The financial world is witnessing a monumental shift as tokenization emerges as a game-changer in the industry. For the uninitiated, tokenization involves converting the rights to a tangible or intangible asset into a digital token. These tokens represent fractional ownership of the underlying asset, enabling multiple investors to hold stakes in a single asset. By utilising Blockchain technology, tokenization ensures secure, transparent, and efficient tracking of asset ownership. This technology is poised to overhaul traditional finance by enhancing accessibility, transparency, and efficiency. Citi, the global banking giant, published a paper in March 2023 projecting an 80-fold increase in tokenization of real-world assets (worth up to $4tn) by 2030. Meanwhile BlackRock’s CEO, Larry Fink, extolled the significance of tokenization in his annual letter to investors in March 20232, stating that it drives efficiencies in capital markets, streamlines value chains, and optimises cost and access for investors.
Web3 companies, which operate using Blockchain and leverage Decentralised technology to deliver various services, stand to benefit immensely from tokenization. Conventional funding sources are frequently beyond their reach, leaving them scrambling for financing. tokenization, however, enables them to create digital tokens representing business ownership, opening up new avenues for funding, despite ongoing debates about whether these tokens qualify as securities.
A prime example of tokenization’s potential, beyond the typical utility tokens that most Web3 companies’ issue, lies in the realm of Bitcoin mining. Bitcoin miners verify transactions on the Bitcoin network and add them to the Blockchain, earning rewards in the form of newly created Bitcoin and transaction fees. However, mining income is notoriously volatile, as it hinges on both the price of Bitcoin and the mining difficulty. For example, by the end of the 2022, Bitcoin mining profitability dropped by a staggering 70%.
Tokenizing future mining revenues can create a new asset class, allowing miners to hedge their future cashflows whilst allowing investors to gain exposure to mining income streams. These tokens enable miners to exchange a portion of their future income for immediate funding—a boon for small-scale miners lacking the capital to invest in costly mining equipment and for investors seeking secure, direct exposure to Bitcoin mining. This could be extended to traditional mining companies that may want to Tokenize royalties based on their future mining revenues. Tokenization allows holders of these revenue-backed tokens to trade them on exchanges and this is where the real power lies: unlocking liquidity.
Tokenization also paves the way for miners to borrow against their future mining revenues. By using tokens as collateral, miners can secure loans from decentralised lending platforms like Aave, Compound, and MakerDAO, accessing much-needed capital without selling mining equipment or Bitcoin holdings. This concept parallels the existing model in the Software-as-a-Service (SaaS) industry, where platforms such as Pipe4, allow software companies to borrow against future recurring revenues in a dilution-free manner, empowering SaaS businesses to borrow against or sell future contract-based revenue for dilution-free capital today.
The applications of tokenization extend far beyond financing based on future revenue streams. Tokenization can fractionalise ownership in real-world assets such as real estate, art, or commodities, enabling investors to buy and sell smaller portions of these assets and making them more accessible to a diverse range of investors. For instance, Crypto bank Sygnum transferred legal ownership of Picasso’s 1964 Fillette au Beret onto the Blockchain and sold 4,000 tokens representing ownership in the painting to investors.
As the funding market tightens, it is increasingly plausible that middlemen like banks and underwriters will be bypassed in capital raising processes. While banks are integral to capital formation, major firms like Siemens have already begun issuing bonds on the Blockchain, circumventing traditional banks. The primary advantage of Blockchain-based debt issuance lies in eliminating costly intermediaries, reducing expenses, and lowering borrowers’ cost of capital. Obligate, a trailblazing Blockchain-based debt protocol, connects borrowers and lenders using smart contracts, with investors receiving tokens directly in their Crypto wallets representing the bond, along with the right to payment at maturity or collateral in case of borrower default.
Leveraging our extensive expertise gained from six years of executing over 100 structured Private Investment in Public Equity (PIPE) transactions, ABO Digital, our innovative digital asset investment firm, is broadening financing opportunities for Cryptocurrency projects. In partnership with AllianceBlock8, we aim to deliver tokenized structured products based on traditional financial instruments and support Cryptocurrency projects in raising capital by tokenizing structured debt or other structured products using their native tokens. We recognise the tremendous potential in unlocking liquidity within private assets, evidenced by the entry of private equity giants like KKR into this domain. Through this groundbreaking technology, we empower Cryptocurrency projects to craft bespoke financing deals, expanding investment options for global investors and fostering greater access to a diverse array of opportunities.
In summary, tokenization is set to redefine financing options for companies as Blockchain technology gains traction. The financial landscape will be reshaped as ownership is fractionalised and capital raising processes streamlined. Early adopters stand to capitalise on a wealth of opportunities, and as traditional finance evolves, the integration of Blockchain and tokenization will become crucial for companies seeking to excel in a rapidly changing world. This heralds an exciting era of growth, innovation, and financial transformation for Crypto and Blockchain enthusiasts. Don’t be left behind—join the growing ranks of Crypto and Blockchain enthusiasts reshaping the financial landscape. Act now, and invest in a future defined by innovation, growth, and financial transformation.