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Asset Tokenization: A Short Overview

Asset Tokenization: A Short Overview

By now, you may have heard about digital artists using Non-Fungible Tokens, or NFTs, to sell ownership interests in their online art. Yet, tokenization is not just limited to disrupting the art world. Private Companies are buzzing with the opportunity to assign both intangible and tangible asset ownership interests to digital tokens. This may create liquidity in normally illiquid assets by allowing owners to sell tokens on secondary markets. So, what exactly is asset tokenization, and can companies use this new trend to create liquidity for their shareholders —in a similar vein to what NFTs have done for the digital art world?

What is Asset Tokenization?

Tokenization is the process of assigning a secure digital token or coin to an asset. This technology adds a layer of immutable security to asset ownership because it digitally encrypts the asset token with data that identifies the owner, the potential chain of ownership, and the description of the asset. Only a holder of a decryption key can unlock the asset for potential transfer of ownership.

For example, imagine that you own an illiquid asset, such as a piece of heavy industrial equipment, equity in a company, or a piece of real estate. Generally, there is not a straightforward way to enhance liquidity from that asset until you sell it. When it comes to private equity assets, the sales opportunities can be even more limited as various regulations impact the sale of non-public equity. Enter asset tokenization, the creation of digitally-secured tokens to represent shares of ownership in an illiquid asset, as the sum of all of the shares will them equal the total value of the asset.

What Can You Do with Tokenized Assets?

Owners may sell tokenized assets on digital trading platforms or within the secondary market; thus, turning a normally illiquid asset into one that can be more freely bought and sold. Tokenization may create new investment opportunities and may potentially create an entry point into the market for more investors. With asset tokenization, an investor may choose to buy a smaller percentage of a real-world asset through its purchase, meaning there could be a lower minimum investment requirement. 

Another benefit to tokenization lies within the digital token technology, itself, as there could be enhanced security for both the buyer and the owner. A blockchain token is engineered to securely store ownership information, such as the token-holders rights and responsibilities, so potential buyers may have greater transparency into the chain of title for the asset, as well as what their inherited rights would be after purchase. This greater transparency may lend itself to faster transactions and less costs associated with those transactions due to the diminished requirement to hire intermediaries to examine the token’s veracity and finalize the sales contract. Further, many token transactions may contain within them an end-to-end encryption process through embedded smart contracts, risk-free settlement of the purchase, etc.

What Assets May Be Tokenized?

Companies and individuals may use asset tokenization to create liquidity in virtually any asset where there is an ownership interest. This includes the tokenization of equity assets. Companies may issue equity compensation shares in the form of digital tokens, giving their employees the opportunity to realize liquidity upon vesting. Further, tokenization may give businesses flexibility as there are often fewer operational hurdles to issue equity in the form of digital tokens.

Equity tokenization may further creates a single source of truth. Instead of housing all shareholder information in a spreadsheet, for example, holders of the tokenized asset may be all kept within a single, shared, immutable ledger that reflects all of the ownership interests in a specific token offering. This may give both the business and token owners transparency and security to foster trading on the secondary market.

What Could Asset Tokenization Mean for the Future?

Tokenization of real-world assets, like equity, may represent a huge disruption in the way private markets operate. Tokens may offer greater transparency, security, and efficiency when compared to more traditional liquidity events. In addition, transacting through tokens may open up the full potential of an asset, potentially eliminating many of the regulatory processes associated with traditional value chains.

While the potential benefits are clear, it is reasonable for a corporation to be slightly wary of only using tokenization to increase liquidity. Although there is strong potential for continued tokenization, this approach to liquidity may be one of the most uncertain. It may be a good idea to talk with your company’s legal and finance teams to discuss what options are best for you. New technologies often come with new risks, and a cost benefit analysis of decoupling assets to cover a company funding through a new tokenization initiative may be too high.

The good news is, if tokenization sounds too risky, there are other ways to get liquidity for participant shareholders prior to an IPO. Well-executed tender offers may also give your shareholders oft-needed influxes of cash.

You may learn more about tender offers by visiting here, or contact the Shareworks’ tender offer team to discuss how you can leverage Shareworks platform and services to run a tender offer event for your company. 

This material has been prepared for informational purposes only. It is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.

Information contained herein has been obtained from sources considered to be reliable. Morgan Stanley Smith Barney LLC does not guarantee their accuracy or completeness.

Morgan Stanley at Work, Shareworks, Morgan Stanley Smith Barney LLC, and its affiliates and employees do not provide legal or tax advice. You should always consult with and rely on your own legal and/or tax advisors.
Morgan Stanley at Work and Shareworks services are provided by Morgan Stanley Smith Barney LLC, member SIPC, and its affiliates, all wholly owned subsidiaries of Morgan Stanley.
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