Physical asset tokenization is one of the more practical, if not quite as glamorous, blockchain use cases.
Minting cryptocurrencies and building loans systems leads to amazing future-thinking solutions. The idea that people will one day be able to take out viable loans through decentralized finance protocols is incredible.
However, for the average person, this is still a little while away. In addition, the mainstream use of cryptocurrencies for payments is also still gaining momentum. However, there is still a lot of regulatory red tape and issues.
This is where asset tokenization has the upper hand. It is already improving people’s businesses and livelihoods.
Considering asset tokenization
Basically, asset tokenization is when digital tokens are created on a blockchain representing a digital or physical asset. It works as proof of ownership.
When most people think of asset tokenization, they may immediately think of the current non-fungible token (NFT) craze and the tokenization of digital art.
While this is one very successful class of asset tokenization, it is far from the only way people are using and benefitting from codified ownership.
However, it has been critiqued for its exclusiveness, with many NFTs selling for thousands of dollars. In addition, so far, proof of ownership is about as much as an NFT of digital art can offer.
As such, a more substantial class of assets being tokenized won’t be found on massive NFT marketplaces. Rather, in far less likely places — like a cattle ranch.
Cattle as the prime asset class
In Bolivia, the Finka Token is aiming to democratize cattle farming through tokenization. Their flagship ranch, La Padera, is a 3200-hectare organic cattle farm.
Investors can buy a Finka Token, which is an ERC20 compatible token. It is a revenue share token, with the owner gaining access to 1/10,000,000 of the top-line revenue of the flagship ranch.
“We searched for a stable and well-known asset class to compensate for the volatility and relative novelty of the crypto space. Cattle ranching offers predictable returns, a very stable cost curve, and a simple production process with very few variables. We are convinced it is the ideal complement for a pioneer digital financial instrument.” Says Carlos Fernandez Mazzi, Founding Partner at Finka.
Alongside its stability, Mazzi explains that cattle were chosen because the barrier to entry for cattle ranchers is very high. As a result, while owning and operating a successful farm is very positive, getting into the industry is not that simple.
“As cattle ranching offers stable and predictable returns over time, we believe that once retail investors learn about the opportunity to invest in such an asset class, the industry will benefit with access to financing with global reach, given the nature of a security token,” he says.
Creating systems for asset tokenization
Multiple ventures are focusing on tokenizing different commodity classes. Many focus specifically on optimizing for a commodity class, such as real estate, as the options for those wanting to participate in this new ecosystem.
However, some projects have a broader approach, providing the tools for projects to build their own tokens and systems.
The Finka Token is one such example. It runs on the Token Economy Operating System (TEOS) by CoreLedger. It intends to make it easier for businesses to build tokens and trade them.
“The make-up of TEOS is three white-label modules that will be more or less useful depending on the customer’s use case. For example, the “White Label App” can function as a simple wallet for tokens or be used as a POS system and even allow the user to trade on a decentralized marketplace, whereas the “White Label Portal” enables users to purchase tokens or redeem the asset backing behind these tokens,” Johannes Schweifer, CEO of CoreLedger explains.
“Tokenization can increase the speed with which buyers and sellers can find each other. Decentralized markets such as the one that comes with CoreLedger’s TEOS can further help to increase the trading speed and opportunities,” he says.
This is only one example of many, which has specific links to projects in Latin America. Alongside Finka, CoreLedger also has a Brazilian company utilizing its TEOS Sandbox to optimize and improve grain storage.
Bringing access with tokenization
No matter the blockchain used, all asset tokenization provides a new level of access when it comes to commodities.
For example, with cattle ranching, barriers to entry are a fundamental issue, especially for developing countries. While these are the areas that need it the most, coming by the necessary capital and investment isn’t that easy.
“In Latin America and the global south, they are using blockchain for more creative purposes; digital barter economies, for example,” explains Schweifer.
As a result, those involved in tokenizing these assets see it as a fundamental asset channel for farmers.
“In LATAM countries, crypto and tokenization are seen as real alternatives to the existing economy and legal tender. Whereas in countries like Switzerland, crypto and Tokenization are all about speculation. They’re totally different user groups. In LATAM, it is real ‘users’ working with the tokens and not ‘investors.’ TEOS can be used to its full extent with full coverage of all features, unlike use cases in, e.g., Switzerland, where buying and selling are the only features needed,” says Schweifer.
Mazzi considers the access extendable to investors as well. For him, it offers “access to unavailable asset classes, access with lower investment amounts, access without intermediaries, access with lower costs.”
“We are firm believers that blockchain technology will disrupt finance and especially for the productive activities in the developing world which, having all the merits, lack access to financing sources. The Finka Token is a good example for financial inclusion and the democratization of capital, as well as the fostering of cross border finance,” he Mazzi.
A maturing industry
While the benefits and possibilities of asset tokenization are apparent, the industry is still in its infancy.
Overall, asset tokenization still is considerably smaller than digital assets in general. A Forkast 2020 report found that the tokenized asset market was at $18.1 billion. In comparison, the total digital asset market size is approximately US$350 billion.
“All projects are pilot projects, and the blockchains supporting them cannot in all fairness be called mature,” says Schweifer.
This doesn’t mean that maturity is not on its way. “We have a similar situation in our industry to circa 2010 when the early smartphones offered data-driven applications. But the telecommunications networks weren’t ready to support that. Demand forced them to upgrade bandwidths,” he explains.
Much like smartphones, asset tokenization will likely have a knock-on effect, with its growth becoming a catalyst for even more adoption, access, and development.
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