Opinion: Although tokenization has not become a mainstream investment tool, it can bring economic benefits

Authors: SU YEN CHIA, KULLARAT, Forkast; Compilers: Songxue, Jinse Finance

Tokenization, the process of digitally representing assets, rights, or items of value through smart contracts on a blockchain, has garnered a lot of attention in recent years.

By dividing assets into smaller tradable units, tokenization has the potential to revolutionize financing and capital models across 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 been at the forefront of the tokenization trend. Jurisdictions such as Thailand, Hong Kong, Singapore, and Japan have been actively implementing regulatory frameworks to facilitate the development and adoption of tokenization. While the U.S. and other countries continue to grapple with the legal vocabulary and issues surrounding tokenized assets, Asian countries are providing a breeding ground for tokenized innovation.

Tokenization as Growth Driver

Although tokenization is far from becoming a mainstream investment tool, it can bring significant economic benefits.

In addition to providing additional liquidity to assets, asset tokenization improves operational processes, compresses costs, and potentially eliminates middlemen. Blockchain technology can lead to greater operational efficiencies compared to the current operating setup of the traditional financial system. Therefore, through asset tokenization, these real real economic assets are brought into the blockchain, which can speed up settlement time, improve market efficiency and reduce counterparty risk.

Second, fragmentation is arguably one of the biggest changes that tokenization brings to the rules of the game. The ability to divide previously indivisible assets allows users to more easily access digital assets, since users no longer need to purchase entire asset units to exercise ownership. This means retail investors can participate in investments that were previously only available to institutional investors, thereby democratizing investment opportunities.

Asian jurisdictions are already seeing 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, powered by a hotel in the city of Sapporo. What is particularly innovative about this token offering is that, in addition to digital securities, security owners receive a utility token that can only be exchanged for souvenirs on-site at the hotel. Thailand has also witnessed notable tokenization projects in various sectors such as real estate, entertainment, and media.

Asia leads the way in tokenization regulation

Tokenization may have real-world benefits, but requires a clear regulatory framework, with legal terms properly defined. Tokenization has certainly blurred the lines between traditional and emerging digital financial systems, making it sometimes difficult for regulators to navigate this new world.

While countries like the US are grappling with how to regulate digital assets, Asia is making significant progress in defining tokenization and providing the necessary regulatory framework for innovation to flourish.

Thailand, for example, has taken significant steps to regulate digital assets and support the development of tokenization. The Digital Asset Business Emergency Decree, introduced in 2018, provides the regulatory framework for offering investment and utility tokens and operating digital asset businesses in the country.

Japan has implemented clear guidelines on how digital tokens will be regulated under amendments to the Funds Settlement Act and the Financial Instruments and Exchange Act. As such, security tokens are considered “interests in collective investment schemes represented by tokens”. There are clear boundaries that can be adopted when promoting security tokens and the types of assets distributed.

In Hong Kong, recent guidance allows tokens meeting certain criteria to qualify for retail investors. With the introduction of a new regulatory framework for virtual asset trading platforms, Hong Kong has taken proactive steps to try to make tokenizing and distributing assets less complicated and laborious for interested participants, which has been welcomed by the digital asset industry .

By clarifying the state of tokenized assets, these Asian markets are laying the groundwork for further adoption of tokenization, which will undoubtedly boost the digital asset industry and boost the economy as well.

Lack of standardization hinders tokenization adoption

These Asian jurisdictions provide shining examples of how we can achieve regulatory transparency.

While most other countries only regulate certain types of digital tokens under existing laws (such as securities laws and payment laws), some Asian countries are introducing specific new rules to govern tokenization or transactions through digital tokens. fundraiser.

Differences in regulatory frameworks and treatment across countries make it difficult for tokenized assets to gain traction globally. Many tokenization projects are global or multi-jurisdictional in nature, which means that a certain level of standardization – especially in anti-money laundering and counter-terrorist financing (AML/CFT) law, accounting and taxation – is essential to facilitate cross-border Transactions and ultimately driving adoption are critical.

Clearly, tokenized assets are in dire need of guidance from international regulators, and a clear classification is crucial for legal purposes. Providing guidance on token classification and identifying the implications of different areas of law is critical for market participants to understand how their projects will be regulated and avoid potential enforcement action.

What does the future look like

Tokenization has triggered a paradigm change in traditional banking and opened up new opportunities for the securitization of non-bank and real-world assets. Real estate, environmental sustainability, and agriculture are just a few industries that could benefit from tokenization as legal frameworks improve and provide clearer norms.

Tokenization lays the foundation for a fairer and more efficient financial ecosystem by facilitating alternative financing, encouraging innovation and improving liquidity. Countries in the Asia-Pacific region are actively strengthening their legislative frameworks to enable this game-changing technology, making them important players in the continued development of financial markets.

While the rest of the world is now starting to catch up in this space, it is clear that Asian markets are ahead of the curve in understanding how proper regulation can yield real-world benefits from tokenization. With further proper regulation and standardization in global markets, we can stimulate the adoption of tokenization and increase the chances of unlocking the full potential of innovative technologies to play a positive role in the financial system.