Why Tokenization Is Still a Chimera: Expert Take

Tokenization is nothing new The term "Tokenization" is mainly associated with securities, equities and real assets, and it indicates the creation of a digital token which represents ownership rights of the underlying assets and which is issued on a blockchain.

Despite the beliefs about the potential of Securities Token Offerings - and literally dozens of tokenization platforms springing up in the last 12 months with plenty of businesses willing to try to raise funds with them - very little practical progress has been made so far.

Notwithstanding the announcements of imminent issuance of tokens representing equities or real assets, none have yet been practically issued.

Tokenization use cases Let's look at two use cases: Use case A is the issuance of tokens representing private equity, while use case B is the issuance of corporate bonds/commercial papers or other corporate debt instruments by the same private company.

XYZ can be issued directly to single buyers with the tokens representing its debt.

Tokens can be issued on the Ethereum blockchain and a smart contract will embed the terms of the debt issuance in the token, such as automatic coupon/yield payments and the repayment of the principal at the duration expiration with subsequent burning of all the tokens redeemed.

Well-practised, traditional legal structures such as SPVs, trustees, nominees and escrows - backed up by collaterals such as a mortgage or a pledge - are still needed to guarantee to the investor that the issued token is tied to the real-world asset.

Guaranteed liquidity is the key prerequisite Most importantly, what is still missing from the picture - and it is certainly the essential prerequisite for any tokenization either on- or off-chain - is the guaranteed liquidity and the possibility for the investors to effectively trade the tokens.

On-chain tokenization is advisable when the asset can be freely transferred without the statutory need of a third-party, off-chain validation.

Of course, if and when those statutory registers will be on-chain themselves, then on-chain transactions will be possible also for real assets, and the smart contract will be able to close the loop and to reconcile the ownership title of a real asset off-chain with the digital token on-chain.