Tokenisation

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.

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. 

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.

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.” 

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.