What is asset tokenization?

| November 17, 2023

Share this article

Asset Tokenization

Blockchain technology is poised to revolutionize the financial sector by facilitating the division of assets into smaller units and ensuring digital ownership. This advancement promotes the democratization of investment opportunities in traditionally illiquid assets, paving the way for fairer and more efficient markets. Within the last few years, asset tokenization in the blockchain ecosystem has emerged as a widely adopted practice to secure asset ownership, safeguard data, and enable participation in cryptocurrency investments. Although many individuals grasp the notion of a crypto token, they may need help comprehending the concept of tokenization and its practical applications in the world of finance.

Key Takeaways:

  • Asset tokenization helps fractionalize assets and represents ownership rights in the form of digital tokens on a public blockchain network.
  • Asset tokenization blockchain platforms are designed to transform the way asset-holders exchange information and value.

What is asset tokenization? Explained!

Asset tokenization is a process in which the ownership rights of an asset are transformed into digital tokens and securely stored on a blockchain. These tokens function as digital certificates representing various valuable physical, digital, fungible, or non-fungible objects. By being recorded on a tokenization blockchain, asset owners can retain custody of their assets, especially if held in their secure cryptocurrency wallet. To understand the mechanics and significance of asset tokenization, it’s essential to revisit the fundamentals of Web3 technology. Smart contracts are digital cryptographic agreements created using computer code. These contracts are stored on a highly secure blockchain database or ledger. By developing a smart contract on a blockchain, developers can issue tokens. Consecutively, they can associate positive balances with a series of the wallet or smart contract addresses. Additionally, these smart contracts include functions that empower crypto holders controlling those addresses to modify the balances by adding or subtracting from them.

Examples of different types of tokenization in the blockchain:

Physical asset tokenization:

A wide range of real-world assets can be tokenized on tokenization blockchain platforms. Fiat currency, stocks, government bonds, credit, commodities, carbon credits, intellectual property, and fine art are among them. Similar to gold bullion warrants and property deeds, these tokens represent ownership and entitle the holder to a stake in the corresponding real-world asset. However, the notable distinction is that physical asset tokenization in blockchain allows for storing, trading, and utilizing assets as collateral across various tokenization blockchain networks. 

Virtual asset tokenization:

In the context of Web3, the tokenization of assets that solely exist in a digital format on a blockchain network holds significant importance. This is particularly relevant for scenarios involving DAO governance rights and cross-chain assets. By tokenizing these purely digital assets on a blockchain, owners can possess the asset directly rather than merely holding a claim on the underlying asset. This digital nature of tokenized assets facilitates seamless ownership and enhances the overall functionality of Web3 applications.

In-game asset tokenization: 

In digital asset tokenization, a specific category exists known as in-game assets, commonly found in GameFi projects and metaverses. These in-game assets encompass items like skins, weapons, or in-game currencies, which can be effectively represented as tokenized assets. By tokenizing these assets, their ownership and transfer can be securely facilitated within the gaming ecosystem, enabling users to engage with and trade these valuable virtual possessions.

How does asset tokenization work?

Tokens serve as substitutes for real assets or information. Their creation can be accomplished through various techniques, such as reversible cryptographic functions, nonreversible functions, or randomly generated numbers. These tokens are linked to transaction details, which are stored on a decentralized ledger known as the blockchain. This linkage ensures the secure ownership of an asset, as transactions can be verified using data from the blockchain. In cases where asset tokenization is employed to safeguard payment information, sellers utilize a payment gateway that typically automates the token creation process while storing the original data separately. The token itself is transmitted to a payment processor, which can be traced back to the original information stored on the blockchain or in the seller’s token vault.

What can be tokenized?

Tokenization blockchain opens limitless possibilities by enabling fractional ownership and proof-of-ownership. It extends beyond conventional assets like venture capital funds, bonds, commodities, and real estate properties to encompass more unique and unconventional assets such as sports teams, racehorses, artwork, and even celebrities. Companies across the globe are leveraging blockchain technology to tokenize a wide array of assets. While the range of tokenized assets is vast, they can generally be categorized into four main groups: 

Personal and business assets An asset refers to any valuable item that holds the potential to be converted into cash. Assets can be classified into two main categories: personal and business. Personal assets encompass items such as cash and property that individuals own. On the other hand, business assets comprise the assets recorded on a company’s balance sheet. 

Equity and shares Equity, represented by shares, can undergo tokenization, wherein the assets are preserved as digital security tokens stored securely in online wallets. Typically, investors have the opportunity to purchase these shares through stock exchanges, facilitating the trading of tokenized equity. 

Investment Funds Investment funds can be tokenized, allowing investors to hold tokens representing their ownership or share in the fund. Through the issuance of tokens, each investor is provided with a representation of their specific portion or stake in the fund. These tokens serve as a digital representation of the investor’s share in the investment fund. 

Goods and Services As a means to raise funds or carry out their operations, businesses have the option to offer goods or services. Investors can utilize tokens to acquire these goods or services directly from the business or supplier. By utilizing tokens, investors can participate in transactions and exchange them for the goods or services the business offers.

Upsides of asset tokenization:

Improved Liquidity: Tokenizing assets provides asset owners with enhanced liquidity. Whether an individual possesses illiquid assets that are challenging to sell or intangible assets such as digital collectibles, tokenization in blockchain empowers organizations to obtain greater liquidity from their assets. Furthermore, augmented liquidity proves advantageous even for substantial conventional assets like real estate properties. This approach allows owners to retain ownership of the entire property while still accessing a portion of its value. 

Lower Asset Management Costs: Asset management can often incur significant costs, particularly when it comes to selling ownership shares. However, through tokenization, these expenses can be reduced or even eliminated. Leveraging tokenization diminishes the necessity for lawyers and other intermediaries, thereby lowering standard asset management expenses. 

Better Prices: Tokenization is a valuable solution for organizations dealing with illiquid assets that are challenging to sell. When an asset lacks an established or limited market, owners often have to lower the asset’s price significantly to facilitate a sale. Through tokenization, owners can partially sell their ownership stake in the asset. This process effectively eliminates the need for an illiquidity discount, allowing them to obtain a fair and reasonable price for their asset. By breaking down ownership into fractions represented by tokens, tokenization blockchain opens new possibilities for maximizing value and overcoming the limitations posed by illiquidity.

Various types of tokenization in blockchain

Fungible tokenization: Fungible tokens are commonly used in blockchain networks and possess uniform values, making them interchangeable with one another. They can be likened to swapping one dollar bill for another, as their identical nature allows for seamless substitution. 

Non-fungible tokenization: Non-fungible tokenization is a less prevalent type of blockchain token without a predetermined value. Instead, these tokens symbolize ownership of specific assets like digital art or real estate, wherein the inherent value of the underlying asset determines the token’s worth. 

Governance tokenization: Governance tokens represent voting rights, enabling users to actively participate in voting and engage in collaborative efforts within a blockchain system. 

Utility tokenization: Utility tokens serve the purpose of granting access to specific products and services within a particular blockchain ecosystem. They enable users to perform various actions, such as paying transaction fees or operating decentralized market systems, facilitating seamless engagement with the platform’s functionalities.

Conclusion

Tokenization blockchain has played a significant role in safeguarding business data over the years, and now it is expanding its reach to facilitate the global trading of asset ownership. However, several obstacles still impede asset tokenization from realizing its full potential as an investment mechanism. The landscape of technology and investment regulations varies across countries, creating complexities in establishing seamless transactions. Governments are gradually adapting their regulations, and the increasing awareness and understanding of tokens contributes to the growth of this technology, gradually gaining recognition as a powerful financial tool. Individuals facing barriers in traditional markets and seeking investment opportunities can explore novel avenues that leverage tokenization to digitize asset value. For instance, investors with limited capital might consider venturing into cryptocurrency or tokenized real estate as potential options. Regardless of the investment path chosen, a thorough evaluation of any investment opportunity is paramount before making any commitments or decisions. Investors should exercise due diligence and scrutiny to ensure informed choices in their investment endeavors.

Related Articles:

More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 

Staking-as-a-Service

Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture