Tokenization of assets

Gepubliceerd op 28 augustus 2022 om 09:00

Tokenization is a term that is appearing more and more frequently. You'll see reports come along where real estate and intellectual property are being "tokenized''. What is tokenization exactly?

What is tokenization?

Tokenization basically means that a particular product is chopped up into pieces and those different pieces are sold. This means that there are different owners of a given product. Sometimes even hundreds or thousands of owners.

An example: suppose we have a painting that has a value of €80,000. The person who owns this painting can sell this painting, but the owner of this painting can also choose to tokenize it and sell the tokens. Suppose this owner sells 100 tokens of €800. This means that there are a total of 100 owners of this painting. Now if this painting is sold for €100,000, then the owner who held a token has made a profit of €200.

Tokenization is becoming more popular

Tokenization is a term that is being used more and more often. Tokenizing a product is very secure because it is done through the blockchain. Every holder of a token does not have to worry about someone else making a claim that that particular token belongs to them. In fact, the person holding the token can prove that token belongs to that person because the blockchain reported the first token (and also only valid token).

Suppose we have artist A. Artist A wants to be more in control and is tired of being left with a small amount of royalties. Artist A can therefore tokenize his new music (music rights). Because A has tokenized his music and people have bought a piece of this token, these people/owners are recorded in the blockchain. A core characteristic of blockchain is that once transactions/information are placed on the blockchain, they cannot be modified (immutable). Therefore, the owners with a token of artist A are then recorded on the blockchain forever. As a result, there is no doubt about who owns a piece of music. You can't cheat either, since the real owner is reported on the blockchain.

Tokenization makes the crypto but also the 'real' world more transparent, clear and fair. Everyone now has the possibility to become the owner of a piece of product, without having to buy the entire product. Think about real estate. You also don't need intermediaries anymore and you can buy tokenized products quickly and easily.

Different type of tokens

Security/equity tokens

  • Security and equity tokens are tokens that represent a tradable security on a blockchain. The difference here is that an equity token is a proof of value of a company, just like a share or a debt certificate. With an equity token you become co-owner of a certain project. An equity token can be compared to a digital share, but then from a blockchain project.
  • Example: property coin, NEO, Polymath, Harbor, Swarm Fund en Templum.

Utility tokens:

  • Utility tokens are tokens used to access a product or service of the cryptoproject in question. This is somewhat similar to the software licenses or gift card of, say, Amazon. Utility tokens are often called app coins or user tokens. A utility token is not meant to be used as an investment. Yet, many investors buy utility tokens to sell at a profit in the future.

    One well-known utility token is the Basic Attention Token (BAT). By using a web browser (Brave browser) you earn BAT. So all you have to do is use the browser. The browser also has its own wallet where you can safely store your BAT. Please note that this is not an offline wallet. So the private key is online. 

  • Example: BAT, filecoin and Maker.

Asset tokens:

  • The term says it all - an asset token represents a physical product. A well-known example is real estate. As noted earlier in this blog, you can tokenize real estate. That means that you cut up real estate into small parts and then sell them. The token you bought represents the value of the property. In addition to real estate, you can think about art, gold, etc. Intellectual property can also be tokenized.
  • Example: Goldmint en Tether.

Buying a house via blockchain

Suppose you want to buy a house. But this process takes a very long time. Before the actual transfer takes place, you are already a few weeks away. The process from house search to actual ownership transfer is one of the long haul. In addition, it is currently difficult to find affordable housing. 

In addition, most homebuyers have to apply for a mortgage from the bank. Without this mortgage, they cannot buy the home. In addition, you need many different documents from different intermediaries. Think of the real estate agents, experts, notaries, etc.

You don't need all those intermediaires anymore with tokenization. Through tokenization you can buy part of a property with just a few clicks! 

Pros of using tokenization in the real estate sector

  • Lower costs: nowadays you have to pay all kinds of intermediaries to buy a house. You pay the notary, the buying agent, mortgage advisor, insurers, etc. If this entire process takes place on the blockchain, you only pay the transaction costs. These transaction costs are a lot lower than the notary, buying agent, etc. combined.
  • Faster transactions: less paperwork is required to buy and sell a home. It also requires fewer intermediaries who also want to earn from the transaction. A part of the property can be bought and owned within an hour, so to speak.

  • Accessible: the real estate market becomes more accessible by tokenizing it. Real estate is an illiquid product. If you want to buy a property, you have to buy the whole apartment. Many people don't have the money for that. With the current housing market situation, it is becoming increasingly difficult to buy a home. By tokenizing real estate, people with lesser budgets get access to the real estate industry.
  • The processes can be simplified: you don't need intermediaires. You just need an app where you log in and a wallet to store your token.

  • Safer: because the transaction goes through the blockchain, this is safer than if you were to buy it from a random third party you don't know. By using smart contracts, the security is even more assured and the transaction can be done more easily.

The law

We run into legal problems if we want to tokenize homes and sell that. In the Netherlands, only the notary can transfer property. This is because it is described by law. So transferring property via blockchain or a token is not allowed. The law would have to be changed. Probably many notaries will agitate against this, because a large part of their work will be taken away.

In addition, there is the question of how to legally deal with the sale of a token that represents real estate. Can a token represent a 'share' in a legal sense? If you sell that token, you sell the token but not the underlying share of the property per se. How do you transfer the underlying share of the property? After all, the blockchain can no longer be changed. What about foreign individuals or companies that own a token? How should tokens be valued and how should they appear on the balance sheet? Do you pay taxes as a substantial shareholder in box 2 if you have 5% or more of the tokens? Many tax questions that have not yet been answered.

Another problem is the GDPR. Sensitive personal data of natural persons is stored on the blockchain. If information is stored in the blockchain, it cannot be changed. This is at odds with the GDPR because users should always be given the opportunity to change or delete their data.

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