The token economy is a reality that has the potential to revolutionise various economic sectors by harnessing as yet unexplored and unquantified potential. The concept is based on the fact that it is possible to build a sustainable ecosystem through token projects in every sphere of the economy.
A token is a digital asset registered within a blockchain infrastructure. The latter ensures that token exchanges take place securely and without intermediaries, opening the door to a large number of applications that are not limited only to the world of cryptocurrencies. In fact, although the term 'token' is commonly used in reference to this type of application, the two terms are not interchangeable. Cryptocurrencies are an integral part of a blockchain from which they can be extracted, whereas tokens are generated on existing blockchains thanks to so-called 'smart contracts', software within the blockchain itself.
The main types of tokens that are currently issued and exchanged can be grouped into 3 categories:
Security Tokens (or investment tokens), referred to by identifying a new product obtained through the contribution of technology that shares some characteristics with traditional security and may not be linked to an actual asset.
Asset Tokens, representing rights to even non-financial assets, exchanged between different parties and adopted in the technological context made possible by the blockchain to create a new channel of exchange. In the case of financial securities, asset tokens make it possible to expand their market and increase their liquidity. When referring to non-financial values (e.g. when they represent a digital identity or a voting right within a decentralised governance model), the new channel allows them to be managed more securely than centralised systems.
Finally, Utility Tokens are securities representing future uses of the product or service provided by the company that 'issues' them. Utility Tokens are not meant to be investments, although they are sometimes adopted as tools to facilitate projects involving the creation of a shared infrastructure, operated in accordance with a blockchain protocol.
A further substantial difference is that between Fungible Tokens and Non-Fungible Tokens.
Non-Fungible Tokens (NFT) are basically units of data stored on blockchain that certify the uniqueness of digital assets. The concept of NFTs is based on blockchain technology, in particular the Ethereum blockchain. Fungible tokens, on the other hand, are non-divisible assets that are not unique and can be easily exchanged for another asset of the same type. NFTs are not divisible while fungible tokens are divisible.
In terms of areas of application, tokenisation can be used as a financing tool in the different phases of business development (from Seed to Series C/Tech growth), as well as can be used as an alternative or alongside other instruments such as VC, Stock Market, Business Angel, Funds and Banks.
In real estate, for example, tokens can be used to raise capital for the realisation phase of the property, allowing private investors and institutional players to participate in a real estate transaction on both the lending and equity fronts. An evolution of the dynamics already experimented with real estate crowdfunding, to which is added the principle of liquidity of the security: the token. Tokenisation makes it possible, in fact, to own 'fragments' of a property, with the freedom to exchange them quickly, without high transaction costs, something unthinkable until a few years ago.
The possibility of tokenizing different types of assets, products or services, and thus generating a token in the virtual world and linking it to a real asset via a smart contract, could have a significant impact in terms of increasing speed and security, but also in lowering the cost of transactions.
Among the benefits of asset tokenisation is the efficiency resulting from automation and disintermediation. In addition, faster clearing and settlement processes foster transparency and, above all, increased liquidity. Asset tokenization could represent an alternative way to achieve fractional ownership of an asset, as it reduces investment barriers and allows more inclusive access of retail investors to some traditionally illiquid asset classes.
Of course, asset tokenisation is not without risk. Decentralised networks (DLT) in token markets face several challenges due to their innovative nature. Operational vulnerability; uncertainty about the purpose of settlement; interoperability between different networks that will allow connectivity of different infrastructures; interoperability of the DLT-based infrastructure with the traditional one; network stability; robustness of the market infrastructure; and threats of cyber attacks.
From a regulatory point of view, there is currently no form of common legislation at European or global level. Each country approaches tokenization differently depending on the stage of development reached by the tokenized asset market and the pace at which it evolves.
It is clear, however, that this is a growing market. Decentralised finance and the token and cryptoasset markets are constantly evolving. The industrial application of emerging financial products based on decentralisation has helped to identify shortcomings, risks and areas of potential innovation. It would be important, at this point, to work towards providing investors in alternative financial products with a level of protection similar to that provided to active participants in traditional financial markets.