Tokenisation
An introduction to Tokenisation , its benefits and how it works
Last updated
An introduction to Tokenisation , its benefits and how it works
Last updated
Securities can be tokenised which creates a digital representation of that security on a blockchain. This has many advantages, which we will discuss today.
Security tokens are digital representations of securities on a blockchain. As with traditional securities, security tokens are subject to regulation and need to conform to strict compliance standards
Scallop has its own blockchain, and as we will learn on these pages, is ideally suited to being a custodian and marketplace for tokenised securities. An aim could be to provide a primary issuance platform that supports ongoing corporate management of a real estate asset or REIT, as well as trading those assets via our securities marketplace and providing a secondary marketplace for tokens.
Increased efficiency - Removed middle man, leads to reduced settlement times and cost savings
Reduced Cost - Blockchain reduces bond issuance costs by up to 90% and fundraising costs by up to 40% compared to traditional finance.
Better Compliance - Compliance rules are programmed into each token
Improved Liquidity - Opens up real estate and private equity to the global investor pool, assets that were previously illiquid or non-fractionable.
Increased Transparency - Everything is documented on the blockchain and viewable by everyone. Reduces disputes around record keeping.
Facilitated Innovation - Smart contracts and shared ledger technology open the doors for previously unimaginable innovations. Fractional real estate, dynamic ETFS and many more.
Tokenisation further enables splitting substantial, non-liquid assets into smaller and more liquid segments.
How can security tokens actually be created, distributed, and managed? There are 5 main stages to the process
The first thing you need to do when tokenising an asset is create the ecosystem. This is because no digital assets exists in a vacuum. Important to think about what the life cycle of the asset is so that things work from beginning to end. You need to think of the ecosystem that will facilitate the operations relating to the asset. This includes actual token issuance and finding investors.
Key participants in the creation of an ecosystem
Custodians - Safekeeping of funds and security tokens
Token Sale Platform
KYC /AML provider - Know your client and Anti-money laundering
Capitalization table management - A capitalisation table (or “cap table”) is a list of all the securities your company has issued and who owns them. An ecosystem should allow for issuers to manage their company equity, view holdings and manage investors.
Legal - Some legal firms specialise in the security token space and can assist in structuring the offering
Tax Services - To understand the necessary tax implications
Marketing - To promote the product
Once the ecosystem is in place, it's time to create your token - the most important part of the tokenisation process. The exact process of token configuration varies for each token issuance platform.
Some projects allow for a self service application where users can create, issue and manage security tokens
Security tokens are also sometimes called equity tokens, and are often compared to the way in which buying shares on the traditional stock market confers partial ownership of a company. Real estate is of particular interest because, as a traditionally illiquid asset with lots of red tape, it benefits greatly from tokenisation.
Real estate is the biggest single asset class where tokenisation can provide value – $228 trillion in total assets.
It is clear that, if done well, tokenisation will allow real estate projects to more easily raise capital, with greater speed and at a reduced cost, investors will also enjoy increased liquidity on their investments, good projects will get a liquidity premium, and investors will globally get access to previously inaccessible investments.
Real estate assets have some properties that lend themselves nicely to tokenisation – such as being relatively secure investments, requiring significant investment sums, being relatively easily comparable and quantifiable, as well as being notoriously illiquid investments.
Scallop would develop this token on the Binance Smart Chain / Scallop native chain
Scallops potential responsibilities in real estate tokenisation:
the issuance process where tokenised securities are issued in order to fundraise for the project
the longer term corporate management of a group of investors who are holding tokens to document their ownership of securities within the project
the trading of tokens via the marketplace.
We will explore this in its own article.
You will need to ensure that your token can comply with regulatory requirements. At minimum, issuers need to ensure that security tokens are compliant with KYC/AML requirements, as well as with securities regulations in whatever jurisdictions the token will be operating or trading in.
Better compliance is one of the major benefits promised by blockchain. Studies indicate that blockchain technology could cut compliance costs by up to 50%.
The most important thing here is that blockchain maintains a clear record of procedures and compliance activities for each client in a secure and immutable way.
When it comes to the distribution process, there needs to be some form of sale. Typically, this is referred to in the industry as primary issuance. In this process, it will be a pre-funded transaction, meaning the investors will send their funds ahead of time to Scallop who would be handling distribution. Then these funds will be held by Scallop, the custodian, until the raised limits have been met and then Scallop will perform a delivery versus payment. Scallop will be acting here as a broker dealer.
Delivery versus payment is a securities settlement process that requires that payment is made either before or at the same time as the delivery of the securities.
This is a more streamlined approach than with traditional markets and therefore greatly increases the time to market.
A corporate action is a change initiated by a public company (ie. a company with ownership organised by shares of tradable stock) that directly impacts the securities and/or shareholders. Examples include stock splits, coupon payments, mergers and acquisitions, ballots for annual general meetings, and dividend distributions. Traditionally, corporate actions are agreed upon by a company’s board of directors and authorised by its shareholders. These can however be organised on the blockchain which provides way more transparency and efficiency.
Launch our first STO in the real estate sector.