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Brief introduction to Tokenization
What is Tokenization?
Tokenization is the process of converting business assets such as real estate, stocks, art and so on into a digital token. These tokens are created and stored onto a blockchain, which acts as a digital form of real-world assets.Tokenization allows safe and secure storage of assets, as well as the opportunity to attract new audiences to your business.
If you want to tokenize your business, you can begin with tokenizing shares to increase liquidity, transparency and availability for international investors. Moreover, by introducing block-chain based digital assets or business operations, there is maximum traceability, scalability and flexibility, which will encourage international investors also to be a part of your business.
Where to start with business tokenization?
Firstly, your business needs to be analyzed – assess the financial needs of your company and determine how tokenization will improve your way of doing business. In some situations, you might need to only tokenize a part of your business – for example, promoting a certain product or service, an IPO replacement, or to sell an asset. Next, you need to identify your audience, the market, and competitors to see how prospective your solution can be. You can then begin the formation and technical implementation of the token economy.
A token means the existence of an asset on another blockchain, which is created using smart contracts.
Different blockchains are used for token creation. Ethereum is one of the most popular networks for smart contracts, and offers the advantages of versatile standardization of tokens. For example, you can create ERC-20 tokens that are fungible and standardized to represent a single entity, whereas ERC-721 tokens are unique and non-fungible, best for representing a collection of assets.
In planning the tokenization process for your business, think about how it will be advantageous for investors, how tokens can be used, how they can be issued, and the number of tokens to be issued. Sometimes, creating regulated securities may not be possible with all types of tokens. For example, proper AML (Anti-Money Laundering) and KYC (Know Your Customers) procedures must be in place to accept tokens in the form of shares.
Token Distribution Methods
In business tokenization, the legal form of issuing tokens is an important issue. Let us look at some options:
- ICO (Initial Coin Offering)
This is more like crowdfunding and is suitable for a new business or for funding a new project. ICO tokens can be purchased anonymously but do not offer any guaranteed ownership rights to the owner of the token. Those who invest in ICO tokens are usually more interested in the benefits of the token utility and motivated to trade their tokens further. ICO creates a large space for attracting investors but you have to focus heavily on promoting the offering, and some regulatory issues may have to be dealt with.
- Initial Exchange Offering (IEO) and Initial Decentralized Exchange Offering (IDO)
With IEO, the tokens first become available for purchase on a central exchange system – much like the cryptocurrency analog. IDO is when the tokens are issued on a decentralized exchange. Both IEO and IDO work well in terms of attracting a primary audience via exchange, but the potential for creating an own community is restricted because not everyone uses the services offered by certain platforms.
- Security Token Offering (STO) and Equity Token Offering (ETO)
These are special types of ICOs that represent a share in the company and also give token holders the privilege to vote as well as receive dividends. Hence this type of tokenization is best for share offerings for a company. You have to keep in mind though that each country’s regulations come into play here and STOs and ETOs will be scrutinized in line with the laws of the country.
ETOs are slightly different from STOs where tokens can be owned in the name of an individual or other legal entity instead of a cryptocurrency wallet. This means that with equity offerings, investors have to provide personal data for AML and KYC requirements.
Business tokenization is very effective in terms of digitizing processes, raising funds and attracting new investors. This method of digitization is growing in popularity and tokenization is being recognized more and more as an equivalent to a real asset.
June 8, 2022