A report released by Boston Consulting Group puts the total size of tokenized illiquid assets, including real estate and natural resources, to reach $16.1 trillion by 2030.
The Global Tokenization Market with COVID-19 Impact, by Component, Application Area (Payment Security, User Authentication, and Compliance Management), Tokenization Technique, Deployment Mode, Organization Size, Vertical, and Region – Forecast to 2026 predicts Global Tokenization Market to grow from USD 2.3 billion in 2021 to USD 5.6 billion by 2026.
These two studies prove two things:
- There is an increased push to decentralize the ownership of illiquid assets, and there is immense potential to open up securities and commodities markets through tokenization.
- A significant percentage of data breaches and theft is reduced owing to tokenization technology.
Tokenization is in two forms:
- The ability to divide the ownership of an asset into small digital units called tokens.
- The substitution of confidential customer data like credit card numbers using tokens and storing that data in a safe area.
In light of these two projections, let’s look at the top eleven benefits of tokenization.
Wider reach of the investor base
Indivisible assets are transformed into token forms by transforming ownerships and rights of particular assets into a digital form. Such assets may be corporate equity, debt, real estate, financial instruments, or paintings. This divisibility makes investing in these assets much more accessible to numerous individual investors across the globe. Additionally, tokens are more accessible to trade than conventional securities, which makes them even more attractive to investors.
Tokenization of Commodities
Another tokenization benefit is dividing commodities into ownership pieces that are traded. The commodity exchange market has significantly shifted toward standardizing agreements and electronic transactions. However, the overhead cost of paperless transactions is massive. Therefore, financial institutions and start-ups are investing in tokenizing commodities like gold.
Expansion of collateral options
The fractionalization of new asset classes expands the available and acceptable collateral range beyond traditional assets. Tokenization increases the alternatives available to market participants when selecting non-cash assets as collateral in the securities lending or repo markets.
Decreased cost and settlement times in securities trading
With tokenization, many traditionally toilsome and manual processes involved in bringing securities to public and private markets are transferred to the blockchain and automated through smart contracts. Tokenization removes the need for intermediaries, resulting in reduced settlement time, cost savings for issuance, and other processes like corporate actions, brokerage commissions, and transparent record keeping. Tokenization leads to meaningful reductions in cost, with smart contracts reducing bond issuance costs and fundraising costs by more than half the cost compared to traditional private placement rounds.
Evolution in regulation
Tokenization, powered by distributed ledger technologies, has opened the way for laying the foundations for regulatory frameworks by worldwide regulators. The immutability of data and its real-time nature enable it to foster investor confidence, security of the infrastructure, and transparency of transactions. Fraud and theft cases are consequently reduced due to the openness of the data.
Improved Compliance
Tokenization enables the programming of compliance rules into every security token. So regulatory restrictions are now automatically enforced. This reduces the possibility of error and makes complex compliance requirements cheaper and easier to manage. Likewise, the regulators are notified of changes in on-chain events in real time.
Reduction in risk of a data breach.
Fraudsters aim for businesses that accept credit and debit cards because there’s a treasure of intelligence in payment data. Attackers target defenseless systems containing this confidential information and barter the stolen data or use it to make fictitious purchases. Tokenization helps protect businesses from the adverse financial impacts of a data breach. Tokenization reduces the economic fallout from any potential breach but doesn’t eliminate the risk.
Fosters trust with customers
Consumers want safety and security wherever they shop. In this generation, where fraud threatens the economy, fostering trust and loyalty with customers begins with keeping their payment and other personal data safe.
Hassle-free compliant measures
Leading payment technology companies offer tokenization as part of their payment processing services.
Tokenization never lets card data touch payment systems.
Tokenization makes achieving and maintaining compliance with industry regulations significantly easier. This lets businesses focus on growing their business while their payment partner reduces red tape by ensuring PCI DSS compliance.
Stronger levels of security
Tokenization offers better protection than high-quality encryption because the latter can be broken if the hacker obtains the encryption keys. This is because tokenization renders the data useless after hacking. After all, the actual data is stored safely away from that environment.
Wider use of tokenization
Tokenization is applied to all types of sensitive data, not only credit and debit card numbers. It secures social security numbers, driver’s license numbers, electronic health records, prescriptions, and addresses. All personal information worthy of protection is open for tokenization.
A delay in tokenization implementation is harmful as it is the apex of data protection technologies. The physical and logical separation of payment and privacy data significantly reduces companies’ exposure to information theft. Likewise, for tokenization to bear fruit, an organization needs to look at the fit between its business processes and distributed ledger technologies, which are tokenization’s bedrock.