In accomplishing our overarching vision of achieving democratisation and transparency within the financial industry space, we at the IndoWealth Group believe that information is our strongest tool in our current climate mired with uncertainty and conflicting news and information.
As such, we have set out to publish an informational miniseries over the next several weeks to share with you our insights and thoughts, which we hope would be helpful in enabling new and seasoned investors alike to answer some of the most pertinent considerations when investing, namely:
1. "Why" invest in high quality RWA asset tokens, by providing an overview of the tokenisation process, its strengths, and potential risks, on why investments in the right tokenised assets can help accomplish returns objectives or serve as part of building a stronger investment portfolio.
2. "What" to invest in, by providing a brief overview of the various asset classes and risk-return profiles associated with investments for comparative study; and
3. "When" to invest, by providing a brief overview of the current investment climate and trends when considering when to invest.
Concluding thoughts and considerations, to bring all the considerations together.
Asset ownership has come a long way: from bearer shares, which were representative financial assets at one point in time since it gave way to registered physical share certificates to today's digital share registers; asset digitisation via blockchain technology, therefore, should come as no surprise as the next logical step, given its versatility, transparency and security in providing a secure, immutable record of ownership.
Part 1 of this series intends to provide a quick summary of the tokenisation process and how it can benefit us as investors.
Tokenisation is the process of representing assets as digital tokens, and can represent a fraction of the underlying asset, which can then be traded.
1. Valuation: The first step in tokenisation is identifying (e.g. real estate, art, etc.) and valuing the asset to be tokenised. Accurate valuation is crucial as it determines the ultimate value of the tokens to be issued.
2. Legal Structuring: Tokenisation involves legal considerations to ensure that the digital representation of the asset complies with existing regulations such as the creation of a legal entity that holds the asset and issues tokens representing ownership rights.
3. Smart Contracts: Smart contracts are self-executing contracts with the terms of the agreement directly written into code, and used to automate and enforce the transfer of tokens and associated rights, ensuring "trustless[1]" and efficient transactions.
4. Token Issuance: Once the asset is valued and legal structures are in place, tokens are issued on a blockchain, where each token represents a share in the asset, and ownership can be transferred seamlessly between parties.
5. Trading: Tokenised assets may be traded on digital exchanges, which provide liquidity and market access to a broader range of investors.
1. Fractional Ownership: Investors can own a portion of high-value assets, enabling broader participation via lower buy-in points, which also help facilitate investment portfolio building.
2. Increased Liquidity: Illiquid assets (e.g. real estate) become easier to buy and sell when tokenised, where assets are able to be divided and sold as smaller fractions.
3. Cost Efficiency: Tokenisation cuts costs by reducing reliance on intermediaries due to the ability of automation via smart contracts, where traditionally the process may have been performed by brokers and lawyers, lowering fees and increasing efficiency.
4. Global Access: Tokenised assets can be traded worldwide, reaching a wider pool of investors.
5. Transparency and Security: Blockchain technology provides a transparent and immutable ledger of all transactions, reducing the risk of fraud and enhancing security.
1. Regulatory Compliance: Navigating the regulatory landscape is one of the most significant challenges in asset tokenisation due to different jurisdictions having varying rules and regulations regarding the issuance and trading of digital tokens.
2. Technology Risks: Cybersecurity threats, smart contract vulnerabilities, and technological failures can pose significant risks to tokenised assets.
3. Market Adoption: Educating investors is crucial for widespread acceptance.
4. Accurate Valuation: Accurate valuation of assets is critical for tokenisation, given inaccurate valuations can lead to disputes and undermine investor confidence.
Tokenisation of real-world assets, while relatively new, has seen some traction, with tokenisation already happening in the fields of real estate[2], art[3], commodities (e.g. gold[4]), and even US Treasury Bills[5]. As technology continues to evolve and become more prevalent in our day-to-day lives, the adoption of tokenised assets will continue to grow, potentially supplanting the more traditional routes of ownership, especially within the context of our increasingly connected and digital future.
This post constitutes the author's personal opinions, and should not be taken as a recommendation or advice for any kind of investment or securities. Kindly consult your financial, legal, tax, or any such other advisors for your specific needs accordingly.
