodian or special-purpose broker-dealer pending distribution.

Overall, the process of tokenization involves a series of steps that require careful consideration of the asset to be tokenized, the regulatory framework, and the network and compliance functions to be embedded. Tokenization providers play a critical role in ensuring compliance with regulatory requirements and managing the tokenization process.

Tokenization in financial services

Tokenization has the potential to transform financial services by improving capital efficiency, reducing operational costs, and enhancing compliance, auditability, and transparency. It can be applied to various asset classes, such as money market funds, repos, private funds, and corporate bonds. Tokenization can also enable new business models, such as fractional ownership and peer-to-peer lending.

Tokenization in retail

Tokenization can be applied to retail world by improving customer engagement, loyalty, and retention. It can enable new business models, such as loyalty programs, gift cards, and reward points. Tokenization can also enhance security, privacy, and convenience by eliminating the need for physical cards and reducing the risk of fraud and data breaches.

Tokenization in music

Music is another sector impacted by tokenization by improving artist compensation, fan engagement, and revenue sharing. It can enable new business models, such as fan tokens, royalty sharing, and crowdfunding. Tokenization can also enhance transparency, accountability, and trust by eliminating intermediaries and enabling direct interaction between artists and fans.

Tokenization in gaming

Gaming has been revolutionized by tokenized asset, by improving player engagement, ownership, and monetization. It can enable new business models, such as in-game assets, virtual worlds, and esports. Tokenization can also enhance interoperability, liquidity, and innovation by enabling cross-game and cross-platform transactions.

Tokenization in media

Tokenization can transform media by improving content creation, distribution, and monetization. It can enable new business models, such as micropayments, pay-per-view, and subscription services. Tokenization can also enhance transparency, accountability, and trust by enabling direct interaction between creators and consumers.

Conclusion

Tokenization has the potential to transform various sectors, such as financial services, retail, music, gaming, and media. It can improve capital efficiency, democratize access, and enhance compliance, auditability, and transparency.

The process of tokenization typically involves four fundamental steps: asset selection, tokenization provider selection, token issuance and custody, and token distribution. Tokenization can enable new business models, such as fractional ownership, peer-to-peer lending, loyalty programs, gift cards, reward points, fan tokens, royalty sharing, crowdfunding, in-game assets, virtual worlds, esports, micropayments, pay-per-view, and subscription services.

Despite past challenges, the current landscape suggests a different path for the adoption of digital assets.