The rise of Tokenisation and Digital Assets

A topic currently gaining momentum across Web3 is the discussion around the tokenization

of real world assets; it’s becoming the focal point of the discussion rather than an aside.

Partly, due to its conceptual potential as a new method of maintaining trust, control and 

transparency of asset ownership – the 3 are interrelated and complement each other in their benefits.

To set the scene early, to tokenize a real world asset, is to digitally represent it on the

blockchain. 

As a neutral reader, I’d then ask the question “so why can’t I digitally represent it in

Microsoft Excel?’…the response would be that you could, but it’s neither on-trend nor

provides all of the associated benefits of utilising blockchain technology as leverage.

Words such as ‘conceptual, theoretical, potential’ are extremely apt when referring to

tokenization; partly due to the current state of technological capability/adoption but also

due to factors such as regulatory, legal, financial, resourcing-skillset and utility

considerations…so, just a few things to think about before you run to your leadership team

for endorsement.

As with all of my writing, take the best – leave the rest, do your own research and take

opinions with a pinch of salt. *Disclaimer - this article is not a deep-dive into tokens,

blockchains or use cases*

1. A Brief Overview

On par with the majority of thought-leadership articles, it often helps to kick off with a

reputable definition of the subject in question, so we’ll roll with the Gemini viewpoint that

“tokens are assets that allow information and value to be transferred, stored and verified in

an efficient and secure manner” (Gemini, 2021). The catch is that tokens cannot effectively

operate without blockchain technology  - a bit like how fish can’t operate effectively without

water and Consultants can’t operate effectively without coffee etc.

The first token/blockchain collaboration went live in ~2008 with the Bitcoin blockchain; a

revolution that until recently, was touted as being too theoretical to work in practice…but

fast-forward 14 years and even your grandparents are trying to figure out how to tokenize

their fiat capital in the form of Bitcoin (on the blockchain). Bitcoin, put simply, is a token

which represents your ownership, via a set of data points, coded within an immutable

network.

One of the key drivers of success of tokenization is the selection of the blockchain to use as

the driving platform, and is the core reason behind the need to clearly articulate what it is

that you’re trying to tokenise and why. As Physicist Richard Fynman once said, ‘you must

not fool yourself, and you are the easiest person to fool’. Blockchain technology has, and is

continuing to, advance year-on-year and so do the associated attributes – all trying to help

solve the scalability trilemma of decentralisation, security and capacity to scale. All that

being said, just because you can, doesn’t mean you should…so let’s get to the why and

begin evaluate how to make an assessment.

2.    Getting to the why 

In true Consultant terminology, let’s take a step back and re-evaluate the angle at which

you’re considering tokenisation; firstly, are you a business or an individual?

Assuming that you’re a business, it’s important to consider some key questions such as what

your innovation strategy looks like and whether there’s internal demand for such blue-sky

thinking. For the purposes of this article, let’s the example of a Commercial Bank operating

across the Financial Services sector (obviously). One of my first questions as a GM would be

‘why should I care about this?’ and the response ideally should be – because there are a

diversified set of Web3 associated opportunities that cannot be ignored, $1 Trillion (USD)

worth, according to JP Morgan. 

This valuation is supported by opportunities across areas such as provision of decentralised

finance, smart contracting, NFTs, not to mention efficiency gains on existing offerings such

as speed of transactions, collateralised loans, cross border payments, crypto-asset custody,

enhanced compliance capabilities, regulator transparency and increased customer

engagement. It would understandably be easy to be carried away by the narrative and

again, ties back to the why. If none of these use-cases resonate, an alternative viewpoint

may be to look at what competitors/other global firms are doing in the space of

tokenization.

A key example, specifically within Australia, is ANZ Bank’s creation of a  Stablecoin . Although

real-world utility may still be lacking for this specific initiative, it highlighted that the Bank is

pre-empting the future use cases of tokenized assets and showcases their desire to be

innovative. Stablecoins as a product offering, can provide new revenue streams for Banks

via their ability to facilitate cross-border transactions, facilitate decentralised finance

capability, inhibit enhanced yields via crypto exchanges and transact on the Banks

Blockchain.

3.    So you’ve settled the why, now what?

An undervalued trait in business strategy is the ability to ask better questions; ones that

hone in on pragmatism, actionability and really just focus on cutting through BS (and that’s

not an abbreviation for business strategy…)

For those relatively fresh to the notion of tokenized assets, it is important to begin to

understand the optionality available to businesses and begin to facilitate structured

thinking. Although not fact-based, a useful way to consider token categories revolve around:

Real World: assets that exist in reality e.g. Houses, Cars, Art, Memorabilia 

Financial: arguably many financial assets are already digitised, for example, when

have you ever held a stock of Tesla, and when do you ever physically touch a

commodity you’ve traded…

Digital native: focussed on assets that don’t exist outside of the digital economy, an

example here would be Stablecoins 

Intangible: we’ve all heard that data is the newest commodity, and it’s true, but as

with the theory of digital identity, there’s a great deal of opportunity in tokenizing

intangibles

Now that categories have been bucketed, it is down to business leaders to begin to consider

how these may best suit their goals, and this begins with asking a further set of questions

which may include:

1.     What problem does this solve for our business?

2.     Does this fit into our strategy and associated annual funding allocation?

3.     How do we actually make money from this, or is it for the love of innovation?

4.     What are our competitors doing and where do we measure up?

5.     Do we have the skillset and internal culture to be able to effectively implement this? 

 Although asking so many questions may appear to take the fun out of innovation, applying

a decision-based logic approach can ensure that time and efforts are not wasted. Assuming

that all answers to the above questions yield a positive outcome to progress, the next step

may be to ask the questions of:

4. What are some interesting use cases?

Digital Art, Community, Trading: It feels unfair not to call out NFT’s as one of the most

prominent use-cases, and although many people turn their nose up at them – the Bored

Ape Yacht Club is an interesting story. One of the founders Gordon Goner stated that the

NFT collection he created was less about the art itself, but was to form a “community of

like-minded individuals who got rich ‘aping in’/investing in innovative ideas”. NFT’s don’t

only represent the art, but they provide owners with verifiable asset ownership of a 1-of-1

item, which enables access to benefits such as exclusive communities, on-sell opportunities

and general bragging rights.

Real-World Assets: Conceptually, putting real world items on the blockchain via

tokenization makes sense. The immutable traceability of ownership and associated terms,

are benefits that are ready to be reaped by the real-estate market. Leading DeFi provider

Aave in 2020 began dabbling in tokenized real estate, which allows buyers to own

shares/tokens in e.g. a commercial property. They partnered with tokenization firm  RealT  to

operationalise the concept whereby owners can take their ownership tokens and stake

them across DeFi protocols to earn yields, or use it as collateral to obtain loans.

What’s the lowest hanging fruit that we can pick, that doesn’t upset regulators and allows

our business to actually implement this

There’s no denying that use-cases sound attractive to be associated with, especially if you’re

an ‘up and to the right’ disruptor firm; however, asking the questions of ‘how’ we put this

into practice, can help determine the feasibility of a tokenization strategy. 

5. How to do it

When I think blockchain pragmatism, I revert to the scalability trilemma as it supports in

guiding the discussion re: which aspect is most important to your strategy. The traits revolve

around security, scalability and decentralisation – at best you can have 2 of the 3, but

almost never 3 (to-date) and many blockchain firms are trying to solve the trilemma.

When a business understands the what and why, they can better select the blockchain

solution that best aligns to solving the trilemma for them. To run an example scenario, let’s

use say the ‘why’ is so that a Bank can provide a new product offering for customers and the

‘what’ is the tokenization of real-estate. 

Security: the monetary value associated with property almost predetermines that security

would be a driving factor behind blockchain selection, and so this may reduce the need for

decentralization and increase the requirement for a more centralized governance approach.

Decentralisation: to embrace tokenization within banking, decentralisation becomes a real

issue when it comes to KYC (know your customer) and AML (anti-money laundering). Even if

the customer does not have this at front of mind, banks certainly should, and likely favor's

a more permissioned blockchain solution

Scalability: network effects are often important for widespread adoption, in concurrence

with interoperability i.e. if the suppliers and vendors you do business with don’t use

blockchain, it doesn’t make sense for you to. In the case of real estate tokenization,

facilitated by a bank however, scalability is less in demand and further narrows blockchain

selection

Once the blockchain solution has been determined via a logical process of elimination, it is

important to understand the technical capabilities required to achieve such a feat. These

consist (non-exhaustively) of:

Blockchain: Buy or Build (Buy would be the preferred option 99% of the time). For

example, buying a permissioned ‘out of the box’ blockchain such as that provided by

Amazon, may be the most efficient choice

Determining the skillset of engineers. To be able to execute on the strategy,

engineers will be required to have experience in programming languages and

understand the tokenization process

Facilitating data parameters (to tokenize). As with smart contracts, data that has

been entered in the initial blockchain node should be as accurate and permanent as

possible e.g. Owner name, valuation at purchase date, location of asset

Liaising with Regulators. APRA have recently released their intent to continually

regulate the digital assets space and as such, their policies continue to adapt and

change. It is important for Banks to keep them informed as to their plans as they

progress, to avoid developing a finished MVP and being declined the chance to

operationalize it with customers

Summary

It is evident that tokenization has a lot of potential to disrupt current business operating

models and increase revenues, however in my opinion, we are still ~5 years out from use-

cases being adopted and implemented within society. It is still worthwhile however, for

businesses to begin investigating the best ways in which they can benefit from asset

tokenization; whether it’s the development of an innovators working group, proof of

concept or simply just whiteboarding ideas. The space moves fast and it’s important to keep

up.