How Tokenization Is Changing the Way the Industry Thinks About Financial Transactions

Tokenization, which could soon be available for anything from real estate, financial products to artwork, has the potential to transform the way we invest in assets.

Asset tokenization, one of its major disruptors, has the potential to transform how we think about financial transactions across multiple industries. Trillions of dollars are now locked up in assets that cannot be exploited or have very limited access to retail investors. Markets like real estate, artwork, and other valuable real-world assets predominantly are dominated by institutional investors, leaving limited space for retail investors to participate. When it comes to investment options for retail investors, they are limited to public equity markets, which are relatively higher risk and more volatile.

As such, Finnax, being the trailblazer in fractionalized property ownership by leveraging the technology of asset tokenization on the blockchain, brings forth a whole new investment opportunity that enables instantly available cash to flow into previously illiquid real-world assets.

How Does Tokenization Works?

Tokenization serves as a bridge between the physical world and the digital world of trade, storage, and transfer. By achieving this, blockchain technology is used to create the corresponding medium.

An asset’s value may be tokenized into a digital token to be placed on the blockchain, which can then be exchanged with other tokens on the blockchain. To put it another way, tokenization allows for the digital transfer, ownership, and storage of nearly any asset, real or virtual, without the involvement of a third party.

Because of its unique asset reference, attributes, and/or legal rights, it is possible to think about digital tokens in this way. Blockchain distinguishes a token from other digitalization approaches, even if equivalent software may be created. In order to produce a digital token, blockchain may be used to bring together information that would otherwise be dispersed across multiple firms. Additionally, all parties may keep their data up to date in real-time.

Changes Brought by Tokenization to Financial Transactions

Tokenization of assets opens up a slew of new possibilities, ranging from lower transaction costs to more flexible trade finance. Here are some of the major changes introduced by asset tokenization:

       I.          Streamlined Operation

Transaction costs are reduced significantly by simplifying IT systems, sharing the infrastructure across all investors, and without needing a central third party or middlemen. There are numerous ways to reduce inefficiencies in the financial sector by digitizing and automating manual work, as well as by reducing some of the reconciliation/compliance work, such as by automating simple send or receive transaction settlement and clearance, which traditionally required hours or days.

In both cases, the efficiency of individual transactions is increased and the markets themselves are optimized. This provides a more efficient market and improves the way goods and services may be traded by handling tokenized assets.

     II.          Fractionalization of Assets Ownership

Blockchain facilitates higher liquidity by permitting fractionalization of asset ownership and the ability to possess and conduct actions over just a piece of an asset. It is now easier for more retail investors to acquire and invest in assets when there are fewer impediments. Traditionally illiquid markets like real estate and fine art might benefit from this technology's ability to connect sellers with potential buyers by having access to different fractionalized platforms.

It also promotes financial inclusion by allowing a larger spectrum of investors to participate in the investment market. Investors are now able to participate in investment possibilities formerly unavailable to them owing to geographical and infrastructure limitations or high minimum investment requirements. Financial markets and a wide range of new assets are now accessible to investors regardless of location and with significantly lower capital requirements.

Fractionalized asset ownership is an important concept in a culture where use increasingly outweighs ownership as a result of fractionalizing assets, which allows numerous investors to acquire and utilize a particular real-world asset collectively. For example, a group of retail investors may own a hotel and choose how to operate it more efficiently.

Conclusion

The most important thing right now is to show that everybody can invest in assets they had never before thought possible. Retail investors no longer have to depend entirely on public equity market investments because they lack the capital to invest in real-world assets such as real estate. As such, retail investors may earn capital gains depending on the success of a real-world asset they have invested in via the ever-growing asset tokenization.

In other words, any investor who is unprepared for the arrival of asset tokenization is at risk of being left behind.

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