How real businesses tokenize assets: Step-by-Step guide

In tokenization, a business creates a digital representation of its real assets on the blockchain - a system that ensures transparency, security, immutability, and decentralization of data in digital transactions.

For example, a company decides to tokenize precious metals. To do this, it issues a token, which is a record on the blockchain. This record confirms that the company owns ten gold bars and each token is equivalent to, for example, one bar.

It is assumed that by purchasing these tokens, users will acquire ownership rights to the gold bars - real-world assets. These ownership rights should be recognized and protected by the government. However, at the time of writing this article, the MiCA regulatory package has only been partially implemented, and a comprehensive legal practice has not yet been established. This factor should be taken into account when planning investments in real-world asset (RWA) tokens.

The process of tokenizing assets adds extra value by providing sellers and buyers with privileges that are absent in traditional asset trading on the exchange. For example, tokenization allows businesses to draw in investments from the crypto world, automate transactions, and introduce novel methods of product distribution. Here, we outline the main advantages and risks associated with tokenizing tangible assets for businesses.

Entering a new realm of distribution. By tokenizing real assets, a company taps into the financial resources of digital investors to expand its offline business. Platforms that facilitate the trade of crypto-assets, such as NFT marketplaces, centralized, and decentralized exchanges, play a pivotal role in facilitating this.

Fragmentation of ownership rights among numerous small investors. Thanks to blockchain, a key player in the tokenization of real assets, a company can break down its assets into tokens of various sizes, like gold bars, kilograms, square meters of real estate, and more. This enables the company to sell real assets to a multitude of small investors, streamlining the investment process and accelerating fund acquisition.

For example, on a traditional stock exchange, an investor cannot purchase less than one share, but in the crypto world, they can. In simpler terms, an investor can acquire a token representing a 0.000001 fraction of an asset, gaining access to even high-value assets for which they may not have enough funds to buy outright.

The direct transfer of ownership rights to investors, without intermediaries, brings added value. Legislation in many countries, such as the United States and Switzerland, allows for token trading without intermediaries, such as governmental or financial institutions. Direct asset trading reduces transaction costs and expedites the asset-selling process.

Transaction automation through smart contracts is another significant aspect. A smart contract is a digital agreement between a seller and a buyer that operates on the blockchain. It establishes the rules of a digital transaction, monitors the fulfillment of obligations by both parties, and automatically executes contract conditions upon specific actions. For instance, an investor gains the right to execute a transaction after making a deposit or confirming their financial capability.

New business models emerge alongside traditional methods of selling assets. Instead of physically transferring ownership, a company can engage in transactions involving real assets by transferring only their digital rights. 

For example, while trading wine in an offline store, a company can issue tokens and sell the right to own a bottle of wine in the digital realm, keeping the actual bottle stored in a specially equipped warehouse. In this scenario, smart contracts can be used to enable investors to independently resell bottles in the form of tokens to each other, with the company automatically receiving a commission for each transaction.

Token issuance and entering the NFT marketplace serve as effective marketing and PR tools. Many prominent brands from various industries, such as New Balance and Gucci, are exploring the NFT market, actively promoting their involvement and attracting new audiences.

Despite the advantages of tokenizing real assets, there are associated risks, categorized into legal and business risks.

Legal risks of tokenization are related to the legislative regulation of the crypto industry in general and, specifically, the tokenization of real assets.

Business Risks of Tokenization. Tokenizing real assets marks the commencement of a new business venture, unlocking fresh avenues for product distribution, attracting investments, and engaging customers. When venturing into tokenization, a company takes on all the standard risks typically associated with developing a new business direction.

A company has the ability to transfer ownership rights in various forms to digital investors, encompassing stocks, bonds, intellectual property, art objects, and real estate. Here are the real assets typically subject to tokenization.

• Financial assets: stocks, bonds, options, securities.
• Intellectual property: copyrights, patents, trademarks.
• Luxury items: supercars, designer clothing, accessories.
• Precious metals: gold, silver, platinum bars.
• Industrial goods: electricity, minerals, agricultural products.
• Real estate: land plots, houses, apartments in new buildings, office spaces, warehouses.
• Pieces of art: paintings, photographs, sculptures.
• Collectibles: antiques, sports cards, coins, stamps, wine.
• Tickets: tickets for concerts, exhibitions, theatrical performances, business events.

To initiate the process of drawing investments from the crypto world into the offline realm, follow these steps to tokenize your real assets. We'll guide you through the essential steps of this process.

Step 1: Develop a business plan

First and foremost, address two crucial questions: "What can I tokenize?" and "How can I profit from this?" Creating a comprehensive business plan is key. This plan will assist you in determining what assets to tokenize, the pricing strategy for trading these assets, identifying your target clients, understanding their numbers, devising strategies for attracting them, and estimating the associated costs.

Suppose you're running a traditional business, specializing in the sale of collectible whiskey. It's crucial to gauge whether your customer base would be intrigued by purchasing tokens rather than traditional bottles. On the flip side, it could prove more lucrative to directly appeal to crypto investors familiar with digital investments and well-versed in tokenization. Crafting a profile of your target audience allows you to formulate a targeted marketing strategy. This approach ensures you attract the right buyers and enables a thorough assessment of the associated costs tied to their acquisition.

Step 2: Choose your Token

Assets can be tokenized using either NFTs or regular tokens.

NFT (Non-Fungible Token). Non-fungible tokens are usually designed for unique assets whose value is directly tied to their distinctiveness. For instance, NFTs find common use in tokenizing art pieces, where the uniqueness of each item is a key factor.

Regular Token. Fungible tokens are suitable for tokenizing assets that are plentiful and interchangeable. Take precious metals, for example: one gold bar is equivalent in value to another gold bar. In this case, these two gold bars are interchangeable, and there's no need to create a unique NFT for each bar.

Step 3: Choose a platform

The issuance and trading of tokens occur on specialized platforms, and a company can opt to either create its own platform or become a part of an existing one.

Proprietary Platform. This approach is well-suited for larger companies with specific security requirements and their own technological solutions. It's a path often taken by federal and international corporations.

Intermediary Platforms. Medium and small businesses typically choose to release tokens on pre-existing platforms. For example, OpenSea serves as a suitable platform for issuing NFTs — the most popular NFT marketplace where tokens are traded by both regular users and companies.

Apart from these, there are specialized platforms dedicated to the tokenization of assets.

Here are the five most popular international platforms.

• Securitize is the primary platform for tokenizing securities.
• Polymath specializes in the issuance of tokenized securities.
• Harbor is a platform for tokenizing real estate, direct investments, and other assets.
• RealT assists companies in tokenizing real estate, including land plots, houses, and apartments.
• ADDX is designed for the tokenization of direct investment assets and real estate.

Additionally, businesses can leverage the tried-and-true Binance, which is currently considered the largest cryptocurrency exchange globally.

Step 4: Plan the mechanics of Token issuance and activity

You must grasp the origins of the tokens, how their issuance will be regulated, and the reasons users would want to own and trade them.

The mechanics of tokenization resemble the process of issuing traditional stocks or bonds when gearing up for a public offering and extending an offer to potential investors.

Step 5: Issue Tokens

Token issuance marks the conclusive stage of tokenizing real assets. Following this step, the company's tokens become accessible to crypto investors, kickstarting the investment attraction process.

Throughout token issuance, businesses generally adhere to the rules stipulated by the platform where the tokens will be traded, aligning with the business plan and the mechanics of tokenization.

One notable example of asset tokenization occurred in 2021 when a California startup sold an apartment using NFT. Subsequently, there were instances of successful sales involving gold, agricultural land, and collectible alcohol. Dive into the details of how traditional businesses are embracing asset tokenization.

Real Estate. Propy, a California-based startup, is at the forefront of real estate transactions leveraging blockchain technology. One of Propy's standout deals involved the sale of a penthouse in Kyiv. The property was auctioned and traded as an NFT, with the transaction's value totaling 36 ETH, surpassing $93,000 at the time of the deal.

The interior of the penthouse in Kyiv that was sold using NFT. Source: propy.com

Gold. In 2022, IWI Global, a company overseeing gold deposits across Asia, Africa, and South America, introduced its own token, GDIT, backed by tangible gold bars. Each GDIT corresponds to one gram of actual physical gold. The GDIT presale is set to continue until December 11, 2023, following which the tokens will be accessible to investors on the open markets.

IWI Global merged one of the oldest currencies in the world with blockchain technology. Source: gdit.gold

Agriculture. Agrivirtus, boasting over 20 years of experience in agricultural development in Latin America, has taken a groundbreaking approach by tokenizing tomato cultivation. In this initiative, Agrivirtus unites farmers, end consumers, and investors. Every participant in the digital transaction reaps distinct advantages: farmers gain access to agricultural land, end consumers receive farm produce, and investors earn a share of the profits generated from vegetable sales.

Agrivirtus aims to establish a farming ecosystem by combining traditional agricultural technologies with cryptocurrency investment opportunities. Source: agrivirtus.farm

Premium Whisky. A company dedicated to the sale of collectible whiskey curates the finest selections from renowned European producers, storing them in a specially equipped warehouse. Each bottle is intricately linked to a unique NFT. A connoisseur of premium spirits has the opportunity to acquire ownership rights to a rare bottle of a specific brand and vintage through an NFT. Additionally, they can opt to resell the NFT to another individual, potentially making a profit, as over time, such prized whiskey often appreciates in value. In these digital transactions, the actual whiskey bottles remain securely stored in the warehouse, alleviating owners of concerns regarding preservation and transportation.

Thanks to tokenization, the offline business of selling collectible whiskey has attracted a new audience in the form of crypto investors. Source: unsplash.com

Step 1: Develop a comprehensive business plan outlining which real assets you intend to tokenize and how you plan to generate revenue from this process.

Step 2: Choose the type of token that best aligns with your real assets, whether it be NFTs or traditional tokens.

Step 3: Choose a platform. Decide whether to create your own platform or leverage an existing one.

Step 4: Design the mechanics for token issuance and circulation, addressing where tokens will come from, how their emission will be regulated, and why users would want to own and trade them.

Step 5: Finally, initiate the token issuance process to make them available to potential investors.