Tokenization of everything?! A kind of magic? No way!

5 min readMar 10, 2021

As of today, tokenization is already an integral part of the capital market of tomorrow. Tokenization represents one of the biggest or actually is the biggest revolution in the world economy of our times. Things are moving fast and in the near future, almost any asset will be tokenized.

By this, a completely new way to create and manage values is rapidly emerging. A way that is disrupting existing structures as it transforms the concept and the exchange of value as we know it. Tremendous advantages come along with this. Those go far beyond solely financial and efficiency aspects — as tokenization also provides a much more secure, more transparent and more easily manageable and accessible environment for assets even to a broader audience.

Sounds like magic? No, it is solely due to the revolutionary capability of the underlying technology tokenization is based on: the distributed ledger technology (DLT) on which real-world assets can be managed, traded, bought and sold completely digital.

What is tokenization and what is a token?

The German BaFIN defines tokenization as the

“digital reproduction of an asset or value including the rights and obligations attached to it as well as the transferability this makes possible”.

For this digital reproduction an asset is transformed into a so-called security token which is issued on a distributed ledger — in most cases a blockchain. This digital token then represents a (fractional) unit of value of this asset and holds all properties that come along with it. Digital programs — so-called smart contracts are then used to cover rights and obligations as well as the ownership of the token. So basically, smart contracts are able to manage any existing digital or physical asset or access rights to it in an automated and decentralized way.

What can be tokenized?

Tokens can represent almost anything from a store of value to a set of permissions, independently if it is in the physical, digital or legal world. Examples range widely from company shares or other financial instruments, to (fractional) parts of real estate, classic cars or IP rights. However, what can be tokenized and actually how this can be done is completely depending on the jurisdiction one is dealing with and therefore the legal framework that comes with it.

Photo by Tingey Injury Law Firm on Unsplash.

In recent years, many startups have emerged offering different tokenization frameworks and solutions. And probably even more companies are developing as legislation is moving forward quickly in many countries.

European pioneers

One of the most pioneering countries regarding tokenization is Liechtenstein. In January 2020, the Liechtenstein Token Act came to law. This framework comprises a collection of new rules and changes of existing laws — even the civil law — allowing rights and assets to become tokenized. Using the Token Container Model as vehicle, nearly anything can be tokenized in a straight-forward-manner without needing complex work-arounds anymore. Meanwhile already the first equity tokens have been tokenized according to this law and many more to come.

Besides Liechtenstein, also Switzerland is one of the leading countries when it comes to creating a legal basis for tokenization. Only recently, in February 2021, the first part of the Swiss blockchain act came to law, firming a legal basis for digital asset exchange and tokenization. First Swiss companies have already tokenized their shares and as in Liechtenstein many more will follow.

That this will be not the exception, but the standard in the near future is also underpinned by the attempts of the ISO (International Organization of Standardization) or the ITSA (International Token Standardization Association) in order to define and implement comprehensive market standards for the global token economy.

What about Germany?

Having a solid legal framework will have a real boost on the token economy in both countries and all others that will be active in this field. Germany needs to catch up quickly in order to not fall behind. However, in comparison to e.g. Liechtenstein and Switzerland things might be a bit more complex in Germany due to its in parts extensive legislation. Under the German law, traditional securities still require the existence of a paper-based certificate, whereas digital securities are detached from this, enabling the usage of blockchain technology in order to register, transfer and settle them without intermediaries such as central counterparties like Clearstream.

So, how quick things are moving forward in Germany is not clear yet, but first steps towards the digitization of securities are being made. A solid strategy of the Federal Government exists already since 2019.

Currently, the draft for the eWpG (elektronisches Wertpapiergesetz) Germany is discussed allowing the issuance of bearer bonds without a paper certificate, but using a decentral electronic register. This is a milestone for Germany and will strengthen its position as a financial location It probably will be passed within the next months and other instruments could follow on the basis of it in the future. However, for those severe changes in the legislation have to be made first.

Conclusion

Tokenization is all about technology and regulation. Although there is no magic behind, the magic comes when diving deeper into the topic of tokenization as while understanding the underlying key principles you would quickly realize its potential. So basically, it is only about being open-minded and getting educated on this. Why not start with it today? Get educated and let the magic happen.

Remarks

Dr. Mara Hartsperger is a Blockchain enthusiast and passionate about digital transformation. She is working as Business Development Manager at Baader Bank AG and you can contact her via LinkedIn (https://www.linkedin.com/in/dr-mara-hartsperger/).

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