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Key Differences: Asset Tokenization vs. Securitization

Asset Tokenization vs. Securitization

With the rise of blockchain and cryptocurrencies, a new landscape of possibilities is emerging within the finance sector, such as asset tokenization and securitization. The technology, known as "asset tokenization," enables crypto tokens on a blockchain to represent various real-world assets.

But what exactly is asset tokenization, and how does it differ from more traditional financial concepts like securitization? Let's take a deeper look at our comprehensive blog!

While tokenization and securitization both involve representing assets digitally, they achieve this goal through distinct technical approaches.

Securitization creates securities (like bonds) backed by asset cash flows. In contrast, tokenization uses crypto tokens on a distributed ledger to represent direct fractional ownership of an asset.

Think of it like two ways to slice a pie: securitization slices it into bonds, while tokenization divides it into tokenized slices, representing pieces of the actual pie.

Securitization deals with the economic value of assets, while tokenizationdeals with actual technical ownership on a blockchain. This difference is key to understanding each technique's varying applications.

What is securitization, in simple words?

Put simply, securitization is the process of taking an illiquid asset (like a loan or piece of real estate) and pooling it with other assets. Issuers then issue securities that entitle their holders to a portion of the cash flows from those assets.

Grouping many smaller assets together creates larger securities, appealing to institutional investors and unleashing capital to fund more illiquid assets. This unleashes capital to fund more such illiquid assets.

Mortgage-backed securities provide an example that explains securitization by demonstrating how home loans are bundled into bonds and sold to investors to generate capital for further lending.

What is securitization, for example?

A common example is mortgage-backed securities (MBS). Banks bundle thousands of home loans together and sell security interests in those cash flows to investors.

This replenishes the bank's funds to issue new loans while providing returns for investors through regular payments. By distributing risk across many homeowners, MBS lowers risk compared to any single mortgage.

What is asset tokenization?

Asset tokenization is the process of issuing crypto tokens on a blockchain that represent direct ownership of physical assets like real estate, artwork, or commodities. You can check out “NFT” and “real estate tokenization” for more details.

Unlike securitization, which deals with asset cash flows, tokenization allows fractionalizing the assets themselves into digital tokens, empowering increased liquidity and access.

Each token represents a divisible piece of the underlying asset, with transaction details, ownership records, and more stored on-chain for transparency. This process also enables tokenized payments.

The token's design links its value directly to the real-world asset, such as through mechanisms allowing token holders to exchange their tokens to claim ownership.

NFT asset tokenization

What are examples of tokenized assets?

Examples of tokenized real-world assets include:

Real estate

Companies like RealT are tokenizing ownership in commercial and residential properties.

Fine art

The ArtToken platform tokens high-value paintings and sculptures.

Equity shares

Firms like tZero allow trading of tokenized stock.

Commodities

Projects in agriculture have tokenized soybeans, grains, and other crops.

Corporate bonds

Obligate utilizes tokens and tokenization for debt securities on Ethereum.

Another prime example of tokenized securities in action is the EURK stablecoin. Rather than relying on fractional reserves, the EURK system provides full transparency into reserve balances through continual attestations and proof of reserves as a euro stablecoin.

The EURK stablecoin model is paving the way for more institutions to offer tokenized financial instruments to global audiences. The full potential of asset tokenization is still emerging, but it provides exciting opportunities to drive efficiency in various new and existing markets.

What is tokenization in securities?

Tokenizing securities directly is also possible. Called "security tokens," this involves issuing crypto tokens on a blockchain that represent traditional securities like stocks, bonds, and shares in investment funds or companies.

Security tokens automate dividend payments, ownership records, and more using smart contracts for efficiency. Traders can freely trade them peer-to-peer like any other digital asset or through traditional exchanges, unleashing 24/7 global liquidity otherwise limited by local market hours.

What is tokenization of assets and securities?

Asset and security tokenization refers to the issue of blockchain-based crypto tokens that represent ownership in real-world assets such as real estate, artworks, collectibles, or securities.

It provides a way to digitize asset ownership and enable fractional ownership with a high degree of liquidity, transparency, and programmability.

What is an example of tokenized security?

One example is Blockchain Capital's tokenized BCAP fund. Tokenizing the investment fund's shares on Ethereum enables anyone to purchase a single share worth fractions of a penny.

This lowered the barrier of entry compared to the typical $100,000 minimum for most private equity funds. Individual investors worldwide can now benefit from exposure to early-stage blockchain companies.

securitization

Is tokenization the same as securitization?

No, while both involve digitally representing assets, tokenization and securitization differ in important technical ways:

  • Securitization deals with asset cash flows by pooling them into new securities. Tokenization represents direct fractional ownership of assets on a blockchain through crypto tokens.
  • Tokens allow for global 24/7 on-chain crypto trading of pieces of assets, granting ownership of the underlying asset itself. Securitization securities provide ownership over a share of pooled cash flows from many assets.
  • Tokenization allows for programmable assets with rules enforced by smart contracts. Securitization relies more on legacy institutions and regulations to administer assets.
  • Securitization focuses on trading economic value derived from assets, while tokenization implements direct technological ownership of assets using blockchain.
  • While both provide access to new markets, tokenization fundamentally transforms the way assets are defined and transferred.

What is the difference between tokenized securities and security tokens?

While often used interchangeably, there is a key distinction between tokenized securities and security tokens. Equities, bonds, or funds represented on a blockchain are still regulated as traditional securities in the case of tokenized securities. Ownership rights follow the referenced off-chain asset.

Security tokens, on the other hand, utilize blockchain to issue completely digital, freely-tradable assets governed by on-chain rules rather than off-chain law. They are essentially native blockchain securities that don't depend on an external asset.

Tokenized securities map real securities onto the blockchain, while security tokens are purpose-built blockchain assets governed by on-chain programs instead of legacy regulations.

Both have potential, but security tokens introduce entirely new financial instruments. For a more comprehensive understanding, you can check out “On-chain vs. off-chain transactions.”.

The bottom line

Blockchain technology enables the fractionalization and liquidity of any real-world asset through tokenization. This new paradigm has the potential to transform how value is created and exchanged globally by increasing access, transparency, and efficiency in various industries.

It also generates exciting synergies between traditional finance and revolutionary crypto-inclusive DeFi applications. With more enterprise adoption and the development of standards, the coming years will see tokenization unlock tremendous potential.

Leading the push is Cryptobunq, a company that makes crypto inclusive for all. Cryptobunq is a crypto-aware digital bank offering various services like custody and wallet, checkout and invoicing, batch payments, exchange APIs, tokenization solutions, and more.

By using Cryptobunq's expert and secure crypto services, companies can easily integrate with crypto and leverage its opportunities with the power of blockchain technology.

With further innovation from companies like Cryptobunq, the advantages of crypto will become clear for all to see. If you want to explore expert solutions, invest in tokenization, or invest in blockchain, CBQ is here for you. Contact us today and grow your business. Don’t forget to check out our case studies too!

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