Tokenization is the process of representing the securitization of a real-world asset using digital tokens on a blockchain. It is one (if not THE) killer usecase of blockchain technology, featuring a significant integration part. In this blog post, we present the various Tokenization fields we have been working on in 2019 and what we want to make of them.
We had our first bigger tokenization case, when we provided workshops and Proof-of-concepts for Deutsche Bahn Vertrieb, evaluating on tokenizing the ecosystem of a public transportation company with the help of Blockchain technology.
In 2019 we have been in touch with many parties interested in using blockchain to represent securities as digital tokens on a blockchain. This field holds huge potential, and our idea is not to offer “just one tokenization template”. There are a number of components within a tokenization process that need integration, code generation and monitoring — all this can be done by the Unibright Framework.
Until now, there are many partial solutions when it comes to tokenization. Our vision is a regulatory compliant 360° security token platform. A platform that covers ALL relevant stages of a tokenization process and integrates them into markets and system landscapes.
Let’s take a short look at an example on what tokenization of a real-world assets means.
Assume you own some property (real estate) and you need some cash to develop it further. You don’t want to sell the whole property to somebody else: so you face the question: “How to sell this fraction of an asset?”
Tokenization is the method of converting rights to an asset into a digital token which can be transferred and even traded. Given the example from above, we could tokenize the real estate property into some number of tokens and sell the needed number of tokens to get us the needed cash. In return, token holder particpate from the value growth of the asset, as well as from periodic payouts (e.g. on rental fees).
The majority of current STO platforms mainly address token issuing and act as a “technical service provider”. Unfortunately — from an issuer perspective — this sounds better than it actually is. In fact, the asset owner has to decide on all legal and technical steps themselves, as well as choose the right tokenization process, platform and legal structure. Regulations are primarily addressed only for the issuing component, using vehicles like Reg-S listings in the US (which basically means it is not regulated at all, just assuring that US citizens are not allowed to participate).
Today’s STO platforms help with creating the token technically and selling it to investors, utilizing some kind of “listing fee” and perhaps participating in the sale itself. All trading and occurring ongoing fees are draining in “secondary markets”: intransparent and with no benefit for token holders or issuers.
A vision of a 360° Security Token Platform
The Token issuance part, is just a very small part of what we understand as a 360° security token platform:
A 360° security token platform in our understanding should bundle together issuance, a regulatory compliant marketplace and guaranteed liquidity inside the platform. It should offer a platform-independent issuing process targeting the domain expert (e.g. a real estate asset owner) on the other side of the User Interface, not a legal and/or technical expert! A platform should transparently(!) enable long term revenue streams like trading fees, introduce new investment classes (e.g. for liquidity providers) and include all involved parties to benefit from trading fee kick-backs.
A 360° platform should take care of the key management, of integration into professional IT and process surroundings, offer layer 2 structures like derivates and portfolios and gain knowledge out of all Big Data arising — for the benefit of all participants.
Let’s take a look at all the different parts:
1 Definition of the Security
As an asset owner, you need to describe the underlying asset and security connected to it. This process and the imposed responsibilities (e.g. the obligation to publish a prospectus) does not change “with Blockchain” and is still handled “off-chain”. Tokenization only is as good as the underlying legal contract; a token is just a digital reflection of the underlying legal agreement between the parties involved.
2 Token Definition
Existing tokenization platforms only offer partial customizing options. All the legal groundwork (like the regulatory and tax implications of the tokenization process for all involved jurisdictions, the needed KYC level and much more) and the related decisions arestill open to the issuer. A 360° platform should abstract from the technical conclusion on how a token should be designed, and guide the issuer through a graphical process commensurate to their knowledge level. After this definition, the token and the related smart contracts can be generated automatically for a desired blockchain protocol.
Unibright can offer a graphical user interface, a “tokenization template”, to define and generate the token and the corresponding code for various platforms.
3 Token Issuance and STO Platform
Once the token is created, it has to be issued and sold to investors. Related to that is a proper KYC process, a secure and safe solution to buy tokens by crypto and fiat transactions and a user-friendly interface for all related user actions. There are already solutions for this out there, which can also be whitelabeled or (in the best case) integrated.
The Unibright Connector is a perfect tool to integrate STO Platforms with automatically generated Token Definitions into related processes, off-chain systems and other token ecosystems.
4 Exchanges and Liquidity
Existing STO Platforms finish their process by “just” offering the token for sale. Afterwards, both investor and issuer are dependent on the so-called “secondary market”, which has shown in recent years to be very intransparent, fee-consuming and in many cases operating without any regulatory compliance.
Missing Liquidity (as experienced for many altcoins after the ICO hype) will be an even bigger problem for security tokens, which are intended to be long-term focused investments, targeting at a regional level or representing caps < 10 Mio USD.
One of the main reasons existing token issuing platforms leave out the trading part may be the high (regulatory) hurdles of setting up a own classical bid/ask exchange, acting as an intermediary between buyer and seller. Therefore, the investor is left pretty much alone after the initial process of token issuing. A huge business opportunity of collecting related trading fees that occur with every token trade, and the opportunity of providing liquidity and earning interest is left to intransparent external exchanges, not working on the legal and regulatory base the issuer had in mind when tokenizing his asset.
A 360° platform would need to offer a regulatory compliant, liquidity backed exchange service from the very beginning. This not only guarantees buyers and sellers to exchange tokens on the same legal base the issuance took place, but it also allows the platform provider (and all participants by kick-backs) to benefit hugely on the trading fees occurring with every trade.
At Unibright we investigated different options on how to build a regulatory compliant security token exchange with automated liquidity. We prototyped different solutions, filed in our concepts to be reviewed by the German regulator and are able to bring that knowledge into a 360° security token platform.
5 Derivatives and Portfolios
All derived financial instruments (as seen on classical markets) rely on a reliable liquidity of the underlying assets. They cannot be built in the tokenization world prior to the existence of such liquidity. With the implementation of the above-mentioned liquidity-backed exchange, this platform would be in a first-mover position offering the first fully-integrated environment for issuing and trading security tokens.
The potential for derived instruments can be leveraged by a 360° security token platform designed to offer derivative issuing and software driven, rule-based portfolios, automatically trading underlying (liquid!) assets from the very beginning.
A tool like the Unibright Lifecycle Manager with its built in code generation engine is the perfect tool to automatically generate rule based smart contracts representing portfolios or other rule-based instruments. It opens the ecosystem to professional asset managers, financial institutions and (contrary to classic markets) to individuals implementing their very own financial strategy.
6 Big Data & AI
The more assets are tokenized, issued and traded, the more derived and automated instruments on these tokens occur and the more data on these tokens and occurring trades appear. It is a complete business opportunity on its own to work with this data, draw conclusions out of it present the findings in an understandable manner.
A 360° security token platform would not use this data only for internal use or secretly sell it to third parties. The occurring big data and the related findings would be presented to every user of the platform, be it issuer, trader, liquidity provider or other participant. It could be used for a simulation of the future performance of a token about to be issued, based on past data, future metrics and applicable scenarios.
At Unibright we researched on strategies on token performance simulation based on past data, stochastic distributions and external events. With our graphic monitoring tool (the Unibright Explorer) we worked on different views for both issuers and token holders to evaluate the simulated future performance of a token, and to make the right decisions about it.
7 Custodian Services
With the tokenization space maturing, professional solutions for key management and asset administration are needed. Just like exchanges, offering custodian services need to meet certain regulatory requirements, depending on jurisdiction and legal context. A 360° security token platform would offer its own or integrated custodian services for professional players.
At Unibright we researched different approaches to hot and cold wallets, multi-sig and multi-party-computing based approaches and their ability to be integrated into processes and systems. We met with various custody providers, software experts and data center builders to examine and push integration standards in this field for future use, always having the regulator’s view in our mind, too.
With tokenization, integration can be understood as more than just technical integration. It is also about integrating processes and markets to fully profit from token issuing, trading, liquidity, derived financial instruments, big data and custodian services.
Integration is Unibright’s key field. We are able to provide integration on technical level (e.g. generating smart contracts, connecting ERP systems), on process level (e.g. providing graphical workflows to start a process) and also on market level (e.g. liquidity concepts) with the knowledge we gained in the field in the last years.
Potential for Unibright
Driven by Blockchain technology and tokenization, more and more assets will be represented by tokens, and classic securities will be emitted as crypto values. Studies suggest that by 2027 at least 10% of the market will be cryptographic assets.
When we outline and describe our vision for a 360° security token platform, we specifically take a look at the potential that is in it for Unibright.
We see huge potential on solutions to…
- …provide code generation (token definition and issuing, derivatives, portfolio building)
- …provide monitoring (data analysis, simulation)
- … provide integration (tokens, platforms, asset managers, on- and offchain)
- …provide solutions in related fields (liquidity, regulation, custodian services and many more) by our unibright.solutions packages
- …drive the ecosystem by participating in research programs
- …drive the regulatory environment by developing in close contact with the (in our case German) regulator.
We will continue putting work and resources into developing and integrating tokenized markets, on technical, process and market level to support our vision of a 360° security token platform.
Unibright offers a unified framework, bringing blockchain technology and smart contracts to mainstream usage. With its “no-coding-needed” approach, smart contracts get generated, deployed and updated automatically into different blockchains. Unibright works with visual, usecase-related templates and also automatically integrates existing IT systems into the blockchain.
Unibright Solutions, a dedicated consulting branch to support blockchain use in business processes, was additionally launched in December 2018.