Viewpoint: Tokenization, although not yet a mainstream investment tool, can bring economic benefits.
Tokenization can bring economic benefits, despite not being a mainstream investment tool.
Author: SU YEN CHIA, KULLARAT, Forkast; Translation: Song Xue, Blocking
Tokenization is the process of representing assets, rights, or valuable items in a digital way through smart contracts on the blockchain, and has attracted widespread attention in recent years.
By dividing assets into smaller tradable units, tokenization has the potential to completely change the financing and capital models of many different industries. Real-world assets that may not have been bankable before can now enter the financial ecosystem and be accepted by a wider range of investors.
Asia has always been at the forefront of the tokenization trend. Jurisdictions such as Thailand, Hong Kong, Singapore, and Japan have been actively implementing regulatory frameworks to promote the development and adoption of tokenization. While the United States and other countries continue to grapple with legal vocabulary and issues surrounding tokenized assets, Asian countries are providing a hotbed for tokenization innovation.
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Although tokenization has yet to become a mainstream investment tool, it can bring significant economic benefits.
In addition to providing additional liquidity to assets, asset tokenization also improves operational processes, reduces costs, and may eliminate intermediaries. Compared to the current operational settings of traditional financial systems, blockchain technology can bring higher operational efficiency. Therefore, by tokenizing assets, these true real-world assets are brought into the blockchain, settlement times can be accelerated, market efficiency can be improved, and counterparty risk can be reduced.
Secondly, fragmentation can be said to be one of the biggest changes that tokenization has brought to the game rules. Since users no longer need to buy the entire asset unit to exercise ownership, the ability to divide previously indivisible assets allows users to more easily access digital assets. This means that retail investors can participate in investments that previously only institutional investors could participate in, democratizing investment opportunities.
Asian jurisdictions have seen firsthand how tokenization can have a tangible, positive impact on the real economy. For example, Japanese real estate company Kenedix announced the launch of its fifth digital security product, supported by a hotel in Sapporo. The special innovation of this token issuance is that in addition to digital securities, security holders also receive a utility token that can only be exchanged for souvenirs at the hotel. Thailand has also witnessed notable tokenization projects in multiple fields such as real estate, entertainment, and media.
Asia Leads in Tokenization Regulation
Tokenization may bring benefits to the real world, but it requires a clear regulatory framework and a proper definition of legal terms. Tokenization undoubtedly blurs the line between traditional and emerging digital financial systems, making it sometimes difficult for regulatory authorities to navigate this new world.
While countries like the US are struggling with how to regulate digital assets, Asia is making significant progress in defining tokenization and providing necessary regulatory frameworks to foster innovation.
For example, Thailand has taken significant steps to regulate digital assets and support the development of tokenization. The Emergency Decree on Digital Asset Businesses launched in 2018 provided a regulatory framework for offering investment and utility tokens, as well as operating digital asset businesses in the country.
Japan has implemented clear guidelines on how to regulate digital tokens based on amendments to the Payment Services Act and the Financial Instruments and Exchange Act. As a result, security tokens are viewed as “interests in a collective investment scheme represented by tokens.” There are clear boundaries to be adopted when promoting security tokens and asset types for distribution.
In Hong Kong, recent guidance allows tokens that meet certain standards to be eligible for use by retail investors. With the introduction of a new regulatory framework for virtual asset trading platforms, Hong Kong has taken proactive steps to make asset tokenization and asset distribution less complex and cumbersome, which is welcomed by the digital asset industry.
By clarifying the status of tokenized assets, these Asian markets are laying the foundation for further adoption of tokenization, which will undoubtedly promote the development of the digital asset industry and the economy.
Lack of Standardization Hinders Tokenization Adoption
These Asian jurisdictions provide glowing examples of how we can achieve regulatory transparency.
While most other countries only regulate certain types of digital tokens based on existing laws such as securities and payment laws, some Asian countries are introducing specific new rules to manage tokenization or fundraising activities through digital tokens.
The differences in regulatory frameworks and treatment across countries make it difficult for tokenized assets to gain attention on a global scale. Many tokenization projects are inherently global or multi-jurisdictional, which means that some level of standardization – particularly in anti-money laundering and countering the financing of terrorism (AML/CFT) laws, accounting, and taxation – is critical to facilitate cross-border transactions and ultimately drive adoption.
Clearly, tokenized assets are in urgent need of guidance from international regulatory bodies, and clear classification is crucial for legal purposes. Providing guidance on token classification and identifying the implications across different legal domains is essential for market participants to understand how their projects will be regulated and avoid potential enforcement actions.
What does the future hold?
Tokenization has already sparked a paradigm shift in traditional banking and opened up new opportunities for non-bank assets and real-world assets to be securitized. Real estate, sustainable development, and agriculture are just a few of the industries benefiting from tokenization.
Tokenization lays the foundation for a fairer and more efficient financial ecosystem by facilitating alternative financing, encouraging innovation, and increasing liquidity. Countries across the Asia-Pacific region are actively strengthening their legislative frameworks to harness the game-changing technology and make them significant participants in the financial market’s sustainable growth.
Although other parts of the world are now catching up in this area, it is clear that the Asian market is already ahead in understanding how appropriate regulation can yield real benefits from tokenization. As the global market further regulates and standardizes appropriately, we can stimulate the adoption of tokenization and increase chances of unlocking the full potential of innovative technology in the financial system.