Security Tokens have a great role to play in the future. As these tokens are developed in accordance with the SEC Guidelines and the country’s regulations. Moreover, they offer higher liquidity, regulatory compliance, good transparency, etc.
One such Security Token is the Asset-backed crypto tokens. These tokens have gained crucial importance in recent days. This blog is intended to provide you with a clear perception of Asset-Backed Crypto Tokens.
What is an Asset-Backed Crypto Token?
Asset-backed tokens are one of the top-notch Blockchain applications which facilitate the cost-effective, quick and secure trading of real-world assets. These tokens value derives from the underlying asset which is backed.
Asset-backed crypto tokens act as an alternative way for traditional stocks, with one major difference. This means that investors can purchase stocks in the form of tokens. In addition to this, these tokens offer high liquidity and enable easy hassle-free trading.
However, asset-backed tokens are offered during STOs which carry an actual value since they are correlated with an external, real asset token value. They offer secure, reliable, and minimal cost of trading for traditional assets through Blockchain Technology.
The owner of the asset-backed token owns a piece of a product that is tangible and has the rights as the owner. Unlike a speculative cryptocurrency, asset-backed tokens represent the following:
- Legal rights of owners of the tokens
- The value of the underlying assets that holders are entitled to per token
Why it is beneficial to create an Asset-Backed Crypto Token?
Most utility tokens do not have much intrinsic value. They aren’t backed by anything tangible. Utility Tokens rarely perform the action which is unique and valuable. But in the case of Asset-backed crypto tokens, they are completely tangible. The value of these tokens is directly linked to the value of the external asset.
These Asset-backed crypto tokens are beneficial for crypto fund managers to create cryptographically traditionally assets to increase liquidity which are sold at a reasonable price.
Generally, bonds and stocks are the products that come with high liquidity, trading volumes, trading on exchanges, etc while traditional assets like vehicles, real estate, jewelry, lack them.
Moreover, liquidity is much important here. Liquidity correlates strongly with an asset’s trading volume, and can also affect the assets price. Higher liquidity can enhance the underlying assets value, as its negates risk factor.
A tokenized asset trading market where one can trade 24*7 and also provides reduced price volatility.
So, how do Asset-Backed Crypto Tokens works?
Initially, assets are transferred and verified by a middleman who will be in charge of safeguarding these assets. Then, the custodian will code the ownership of these assets and their future cash flow with security tokens.
Token holders become the legal owners of the rights for the underlying assets and are able to exchange or divide them far more simply than how it is handled now. Moreover, by transforming the asset into an asset-backed token, smart contracts are embedded. This means that the token holder automatically receives the cash flow related to the asset.
Asset-Backed Crypto Tokens: Real-Time Use cases
Tokens are usually backed by the external assets that are somewhat comparable to gold-backed paper currencies such as traditional currencies which were under the gold standard. But the situations become worse when we examine tokens associated with assets that are non-fungible.
The Real Estate industry is fairly illiquid and is affected by inefficiencies. It includes a middleman who receives a portion of an investment for taking on counter-risk. But with asset-backed tokens which would tokenize a portion of an individual position in a real-estate asset.
In addition to this, here are the other use cases with the asset tokenization:
- The issuance of corporate debt or equity through a security token.
- Tokenization of commercial real estate equity or rental income. The commercial real estate investment sector is separated. Fractionalization of ownership through tokenization could democratize commercial real estate investing.
- IP asset Tokenization of multi-pronged cash flow such as licensing or royalty payments which is applicable for everyone who has the claim to a patent, movie or a book.
Four categories of Asset-backed crypto tokens use cases:
There are around four categories of Asset-backed crypto tokens use cases:
- Equity or Debt
Equity and debt tokens are the tools for fundraising in the early-stages without the use of investment banks, middleman, and stock exchanges. Fractional ownership of equity in traditional assets can bring in factors like immutable, trustless, etc. By implementing Blockchain Technology, the process is made more efficient.
Exchange-tradeable commodities can be converted into fungible assets backed tokens. Be it oil, gas, sugar, wheat or whatever, it can be tokenized with an intermediary. But with Blockchain technology, it creates market confidence.
3. Non-fungible hard assets
Let us take a real estate tokenization as an example. When compared to private ownership, tokenized real estate is expected to a more profitable, borderless, and democratic. Moreover, with a tokenized real estate and rental income, all investors can build a diversified, compliant portfolio with no or low fees.
4. Non-fungible soft assets
These are generally illiquid and have no secondary marketplace to perform trading. Conceptually it is not difficult to tokenize intellectual property ownership and with huge benefits.
Advantages of Asset-Backed Security Tokens:
The primary advantage is Divisibility. The ownership of an asset, financial or not is traditionally very difficult to split. One cannot cut a company’s share but can split a security token backed by this share. This can, in turn, enhance the liquidity of the financial assets.
Secondly, with security tokens exchanging the assets become more secure. Moreover, Blockchain technology used in the issuance and trading of tokens limits counterparty, settlement or counterfeit risks. But with Blockchain, the settlement and transactions provide a streamlined investment environment.
Using tokens as a way to enhance the security asset will improve the liquidity in any market. This means that tokens are easy to trade. Moreover, increased trust in transactions can also increase liquidity.
To put it in simple words, asset-backed crypto tokens are going to make a major revolution in the industry. Using security tokens backed by real or financial assets will make the process cheap, secure, and transparent. This will pave way for to divide the assets and transfer them instantly!
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