Fintechs Driving Innovation In Tokenization of Real-World Assets

Introduction

Fintech, also referred to as the financial technology business, has been leading the charge for financial innovation in recent years. The tokenisation of physical assets is one topic that has acquired a lot of interest. The opportunities for innovation has also been of interest to traditional finance organisations like Citi bank and Boston Consulting Group, which sees tokenisation as the “killer use case” for blockchain, generating a 16 trillion dollar global industry.

This rising movement is disrupting traditional asset ownership and investing by using blockchain technology to construct digital representations of physical goods. Companies in the fintech sector are essential to this shift because they open up new avenues and democratise access to investment opportunities.

The Tokenisation of Real World Assets

Let’s explore the history of tokenization to comprehend its significance. Real-world assets like real estate, fine art, commodities, or even intellectual property can be transformed into digital tokens that can be safely stored and traded on a blockchain through a process known as tokenisation. As a result, tokenisation offers a number of benefits over traditional asset ownership. It increases liquidity, lowers transaction costs, permits fractional ownership, and gives a wider spectrum of investors access to markets that were previously unavailable.

Real-world assets, like real estate holdings or works of art, have historically been illiquid and susceptible to significant entry obstacles. By removing these obstacles with the help of blockchain technology, fintechs are fostering innovation. They are making tangible assets easily traded and divisible by tokenising them. Now that investors can hold a portion of high-value assets, they have access to markets that were previously only open to institutional investors or the affluent elite. By democratising access to investment possibilities, fractional ownership enables a wider spectrum of people to participate in previously closed markets.

Also, to improve the usability and security of tokenised assets, fintech organisations are using smart contracts, programmable agreements that go into effect automatically when certain criteria are satisfied. Smart contracts make it possible to automate a variety of operations, including rent payments, dividend payouts, and intellectual property licensing, which eliminates the need for middlemen and streamlines transactions. Traditional asset management and transfer methods are dramatically disrupted by the efficiency and transparency offered by fintechs in the tokenisation process.

The immutability and traceability of tokenised assets are further guaranteed by using blockchain technology, increasing security and lowering the risk of fraud. Since blockchain networks are decentralised, there is no longer a requirement for a centralised authority, creating a trustless environment for asset ownership and transactions. By connecting asset owners and potential investors through cutting-edge platforms and marketplaces, fintech companies are enabling the seamless tokenisation and trading of real-world assets.

Fintech Innovation

The largest Bitcoin conference in the world, Bitcoin 2023, was held in Miami from May 18 to 20, 2023, and gave guests three days of interaction with the industry’s top thinkers. The Bitcoin Conference Series has previously given rise to some of the most important events in the history of cryptocurrency, including the announcement by El Salvador’s president Nayib Bukele that his nation would accept Bitcoin as legal tender and the explanation by privacy activist Edward Snowden of how Bitcoin will help safeguard our freedom in the future.

Bitcoin 2023 brought together the industry’s business titans, cultural icons, and technological trailblazers as they discussed where this technology would be next. One participant and the first fintech to tokenise real-world assets on the blockchain is Defactor [Official]. Defactor is a blockchain-based technology that makes it possible to use decentralised finance to aid businesses in growing their economies. The platform’s objectives include managing and controlling the flow of money as well as adding real-world assets (RWAs) to the blockchain.

According to Defactor’s official website, small and medium-sized enterprises have trouble obtaining stable capital, which hinders their expansion and improvement. Conventional financing is a time-consuming, expensive, and difficult procedure. Decentralised finance (DeFi) claims to produce high liquidity and offers creative ways to make lending and trading easier. Defactor offers RWA originators and traders looking for liquidity a safe and convenient way to use the DeFi ecosystem.

Anastasia Nizhegorodtceva, Growth Advisor and Community Manager at Defactor [Official] provided some insight into their innovative platform and what opportunities she recently saw at Bitcoin 2023 in Miami:

What do investors look at when stepping into the DeFi and tokenisation space?

The “How to Value Bitcoin Companies” panel at Bitcoin 2023 featured Greg Carson from Humla Ventures, Eryka Gemma from Timelock Ventures, and Brian Estes from Off the Chain Capital. They agreed that due diligence is very much needed when investing in crypto-related startups, especially talking to the founders and asking them the right questions.

What particular assets from the actual world can be tokenised using Defactor’s platform?

Defactor’s current partner, Defactor Labs, connects liquidity providers with asset originators (AOs) that leverage receivables, trade finance, and inventory finance documents to raise working capital for their business operations. The platform is created in such a way that it can partner with projects that tokenise other assets, such as real estate, precious metals, art, and so on. As long as the partner organisation takes care of educating their users about proper documentation of the assets they are looking to tokenise, Defactor has all the needed infrastructure in place to power this process.

Can you give some examples of companies or sectors that used Defactor to successfully execute tokenisation?

ConsolFreight, like any other AO, applied via our onboarding platform, submitted their KYB procedure, and was then approved by Defactor Labs’ internal risk assessment. To date, ConsolFreight has financed more than $750,000 in trade finance transactions and freight forwarding invoices.

Conclusion

Fintechs are advancing innovation in the tokenization of physical assets, fundamentally altering how we invest in and hold physical assets. These businesses are improving liquidity, lowering entry barriers, and permitting fractional ownership by utilising blockchain technology. The efficiency and security of tokenised assets are further improved by the use of smart contracts. We may anticipate tokenisation disrupting traditional asset markets and giving people access to previously inaccessible investment options as fintech continues to push the envelope of financial innovation.

Kelroy James is a Supply Chain Professional, Strategic Innovation Fellow, and DeFi Talent with Frankfurt School Blockchain Center.

Disclaimer: The author is the current London Ambassador of Defactor.