What Is Tokenisation, And Why Is It So Important ?

Since the days of clay tablets, people have been recording the exchange of goods and services. As we evolve in the digital age, recording these transactions has been much more complex whether as the exchange of things of value between two parties, documenting goods moving through the supply chain, or making contractual agreements. The growth of global commerce and trade has created a network of desperate ledger systems, vulnerable to errors, fraud, and misinterpretation.

Take the diamond industry for example. The journey of a diamond from a mine to a consumer can take a complex landscape of legal, regulatory, financial, manufacturing, and commercial practices. Current supply chains have to rely on intermediaries every step of the way. From government officials, lawyers, accountants, dealers and banks. This adds time, and cost.

Diamond smuggling and fraud can hamper governments from collecting fair export taxes. Consumers and resellers face the prospect of purchasing counterfeit or unethically mined stones. The hyper ledger Blockchain technology has the potential to eliminate these vulnerabilities with transparent transactions. Blockchain offers all parties involved in a business network a secure and synchronized record of transactions. The Blockchain ledger records every sequence of transactions from beginning to end, whether it's hundreds of steps in a supply chain or a single online payment. Blockchain technology is a decentralized, distributed ledger that records the provenance of a digital asset. The data on a Blockchain cannot be modified, making it a legitimate disruptor for industries like payments, cybersecurity, and healthcare.

Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through decentralisation and cryptographic hashing. One can say that Blockchain technology is similar to Google Docs. A group of people can create a document that automatically distributes itself to all computers. This creates a decentralized distribution chain that gives everyone access to the document at the same time. No one is locked out awaiting changes from another party, while all modifications to the doc are being recorded in real-time, making changes completely transparent. That’s why Blockchain is ideal for recording the mining, refining, and distribution of one of the most valuable goods in the world. It can trace a diamond’s path from the mine to the hands of the consumer with exceptional security and transparency. While Blockchain works with all types of transactions, 3 key features make this Blockchain hyper ledger uniquely capable to handle the requirements of a regulated industry like diamonds: It’s distributed, its commissioned, and its secured.

Since the ledger is distributed, it works as a shared form of record-keeping ensuring that no one person or organisation holds ownership of the system. As the diamond cycles through its supply chain, everyone involved through the process is commissioned to have a copy of every record and piece of data and no transaction can be added to the chain without consensus across the participants. It means that no one can add to or alter the Blockchain without being permanently recorded, making it tamper-resistant and highly secure, eliminating the risk of fraud and error. No one, not even the system admin can delete it. In the case of diamonds, a Blockchain ledger keeps a record of high-resolution photos of each diamond at every single touchpoint along its journey. It holds certificates of authenticity, a real-time record of every payment transaction, as well as product details like cut, clarity, colour, karat, and diamond serial numbers. At the end of the buying cycle, there’s a completely auditable and indisputable record of information.

Blockchain technology gives us the ability to transform industries of all sorts from diamonds to flowers, monetary transactions, or even things like contracts, deeds, records, and other public or private agreements. It frees up capital flow, speeds processes, lowers transaction costs, provides security and trust.

One of the technologies to arise from the Blockchain is tokenization. Tokenization means representing an asset or a right using a token on a Blockchain. It can be a digital asset or a real-world asset. A token is a piece of data that stands in for another, more valuable piece of information. Tokens have no value. They’re only useful because they represent something bigger. A good analogy is a poker chip: instead of filling a table with wads of cash (can be easily lost or stolen), players use chips as placeholders. The chips can’t be used as money but they can be exchanged for money after the game.

Tokenisation works by removing the valuable data from your environment and replacing it with tokens. Most businesses hold sensitive data within their systems, whether it be credit card data, medical information, social security numbers, or anything else that requires security and protection. Using tokenization, this sensitive data is taken out of your environment entirely, and then it is replaced with tokens that are unique to each piece of information.

The purpose of tokenization, for instance in your business, is to swap out sensitive data with a randomised number in the same format but with no intrinsic value of its own. It is the process of removing sensitive data from your business systems by replacing it with an undecipherable token and storing the original data in a secure cloud data vault, separate from your business systems. Encrypted numbers can be decrypted with the appropriate key. Tokens, however, cannot be reversed, because there is no mathematical relationship between the token and its original number.

Real World Asset Tokenisation can unlock the value and liquidity of illiquid assets, through data transparency, the efficiency of the transaction, and easier price discovery. It will also allow fractional ownership. This means that people would be able to own a fraction of an asset instead of 100% ownership. Fractional ownership will enable people from different parts of the world to liquidate real-world assets into shares.

Tokens can be used as:

· Utility tokens or fungible tokens, which are used to create coupons or sold as credits for the purchase of goods or services.

· Collectables, or non-fungible tokens (NFTs), represent a single asset on the Blockchain. NFTs carry the necessary data that’s used to identify authentic assets. Some of the information that is stored on the NFTs are asset details like ownership history. In the digital art industry, artists can now set themselves a certain percentage commission every time their work is sold to another party.

· Tokenised Company Shares are traditional securities issued in digital token forms. Countries like Switzerland, Liechtenstein, and Germany are at the forefront of setting up a legal framework. Switzerland has recently allowed the trading of uncertified securities, meaning that shareholders can now own tokens that represent company shares.

Tokenisation still faces a lot of challenges before it becomes a global practice. The first challenge is the struggle to set up a legal framework. Tokenization also faces anti-money laundering (AML) regulations and compliance requirements, which are mandated by both national and international authorities that place a wide variety of screening and monitoring obligations on financial institutions.

The traditional custody services are essential to the provisioning of trust services, with responsibilities that are regulated and governed, while also solving issues of loss or theft of assets. Traditional custody services are still yet to merge with tokenisation. Let's say you have a token that’s worth 1kg gold bar. How do you know that the gold bar exists? There has to be someone who ensures that the gold bar you own in tokens is safely secured somewhere out of your concern for its safety.

Tokenization will enable digital portfolios with multi assets (diversification), enable asset lifecycle, and unlock liquidity in markets. We believe that the Blockchain will do for business what the Internet did for communication. It will create new ways of working and leave more time for creativity and innovation.