Decentralizing Finance

7Asset Tokenization

In Chapter 3, we briefly discussed the concept of tokenization of real‐world assets and gave examples of startups that aim to connect on‐chain capital markets with off‐chain assets. However, in the next three chapters, we will delve deeper into the topic of asset tokenization, specifically focusing on asset tokenization in general, tokenized deposits, and tokenized securities.

You may be wondering, “Haven't we been discussing tokenization all along?” This is true, as crypto‐assets are essentially tokens. However, most crypto‐assets are on‐chain assets and do not have a reference to a real‐world, off‐chain asset. When DLT is utilized in regulated, real‐world environments, there are significant complexities that need to be addressed, such as asset servicing, lifecycle management, and legal and technical elements.

Therefore, in this chapter, we will narrow our focus to tokenized assets that usually reference an off‐chain, regulated asset, which are often securities. We will explore how the tokenization of securities is a highly promising field with the potential to revolutionize the current way securities are issued, traded, and settled. Tokenized assets have significant potential benefits for both primary and secondary markets, and can increase efficiency in the securities market by enabling automation and disintermediation.

7.1 What Is Asset Tokenization?

The FSB defines tokenization as “the act of creating a digital representation of an off‐chain asset ...