Publication
01 Mar 2024 ·
United Kingdom
Tokenisation
6 min read
Tokenisation can be applied not only to financial instruments such as shares and bonds but also to tangible assets such as real estate or artworks, revenue streams such as loans or trade receivables, and even to IP such as copyrights. This makes it central to the digital transformation of business.
It can be used to create unique digital artefacts ranging from concert tickets and souvenirs to in-game assets for video gamers.
Tokens can be used for the secure storage of data, to represent online voting rights, and as ‘utility tokens’ that provide access to products and services in a network.
In October 2023, the UK regulator, the Financial Conduct Authority (FCA) signed up to Project Guardian, an international feasibility test of asset tokenisation and DeFi. This marked a significant shift in the FCA’s position towards the use cases of blockchain and tokenisation (even if its stance towards crypto remains unchanged, for now).
For the business world as a whole, the distributed ledger technology (DLT) that enables the creation of a token on the blockchain is a genuine game-changer – even if, like most other technologies, it can be used well or badly.
Everybody's Alice
Charles Kerrigan, CMS:
Tokenisation will affect every part of the economy. That’s the point. Everyone’s going down the rabbit hole. Everybody’s Alice in Wonderland.
What is tokenisation?
Put very simply, tokenisation is the creation of blockchain code with information about underlying assets, which may be either real-world or digital. A wide variety of information may be securely stored and updated in a token, including data about ownership and transaction history.
"...it's simply a new toolkit to take markets online. However, because of tokenisation, a digital cartoon and a bond issued by a central bank are now members of the same asset class. How can that be?"
Tokenisation and financial assets
Sector example: Breaking up the building
Real estate is traditionally a ‘lumpy’ asset. A property is not usually held by a large number of investors, other than through e.g. shares in a listed real estate fund. But the possibility of tokenising the ownership of a significant asset such as an office building or a shopping centre through a corporate vehicle could change this situation forever.
Broadening the pool of investors
Even the smallest investors would be able to buy stakes in particular properties. With a few hundred pounds, a small investor could buy 0.001% of their local mall. Tenants might be able to – or might sometimes be required to – take a stake in their property. In the future there may also be the possibility to fractionalise the rights to revenue streams derived, for example, from rent.
Increasing efficiency
The tokenisation of investment properties can reduce management, governance and compliance costs and increase the flow of information about the asset.
Reinvigorating residential property
People may be able to buy part of their home, with another party or parties providing the balance of the equity. There would obviously be important issues to resolve around consumer protection and resilience – nobody wants a lot of home loans going wrong. But there would also be real benefits for all parties.
Development and sustainability
Tokenisation is now extensively used in some developing countries where a significant number of people don’t have access to traditional banking or where there is significant fiat currency volatility. Cryptocurrencies accessible via a mobile phone can be useful not only for day-to-day transactions but also for saving and sending remittances. And in some places ‘impact tokens’ are used to promote the UN’s sustainable development goals – often to incentivise particular behaviours such as recycling, or capturing and sharing environmental data.
NFTs
The substantial decline in demand for many NFTs has been compared by many to the seventeenth century Dutch tulip craze and crash.
But a better comparison might be the UK railway mania of the 1840s, in which a genuinely important new technology – railways – attracted wildly excessive levels of investment, encouraging the proliferation of many financially unsound schemes alongside more robust and realistic projects.
NFTs have certainly been on a wild value ride. But even though some are now worthless – simply because no-one wishes to buy them – there remains a market in others. There are many different types of NFT, with a wide variety of functions, and there continues to be strong demand for many lower value NFTs in games or loyalty programmes, in ticketing or access schemes, or as metaverse goods.
Although created on the blockchain, NFTs are often treated as a separate class of digital assets from the fungible security tokens discussed above. As HM Treasury observed when it brought most other cryptoassets into the scope of the UK’s financial promotion regime, NFTs “have so far tended to be used in a way more akin to digital collectibles than financial investments.”
IP rights
Many of the NFTs that have attracted the most public attention – like Bored Apes, or the ‘Trump digital trading cards’ issued by Donald Trump – are tokenisations of digital art.
It is important to understand that someone buying an NFT that tokenises a digital artwork is not directly buying the artwork. They are most likely to get a link to the website which hosts it.
The purchaser of an NFT that tokenises a digital artwork will not usually get the IP rights associated with the artwork. At most, they will probably receive something that amounts to a perpetual licence to use it for non-commercial purposes.
This can cause problems. People are very used to being able to copy and share things online. The idea that they have bought a digital item that they are not allowed to distribute or reproduce is often alien to them. Technical restrictions on duplication are sometimes incorporated into NFTs, but in practice it is often easy to duplicate without permission the art that has been tokenised.
In some instances, copyright holders may find that unauthorised NFTs of the work in which they hold the rights are being created. NFTs may also infringe the trade marks or other intellectual property of a business.
It is possible to use software to monitor marketplaces to identify NFTs that may infringe your rights. If you find such NFTs exist, you have several options on how to proceed. For more information, see Brand.
