The Benefits of Tokenisation

This article was originally published in Blockchain Industry Review - a Crypto Curry Club Magazine published monthly and available in soft copy and the printed version.


By Guest Contributors:

Ron Costa, Co-founding Partner at Reg A Funding Group

Tara Waters , Head of Ashurst Advance Digital

Farza Peseshkpour, Director at DASL

Simon Bowles, Strategic Partnership Advisor at Coinpayments

Michael So, Vice President of Business Development at Cook Finance


The Realization Group here examines the prospects for more widespread adoption of tokenization within the Financial Markets.


There are plenty of obstacles facing tokens as we see them turn from a concept to a financial offering, including security, pricing structure, to questions about regulation. But there is also no doubt about the appetite for more institutional participation.


Below we hear from a large group of experts and tokenization pioneers, all of whom are at the forefront of efforts to bring tokenization into the mainstream. We speak to Ron Costa, co-founder of Reg A Funding, a crowdfunding company, Michael So, VP of Business Development at Cook Finance, Farzad Pezeshkpour, Director at DASL, Simon Bowles, Strategic Partnership Advisor at CoinPayments and Tara Waters, Head of Ashurst Advance Digital.


This wide-ranging group, representing the investing, software engineering, regulatory and vendor community, talk about what tokenization is doing now, as well as what they expect to see from it in the future. Despite the obstacles that each of them mentions, they are unified in the view that the challenges can be overcome and that use of tokens as digital assets will only increase over time.



What is Tokenization?


Tokenization is the process of turning sensitive data into non-sensitive data called "tokens" that can be used in a database or internal system without it being ‘seen’. The purpose is to swap out sensitive data—typically payment card or bank account numbers—with a randomised number in the same format but with no intrinsic value of its own. This differs from encryption, where a number is mathematically changed, but its original pattern is still stored within the new code. Tokenized data is undecipherable and irreversible, allowing it to be used to secure sensitive data. With most businesses holding at least some sensitive data within their systems, whether it be credit card data, medical information, Social Security numbers, or anything else that requires security and protection, tokenization is on the uptake.

“A good analogy is a poker chip: instead of filling a table with wads of cash (which can be easily lost or stolen), players use chips as placeholders. The chips can’t be used as money so they must be exchanged for it after the game,” explains Ron Costa, co-founder of Reg A Funding, a crowdfunding company, when asked to explain what a token is.

Detokenization is the reverse process, exchanging the token for the original number, which can only be done by the original tokenization system. There is no other way to obtain the original number from just the token.


Tokens can be single-use (low-value) for operations such as one-time debit card transactions that don't need to be retained, or they can be persistent (high-value) for items such as a repeat customer's credit card number that needs to be stored in a database for recurring transactions.


The benefit of tokenization is that if a breach of a tokenized environment occurs, the exposed data is worthless to cybercriminals, virtually eliminating the risk of data theft.

“The application of tokenization to the digital asset world is now creating new ways to raise capital,” says Simon Bowles, Strategic Partnership Advisor at CoinPayments, “bringing liquidity to previously illiquid assets, thus opening up investment and opportunities to new investor bases. We are seeing a huge impact from this… typical VC holding times are 5-7 years, however the typical holding times that Blockchain VC's are getting during the private sale might only be 1 month.”

He isn’t alone in seeing how tokenization is shaking up digital investments, Costa sees tokenization as “basically the fractionizing of any real-world asset by creating immutable ownership records using blockchain technology. The process creates ‘tokens’ which theoretically can be traded on secondary markets with the main benefit of providing liquidity to previously illiquid investments, such as real estate and other hard-to-trade asset classes. And because of its global nature, tokenization opens up investment opportunities to a much larger audience of potential investors, making tokenization an excellent option for issuers seeking to raise capital for their companies.

The advantages of tokenization do not stop there, as Michael So, who was previously Head of Tokenization at Atomyze LLC points out; “Blockchain tokenization is revolutionizing asset ownership through immutable and transparent blockchain records, providing opportunities to remove some of the middlemen layer and thereby reducing costs and associated counterparty risks. It also allows the instant settlement through atomic swap of asset tokens”


What can we expect for Digitization beyond Tokens and Poker Chips?


Farzad Pezeshkpour, Director at DASL shares what he sees for the future of tokens; “In our industry, the last decade of work has focussed on the digitization of value. This is often referred to as “tokenization” - the very word implying a conversion between something tangible like “cash” and a representative “poker chip”."

This has been useful for several reasons - we have developed the essential foundations for cryptographic provenance of assets and transaction consensus, giving rise to a wide set of technologies and commensurate networks being born, Ethereum, Quorum, XinFin, Fabric, Corda, DAML, and Bitcoin to name a very small subset. As we know, writing asset contracts in these disparate networks use technologies that are incompatible with each other, be they virtual machines, languages, interface standards etc. Up to now this has not been the greatest of concerns - poker-chips are poker-chips, however we are now seeing a rise in the demand to remove the barriers between the networks. This is an area that DASL are now known for, with the capability to ‘bridge’ between networks as a key feature of DASL.


“By bridging I mean the ‘teleportation’ of an asset between one network and others. DASL has a unique capability of treating all networks, be they incumbent banking and payments services, brokers, exchanges, as well as a range of public and permissioned crypto networks uniformly. Removing technical barriers allow for the flourishing of new business opportunities and this surely is in keeping with the prime directive of any technological product.”

As an industry we are now moving beyond poker chips, with asset classes such as Bonds, Equities (e.g. project equities), NFTs are growing at a significant rate. We are no longer satisfied with transferring poker chips across networks, leading to a rise in a new iteration of assets that require lifecycles whereby the issuers, owners, custodians all participate in flows intrinsic to the definition of the asset. Pezeshkpour sees this as the future of tokenization and explains how they are building towards this at DASL;


“One simple example is the payment of coupons on a bond. If a bond is to be truly portable across networks while retaining its intrinsic coupon schedule, then we need a way of describing this lifecycle in a network-agnostic way.”
 



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